Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended January 31, 2012

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: 1-15449

 

 

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

LOUISIANA     72-0693290

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

1333 South Clearview Parkway    
Jefferson, Louisiana     70121
(Address of principal executive offices)     (Zip Code)

(504) 729-1400

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act.)     Yes  ¨     No  x

The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of February 29, 2012, was 83,267,466 and 3,555,020, respectively.

 

 

 


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

INDEX

 

Part I.

  Financial Information      Page   
  Item 1.    Financial Statements (Unaudited)   
  Condensed Consolidated Statements of Earnings — Three Months Ended January 31, 2012 and 2011      3   
  Condensed Consolidated Balance Sheets — January 31, 2012 and October 31, 2011      4   
  Condensed Consolidated Statement of Shareholders’ Equity — Three Months Ended January 31, 2012      6   
  Condensed Consolidated Statements of Cash Flows — Three Months Ended January 31, 2012 and 2011      7   
  Notes to Condensed Consolidated Financial Statements      8   
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   
  Item 3.     Quantitative and Qualitative Disclosures About Market Risk      48   
  Item 4.     Controls and Procedures      48   

Part II.

  Other Information   
  Item 1.     Legal Proceedings      49   
  Item 1A.  Risk Factors      49   
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds      49   
  Item 6.     Exhibits      49   
  Signatures      51   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

     Three Months Ended January 31,  
     2012     2011  

Revenues:

    

Funeral

   $ 72,011     $ 73,866  

Cemetery

     52,813       55,398  
  

 

 

   

 

 

 
     124,824       129,264  
  

 

 

   

 

 

 

Costs and expenses:

    

Funeral

     53,354       53,478  

Cemetery

     46,074       47,431  
  

 

 

   

 

 

 
     99,428       100,909  
  

 

 

   

 

 

 

Gross profit

     25,396       28,355  

Corporate general and administrative expenses

     (7,059     (6,639

Hurricane related charges, net

     —          (50

Net gain on dispositions

     343       —     

Other operating income, net

     194       233  
  

 

 

   

 

 

 

Operating earnings

     18,874       21,899  

Interest expense

     (5,867     (5,736

Investment and other income, net

     46       24  
  

 

 

   

 

 

 

Earnings before income taxes

     13,053       16,187  

Income taxes

     4,508       8,143  
  

 

 

   

 

 

 

Net earnings

   $ 8,545     $ 8,044  
  

 

 

   

 

 

 

Net earnings per common share:

    

Basic

   $ .10     $ .09  
  

 

 

   

 

 

 

Diluted

   $ .10     $ .09  
  

 

 

   

 

 

 

Weighted average common shares outstanding (in thousands):

    

Basic

     87,037       90,867  
  

 

 

   

 

 

 

Diluted

     87,349       91,177  
  

 

 

   

 

 

 

Dividends declared per common share

   $ .035     $ .03  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

     January 31, 2012      October 31, 2011  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 54,895      $ 65,688  

Restricted cash and cash equivalents

     8,006        6,250  

Marketable securities

     419        662  

Receivables, net of allowances

     48,330        49,146  

Inventories

     36,541        35,859  

Prepaid expenses

     9,193        5,055  

Deferred income taxes, net

     24,923        29,768  
  

 

 

    

 

 

 

Total current assets

     182,307        192,428  

Receivables due beyond one year, net of allowances

     66,816        67,979  

Preneed funeral receivables and trust investments

     419,618        409,296  

Preneed cemetery receivables and trust investments

     222,179        216,582  

Goodwill

     247,020        247,038  

Cemetery property, at cost

     397,916        396,014  

Property and equipment, at cost:

     

Land

     47,182        46,538  

Buildings

     355,352        353,688  

Equipment and other

     200,663        197,766  
  

 

 

    

 

 

 
     603,197        597,992  

Less accumulated depreciation

     310,122        305,708  
  

 

 

    

 

 

 

Net property and equipment

     293,075        292,284  

Deferred income taxes, net

     80,715        79,793  

Cemetery perpetual care trust investments

     248,238        240,392  

Other assets

     14,921        15,292  
  

 

 

    

 

 

 

Total assets

   $ 2,172,805      $ 2,157,098  
  

 

 

    

 

 

 

(continued)

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

     January 31, 2012     October 31, 2011  

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current maturities of long-term debt

   $ 5     $ 5  

Accounts payable and accrued expenses

     23,577       24,547  

Accrued payroll and other benefits

     13,820       18,181  

Accrued insurance

     21,392       22,398  

Accrued interest

     4,254       2,129  

Estimated obligation to fund cemetery perpetual care trust

     12,184       12,017  

Other current liabilities

     7,053       10,013  

Income taxes payable

     1,559       1,173  
  

 

 

   

 

 

 

Total current liabilities

     83,844       90,463  

Long-term debt, less current maturities

     318,813       317,821  

Deferred income taxes, net

     5,082       5,104  

Deferred preneed funeral revenue

     239,133       240,286  

Deferred preneed cemetery revenue

     258,798       259,237  

Deferred preneed funeral and cemetery receipts held in trust

     574,118       558,194  

Perpetual care trusts’ corpus

     246,479       238,980  

Other long-term liabilities

     20,254       19,337  
  

 

 

   

 

 

 

Total liabilities

     1,746,521       1,729,422  
  

 

 

   

 

 

 

Commitments and contingencies

    
  

 

 

   

 

 

 

Shareholders’ equity:

    

Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued

     —          —     

Common stock, $1.00 stated value:

    

Class A authorized 200,000,000 shares; issued and outstanding 83,640,638 and 84,421,416 shares at January 31, 2012 and October 31, 2011, respectively

     83,641       84,421  

Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at January 31, 2012 and October 31, 2011; 10 votes per share convertible into an equal number of Class A shares

     3,555       3,555  

Additional paid-in capital

     506,112       515,274  

Accumulated deficit

     (167,047     (175,592

Accumulated other comprehensive income:

    

Unrealized appreciation of investments

     23       18  
  

 

 

   

 

 

 

Total accumulated other comprehensive income

     23       18  
  

 

 

   

 

 

 

Total shareholders’ equity

     426,284       427,676  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,172,805     $ 2,157,098  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share amounts)

 

     Common
Stock(1)
    Additional
Paid-In
Capital
    Accumulated
Deficit
    Unrealized
Appreciation
of Investments
     Total
Shareholders’
Equity
 

Balance October 31, 2011

   $ 87,976      $ 515,274     $ (175,592   $ 18      $ 427,676  

Comprehensive income:

           

Net earnings

     —          —          8,545       —           8,545  

Other comprehensive income:

           

Unrealized appreciation of investments, net of deferred tax expense of ($2)

     —          —          —          5        5  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive income

     —          —          —          5        5  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income

     —          —          8,545       5        8,550  

Restricted stock activity

     436       (136     —          —           300  

Issuance of common stock

     83       427       —          —           510  

Stock options exercised

     13       31       —          —           44  

Stock option expense

     —          373       —          —           373  

Tax benefit associated with stock activity

     —          (260     —          —           (260

Purchase and retirement of common stock

     (1,312     (6,535     —          —           (7,847

Dividends ($0.035 per share)

     —          (3,062     —          —           (3,062
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance January 31, 2012

   $ 87,196     $ 506,112     $ (167,047   $ 23      $ 426,284  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

  

 

(1) 

Amount includes 83,641 and 84,421 shares (in thousands) of Class A common stock with a stated value of $1 per share as of January 31, 2012 and October 31, 2011, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

     Three Months Ended
January 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net earnings

   $ 8,545     $ 8,044  

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

    

Net gain on dispositions

     (343     —     

Depreciation and amortization

     6,552       6,872  

Non-cash interest and amortization of discount on senior convertible notes

     1,365       1,350  

Provision for doubtful accounts

     1,278       1,301  

Share-based compensation

     1,144       1,132  

Excess tax benefits from share-based payment arrangements

     (23     (51

Provision for deferred income taxes

     3,613       7,152  

Estimated obligation to fund cemetery perpetual care trust

     642       73  

Other

     4       (3

Changes in assets and liabilities:

    

(Increase) decrease in receivables

     559       (860

Increase in prepaid expenses

     (4,138     (4,115

(Increase) decrease in inventories and cemetery property

     (2,596     227  

Decrease in accounts payable and accrued expenses

     (7,482     (5,203

Net effect of preneed funeral production and maturities:

    

(Increase) decrease in preneed funeral receivables and trust investments

     (725     562  

Decrease in deferred preneed funeral revenue

     (1,012     (1,435

Increase (decrease) in deferred preneed funeral receipts held in trust

     (67     199  

Net effect of preneed cemetery production and deliveries:

    

Increase in preneed cemetery receivables and trust investments

     (1,642     (1,220

Decrease in deferred preneed cemetery revenue

     (439     (1,278

Increase in deferred preneed cemetery receipts held in trust

     2,299       2,330  

Increase in other

     251       157  
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,785       15,234  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of certificates of deposit and marketable securities

     250       10,000  

Deposits of restricted funds and purchases of marketable securities

     (1,756     (6

Proceeds from sale of assets

     233       —     

Purchase of subsidiaries, net of cash acquired

     —          (1,809

Additions to property and equipment

     (6,524     (4,604

Other

     23       28  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (7,774     3,609  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayments of long-term debt

     (1     (1

Debt refinancing costs

     (34     —     

Issuance of common stock

     117       341  

Purchase and retirement of common stock

     (7,847     (8,108

Dividends

     (3,062     (2,749

Excess tax benefits from share-based payment arrangements

     23       51  
  

 

 

   

 

 

 

Net cash used in financing activities

     (10,804     (10,466
  

 

 

   

 

 

 

Net increase (decrease) in cash

     (10,793     8,377  

Cash and cash equivalents, beginning of period

     65,688       56,060  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 54,895     $ 64,437  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid (received) during the period for:

    

Income taxes, net

   $ (197   $ 89  

Interest

   $ 2,435     $ 2,482  

Non-cash investing and financing activities:

    

Issuance of common stock to directors

   $ 437     $ 456  

Issuance of restricted stock, net of forfeitures

   $ 300     $ 312  

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1)     Basis of Presentation

(a) The Company

Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. Through its subsidiaries, the Company offers a complete line of funeral and cremation merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of January 31, 2012, the Company owned and operated 217 funeral homes and 141 cemeteries in 24 states within the United States and Puerto Rico. The Company has three operating and reportable segments consisting of a funeral segment, a cemetery segment and a corporate trust management segment.

(b) Principles of Consolidation

The accompanying condensed consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

(c) Interim Disclosures

The information as of January 31, 2012, and for the three months ended January 31, 2012 and 2011, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary to a fair statement of the results for the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2011 (the “2011 Form 10-K”).

The October 31, 2011 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2011 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America, which are presented in the Company’s 2011 Form 10-K.

The results of operations for the three months ended January 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2012.

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates are disclosed in Note 2 in the Company’s 2011 Form 10-K.

(e) Share-Based Compensation

The Company has share-based compensation plans, which are described in more detail in Note 18 to the consolidated financial statements in the Company’s 2011 Form 10-K. Net earnings for the three months ended January 31, 2012 and 2011 include $373 and $311, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. As of January 31, 2012, there was $4,072 of total unrecognized compensation costs related to stock options that is expected to be recognized over a weighted-average period of 3.2 years, of which $1,419 of total stock option expense is expected for fiscal year 2012. The expense related to restricted stock is reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $334 and $365 for the three months ended January 31, 2012 and 2011, respectively. As of January 31, 2012, there was $2,205 of remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2012 is expected to be $1,632.

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(1) Basis of Presentation—(Continued)

 

In November 2011, the Company issued 67,853 shares of Class A common stock and paid approximately $133 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $437 and was recorded in corporate general and administrative expenses during the first quarter of fiscal year 2012. In November 2010, the Company issued 82,160 shares of Class A common stock and paid approximately $114 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $456 and was recorded in corporate general and administrative expenses during the first quarter of fiscal year 2011. Each of the shares received has a restriction requiring each independent director to hold the respective shares until completion of service as a member of the Company’s Board of Directors.

The table below presents all stock options and restricted stock granted to employees during the three months ended January 31, 2012:

 

Grant Type

  

Number of Shares

Granted

  

Weighted

Average

Price per Share

  

Vesting Period

  

Vesting Condition

Stock options

   1,191,500    $6.26   

Equal one-fourth portions over 4 years

   Service condition

Restricted stock

   444,500    $6.26   

Equal one-third portions over 3 years

   Market condition

The fair value of the Company’s service based stock options granted in fiscal year 2012 is the estimated present value at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the three months ended January 31, 2012: expected dividend yield of 2.2 percent; expected volatility of 37.8 percent; risk-free interest rate of 1.5 percent; and an expected term of 6.3 years. During the three months ended January 31, 2012, the Company granted 444,500 shares of restricted stock with market conditions based on achieving certain specified target stock prices in the fiscal years 2012, 2013 and 2014. The Company records the expense over the requisite service period.

(f) Purchase and Retirement of Common Stock

Share repurchases are recorded at stated value with the amount in excess of stated value recorded as a reduction to additional paid-in capital. Share repurchases reduce the weighted average number of common shares outstanding during each period.

On September 19, 2007, the Company announced a stock repurchase program, authorizing the investment of up to $25,000 in the repurchase of the Company’s common stock. Repurchases under the program are limited to the Company’s Class A common stock, and can be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. The program was increased by $25,000 in December 2007, June 2008, June 2011 and September 2011, resulting in a $125,000 program. During the three months ended January 31, 2012, the Company repurchased 1,312,475 shares of its Class A common stock for $7,815 at an average price of $5.95 per share. As of January 31, 2012, the Company has repurchased 13,214,398 shares of its Class A common stock since the start of the program for $89,056 at an average price of $6.74 per share and has $35,944 remaining available under this program.

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(1) Basis of Presentation—(Continued)

 

(g) Receivables and Allowance for Doubtful Accounts

The Company establishes an allowance for uncollectible installment contracts and trade accounts based on a range of percentages applied to accounts receivable aging categories. These percentages are based on an analysis of the Company’s historical collection and write-off experience. At-need funeral and other receivables are considered past due after 30 days. The Company records an allowance on its interest accruals similar to the corresponding principal aging categories. For accounts that are greater than 90 days past due, interest continues to be accrued, however, an allowance is established to fully reserve this interest receivable. Interest income on these receivables is recognized only to the extent the account becomes less than 90 days past due and then only on the non-reserved portion. Accounts are restored to normal accrual status only when interest and principal payments are brought current and future payments are reasonably assured.

As of January 31, 2012 and October 31, 2011, the Company’s receivables and related allowances were as follows:

 

     Receivables as of January 31, 2012      Receivables as of October 31, 2011  
     Ending Balance Collectively
Evaluated for Impairment
     Ending Balance Collectively
Evaluated for Impairment
 

Current receivables – at-need funeral

   $ 8,557      $ 8,317  

Current receivables – other

     44,363        45,455  

Receivables, due beyond one year – other

     73,382        75,097  

Preneed funeral receivables

     42,875        43,457  

Preneed cemetery receivables

     29,613        30,270  
  

 

 

    

 

 

 

Total

   $ 198,790      $ 202,596  
  

 

 

    

 

 

 

Total current receivables

     52,920        53,772  

Total noncurrent receivables

     145,870        148,824  
  

 

 

    

 

 

 

Total

   $ 198,790      $ 202,596  
  

 

 

    

 

 

 

Other receivables are comprised primarily of receivables related to the sale of preneed property interment rights but also include income tax receivables and trade and other receivables.

 

     Allowance for Doubtful Accounts
and Cancellations as of

January 31, 2012
    Allowance for Doubtful Accounts
and Cancellations as of

October 31, 2011
 
     Ending Balance Collectively
Evaluated for Impairment
    Ending Balance Collectively
Evaluated for Impairment
 

Current receivables – at-need funeral and other

   $ (4,590   $ (4,626

Receivables, due beyond one year – other

     (6,566     (7,118

Preneed funeral receivables

     (11,123     (11,359

Preneed cemetery receivables

     (3,165     (3,366
  

 

 

   

 

 

 

Total

   $ (25,444   $ (26,469
  

 

 

   

 

 

 

Total current receivables

     (4,590     (4,626

Total noncurrent receivables

     (20,854     (21,843
  

 

 

   

 

 

 

Total

   $ (25,444   $ (26,469
  

 

 

   

 

 

 

 

10


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(1) Basis of Presentation—(Continued)

 

 

     Allowance for Doubtful Accounts and Cancellations Rollforward  
     Balance –
October 31,
2011
     Charged to costs
and expenses
     Write-offs     Balance –
January 31,
2012
 

Current receivables – at-need funeral and other

   $ 4,626        526        (562   $ 4,590  

Receivables, due beyond one year – other

     7,118        752        (1,304     6,566  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 11,744        1,278        (1,866   $ 11,156  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Doubtful Accounts and Cancellations Rollforward  
     Balance –
October 31,
2010
     Charged to costs
and expenses
     Write-offs     Balance –
January 31,
2011
 

Current receivables – at-need funeral and other

   $ 5,738        526        (661   $ 5,603  

Receivables, due beyond one year – other

     8,324        775        (838     8,261  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 14,062        1,301        (1,499   $ 13,864  
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company establishes allowances for preneed funeral and cemetery merchandise and services trust receivables. Changes in these allowances have no effect on the condensed consolidated statement of earnings but are recorded as reductions in preneed receivables and preneed deferred revenue in the condensed consolidated balance sheet.

The following summarizes the Company’s receivables aging analysis:

 

     Receivables Aging Analysis
as of January 31, 2012
 
     1 to 30 Days      31 to 60 Days      61 to 90 Days      Greater than
90 Days
     Total  

Receivables – at-need funeral

   $ 5,044       $ 1,155       $ 304       $ 2,054       $ 8,557   

Receivables – other

     96,456         4,105         2,399         14,785         117,745   

Preneed funeral receivables

     29,838         1,058         486         11,493         42,875   

Preneed cemetery receivables

     24,351         1,137         559         3,566         29,613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 155,689       $ 7,455       $ 3,748       $ 31,898       $ 198,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(h) Reclassifications

Certain reclassifications have been made to the 2011 condensed consolidated statement of cash flow in order for these periods to be comparable. These reclassifications had no effect on the Company’s net earnings, total shareholders’ equity or cash flows.

(2)    New Accounting Principles

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. The guidance on transfers in and out of Levels 1 and 2 was effective for interim and annual reporting periods beginning after

 

11


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(2) New Accounting Principles—(Continued)

 

December 15, 2009 and was adopted by the Company as of its second fiscal quarter ended April 30, 2010. The disclosures on gross presentation of Level 3 purchases, sales, issuances and settlements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years and is effective for the Company’s fiscal year beginning November 1, 2011. The adoption of this guidance by the Company had no impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-28 regarding the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance clarifies the steps to be performed to determine whether goodwill has been impaired and addresses the steps for reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2010, which corresponds to the Company’s first fiscal quarter beginning November 1, 2011. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with International Financial Reporting Standards. This guidance is effective for the first interim or annual period beginning after December 15, 2011, which corresponds to the Company’s second fiscal quarter beginning February 1, 2012. In the period of adoption, the Company will include the required disclosures in its filings and believes the adoption will have no impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 regarding the presentation of comprehensive income. This new guidance amends the previous application of comprehensive income and the requirements regarding presentation in the financial statements. It requires the disclosure of the components of comprehensive income, which the Company currently discloses in other sections of its filings, to be presented as part of one statement of comprehensive income, or as a separate statement of comprehensive income following the statement of earnings. In December 2011, the FASB issued ASU No. 2011-12 which temporarily defers those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2011, which corresponds to the Company’s first fiscal quarter beginning November 1, 2012. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11 regarding disclosures about offsetting assets and liabilities. This new guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, which corresponds to the Company’s first fiscal quarter beginning November 1, 2013. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

(3)     Preneed Funeral Activities

The Company maintains three types of trust and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. The activity of these trust and escrow accounts is detailed below and in Notes 4 and 5.

Preneed Funeral Receivables and Trust Investments

Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of January 31, 2012 and October 31, 2011 are as follows:

 

12


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(3) Preneed Funeral Activities—(Continued)

 

 

     January 31,
2012
    October 31,
2011
 

Trust assets

   $ 387,866     $ 377,198  

Receivables from customers

     42,875       43,457  
  

 

 

   

 

 

 
     430,741       420,655  

Allowance for cancellations

     (11,123     (11,359
  

 

 

   

 

 

 

Preneed funeral receivables and trust investments

   $ 419,618     $ 409,296  
  

 

 

   

 

 

 

The cost basis and market values associated with preneed funeral merchandise and services trust assets as of January 31, 2012 are detailed below.

 

     January 31, 2012  
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Market         

Cash, money market and other short-term investments

   $ 19,380      $ —         $ —        $ 19,380     

U.S. Government, agencies and municipalities

     2,178        70        —          2,248     

Corporate bonds

     20,560        1,184        (46     21,698     

Preferred stocks

     36,445        463        (2,557     34,351     

Common stocks

     202,307        1,839        (48,619     155,527     

Mutual funds:

             

Equity

     23,213        1,676        (1,767     23,122     

Fixed income

     87,084        1,376        (994     87,466     

Commodity

     17,676        —           (3,677     13,999     

Real estate investment trusts

     14,995        590        (18     15,567     

Insurance contracts and other long-term investments

     12,969        70        (6     13,033     
  

 

 

    

 

 

    

 

 

   

 

 

    

Trust investments

   $ 436,807      $ 7,268      $ (57,684   $ 386,391     
  

 

 

    

 

 

    

 

 

      

Market value as a percentage of cost

                88.5
             

 

 

 

Accrued investment income

             1,475     
          

 

 

    

Trust assets

           $ 387,866     
          

 

 

    

The estimated maturities and market values of debt securities included above are as follows:

 

     January 31,
2012
 

Due in one year or less

   $ 5,155  

Due in one to five years

     14,458  

Due in five to ten years

     3,681  

Thereafter

     652  
  

 

 

 
   $ 23,946  
  

 

 

 

 

13


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(3) Preneed Funeral Activities—(Continued)

 

The cost basis and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2011 are detailed below.

 

     October 31, 2011  
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Market         

Cash, money market and other short- term investments

   $ 30,714      $ —         $ —        $ 30,714     

U.S. Government, agencies and municipalities

     2,094        60        (2     2,152     

Corporate bonds

     21,856        1,079        (8     22,927     

Preferred stocks

     36,382        362        (3,358     33,386     

Common stocks

     202,451        791        (55,830     147,412     

Mutual funds:

             

Equity

     23,591        980        (2,018     22,553     

Fixed income

     78,509        902        (1,417     77,994     

Commodity

     11,844        8        (1,450     10,402     

Real estate investment trusts

     15,075        37        (338     14,774     

Master limited partnerships

     136        4        —          140     

Insurance contracts and other long-term investments

     13,486        39        —          13,525     
  

 

 

    

 

 

    

 

 

   

 

 

    

Trust investments

   $ 436,138      $ 4,262      $ (64,421   $ 375,979     
  

 

 

    

 

 

    

 

 

      

Market value as a percentage of cost

                86.2
             

 

 

 

Accrued investment income

             1,219     
          

 

 

    

Trust assets

           $ 377,198     
          

 

 

    

The Company periodically manages a covered call program on its equity securities within the preneed funeral merchandise and services trust in order to provide an opportunity for additional income. As of January 31, 2012 and October 31, 2011, the Company had no outstanding covered calls. Covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended January 31, 2012 and 2011, the Company realized trust earnings (losses) of approximately $4 and ($146), respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as other funeral merchandise and services trust earnings and losses and flow through funeral revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three months ended January 31, 2011, it continued to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $991 for the three months ended January 31, 2011.

Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stocks and mutual funds.

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

 

 

14


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(3) Preneed Funeral Activities—(Continued)

 

The Company’s Level 3 investments include insurance contracts and partnership investments purchased within the trusts. The valuation of insurance contracts and partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the insurance contracts is based upon the current face value of the contracts according to the respective insurance carriers, which is deemed to approximate fair market value. The fair market value of the partnership investments was determined by using their most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

The inputs into the fair value of the Company’s preneed funeral merchandise and services trust investments are categorized as follows:

 

     Quoted Market
Prices in Active
Markets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Fair Market
Value
 

Trust investments—January 31, 2012

   $ 322,424       $ 58,203       $ 5,764       $ 386,391   

Trust investments—October 31, 2011

   $ 311,463       $ 58,648       $ 5,868       $ 375,979   

The change in the Company’s preneed funeral merchandise and services trust investments with significant unobservable inputs (Level 3) is as follows:

 

     Three Months Ended January 31,  
     2012     2011  

Fair market value, beginning balance

   $ 5,868     $ 6,784  

Distributions

     (104     (622
  

 

 

   

 

 

 

Fair market value, ending balance

   $ 5,764     $ 6,162  
  

 

 

   

 

 

 

Activity related to preneed funeral trust investments is as follows:

 

     Three Months Ended January 31,  
     2012     2011  

Purchases

   $ 16,919     $ 44,289  

Sales

     4,527       37,757  

Realized gains from sales of investments

     327       2,818  

Realized losses from sales of investments and other

     (115     (99

Interest income, dividends and other ordinary income

     4,938       3,336  

Deposits (1)

     5,588       5,356  

Withdrawals (1)

     8,599       10,385  

 

(1)

The Company historically sold a significant portion of its preneed funeral sales through trust. Over time, the mix has shifted to a more significant portion being sold through insurance, particularly in states where the trusting requirements are high.

The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of January 31, 2012 and October 31, 2011.

 

15


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(3) Preneed Funeral Activities—(Continued)

 

 

     January 31, 2012  
     Less than 12 Months     12 Months or Greater     Total  
     Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
 

Corporate bonds

   $ 3,390      $ (30   $ 1,049      $ (16   $ 4,439      $ (46

Preferred stocks

     —           —          19,591        (2,557     19,591        (2,557

Common stocks

     9,018        (227     123,841        (48,392     132,859        (48,619

Mutual funds:

               

Equity

     —           —          6,914        (1,767     6,914        (1,767

Fixed income

     31,749        (309     4,188        (685     35,937        (994

Commodity

     13,998        (3,677     —           —          13,998        (3,677

Real estate investment trusts

     1,284        (18     —           —          1,284        (18

Insurance contracts and other long-term investments

     216        (6     —           —          216        (6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 59,655      $ (4,267   $ 155,583      $ (53,417   $ 215,238      $ (57,684
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     October 31, 2011  
     Less than 12 Months     12 Months or Greater     Total  
     Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
 

U.S. Government, agencies and municipalities

   $ 498      $ (2   $ —         $ —        $ 498      $ (2

Corporate bonds

     6,398        (8     —           —          6,398        (8

Preferred stocks

     548        (2     19,065        (3,356     19,613        (3,358

Common stocks

     5,564        (58     128,478        (55,772     134,042        (55,830

Mutual funds:

               

Equity

     3        (1     8,481        (2,017     8,484        (2,018

Fixed income

     43,688        (707     5,015        (710     48,703        (1,417

Commodity

     10,175        (1,450     —           —          10,175        (1,450

Real estate investment trusts

     12,941        (338     —           —          12,941        (338
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 79,815      $ (2,566   $ 161,039      $ (61,855   $ 240,854      $ (64,421
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the preneed funeral merchandise and services trust portfolio are not considered to be other than temporary. For a discussion of the Company’s policies for determining whether a security is other-than-temporarily impaired, see Note 2(k) to the consolidated financial statements in the Company’s 2011 Form 10-K. Of the total unrealized losses at January 31, 2012, 84 percent, or $48,619, were generated by investments in common stock. Most of the common stock investments are part of the S&P 500 Index. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes it has the intent and ability to hold these investments until they recover in value.

The Company’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements. In substantially all of the Company’s trusts, trust earnings, which include dividends and interest earned and net capital gains and losses (including losses from other-than-temporary impairments of securities) realized by preneed funeral trust or escrow accounts net of fees, are allocated to individual contracts when earned or realized. In these trusts, unrealized gains and losses are not allocated to the underlying contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original contract sales price when the underlying service or merchandise is actually performed or delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

 

16


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(3) Preneed Funeral Activities—(Continued)

 

Cash flows from preneed funeral contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

(4)     Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or service is needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of January 31, 2012 and October 31, 2011 are as follows:

 

     January 31,
2012
    October 31,
2011
 

Trust assets

   $ 195,731     $ 189,678  

Receivables from customers

     29,613       30,270  
  

 

 

   

 

 

 
     225,344       219,948  

Allowance for cancellations

     (3,165     (3,366
  

 

 

   

 

 

 

Preneed cemetery receivables and trust investments

   $ 222,179     $ 216,582  
  

 

 

   

 

 

 

The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of January 31, 2012 are detailed below.

 

     January 31, 2012  
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Market         

Cash, money market and other short- term investments

   $ 10,571      $ —         $ —        $ 10,571     

U.S. Government, agencies and municipalities

     1,979        105        (1     2,083     

Corporate bonds

     2,409        141        (2     2,548     

Preferred stocks

     12,640        83        (1,300     11,423     

Common stocks

     112,240        1,319        (29,662     83,897     

Mutual funds:

             

Equity

     25,340        545        (6,656     19,229     

Fixed income

     47,778        453        (486     47,745     

Commodity

     8,707        —           (2,003     6,704     

Real estate investment trusts

     9,763        453        —          10,216     

Master limited partnerships

     96        8        —          104     

Other long-term investments

     507        —           —          507     
  

 

 

    

 

 

    

 

 

   

 

 

    

Trust investments

   $ 232,030      $ 3,107      $ (40,110   $ 195,027     
  

 

 

    

 

 

    

 

 

      

Market value as a percentage of cost

                84.1
             

 

 

 

Accrued investment income

             704     
          

 

 

    

Trust assets

           $ 195,731     
          

 

 

    

 

17


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

 

The estimated maturities and market values of debt securities included above are as follows:

 

     January 31, 2012  

Due in one year or less

   $ 484  

Due in one to five years

     1,479  

Due in five to ten years

     2,190  

Thereafter

     478  
  

 

 

 
   $ 4,631  
  

 

 

 

The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of October

31, 2011 are detailed below.

 

     October 31, 2011  
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Market         

Cash, money market and other short- term investments

   $ 9,844      $ —         $ —        $ 9,844     

U.S. Government, agencies and municipalities

     2,052        90        (2     2,140     

Corporate bonds

     2,596        131        (3     2,724     

Preferred stocks

     12,518        66        (1,662     10,922     

Common stocks

     112,010        920        (32,761     80,169     

Mutual funds:

             

Equity

     25,374        348        (6,791     18,931     

Fixed income

     46,258        305        (586     45,977     

Commodity

     8,780        —           (892     7,888     

Real estate investment trusts

     9,866        74        (193     9,747     

Master limited partnerships

     97        —           (2     95     

Other long-term investments

     596        —           —          596     
  

 

 

    

 

 

    

 

 

   

 

 

    

Trust investments

   $ 229,991      $ 1,934      $ (42,892   $ 189,033     
  

 

 

    

 

 

    

 

 

      

Market value as a percentage of cost

                82.2
             

 

 

 

Accrued investment income

             645     
          

 

 

    

Trust assets

           $ 189,678     
          

 

 

    

The Company periodically manages a covered call program on its equity securities within the preneed cemetery merchandise and services trust in order to provide an opportunity for additional income. As of January 31, 2012 and October 31, 2011, the Company had no outstanding covered calls. Covered calls are included at market value in the balance sheet line “preneed cemetery receivables and trust investments.” For the three months ended January 31, 2012 and 2011, the Company realized trust earnings (losses) of approximately $5 and ($90), respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as other cemetery merchandise and services trust earnings and losses and flow through cemetery revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three months ended January 31, 2011, it continued to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $420 for the three months ended January 31, 2011.

 

18


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

 

Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stocks and mutual funds.

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are U. S. Government, agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

There are no Level 3 investments in the preneed cemetery merchandise and services trust investment portfolio.

The inputs into the fair value of the Company’s preneed cemetery merchandise and services trust investments are categorized as follows:

 

     Quoted Market
Prices in Active
Markets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Fair
Market

Value
 

Trust investments—January 31, 2012

   $ 178,943      $ 16,084      $ —         $ 195,027  

Trust investments—October 31, 2011

   $ 173,127      $ 15,906      $ —         $ 189,033  

Activity related to preneed cemetery merchandise and services trust investments is as follows:

 

     Three Months Ended January 31,  
     2012     2011  

Purchases

   $ 3,283     $ 31,872  

Sales

     1,959       28,384  

Realized gains from sales of investments

     220       2,251  

Realized losses from sales of investments and other

     (84     (340

Interest income, dividends and other ordinary income

     2,696       1,798  

Deposits

     4,332       3,701  

Withdrawals

     4,454       4,607  

The following tables show the gross unrealized losses and fair value of the preneed cemetery merchandise and services trust investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of January 31, 2012 and October 31, 2011.

 

19


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

 

 

     January 31, 2012  
     Less than 12 Months     12 Months or Greater     Total  
     Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
 

U.S. Government, agencies and municipalities

   $ 34      $ —        $ 4      $ (1   $ 38      $ (1

Corporate bonds

     206        (2     —           —          206        (2

Preferred stocks

     —           —          7,700        (1,300     7,700        (1,300

Common stocks

     15,638        (931     56,145        (28,731     71,783        (29,662

Mutual funds:

               

Equity

     —           —          13,340        (6,656     13,340        (6,656

Fixed income

     28,260        (486     —           —          28,260        (486

Commodity

     6,703        (2,003     —           —          6,703        (2,003
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 50,841      $ (3,422   $ 77,189      $ (36,688   $ 128,030      $ (40,110
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     October 31, 2011  
     Less than 12 Months     12 Months or Greater     Total  
     Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
 

U.S. Government, agencies and municipalities

   $ 313      $ (2   $ —         $ —        $ 313      $ (2

Corporate bonds

     117        (3     —           —          117        (3

Preferred stocks

     —           —          7,609        (1,662     7,609        (1,662

Common stocks

     5,385        (707     59,506        (32,054     64,891        (32,761

Mutual funds:

               

Equity

     —           —          14,376        (6,791     14,376        (6,791

Fixed income

     34,325        (586     —           —          34,325        (586

Commodity

     7,887        (892     —           —          7,887        (892

Real estate investment trusts

     5,775        (193     —           —          5,775        (193

Master limited partnerships

     —           —          95        (2     95        (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 53,802      $ (2,383   $ 81,586      $ (40,509   $ 135,388      $ (42,892
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the preneed cemetery merchandise and services trust portfolio are not considered to be other than temporary. For a discussion of the Company’s policies for determining whether a security is other-than-temporarily impaired, see Note 2(k) to the consolidated financial statements in the Company’s 2011 Form 10-K. Of the total unrealized losses at January 31, 2012, 91 percent, or $36,318, were generated by common stock and mutual fund-equity investments. Most of the common stock investments are part of the S&P 500 Index, and the mutual fund-equity investments are invested in small-cap, mid-cap and international mutual funds that are highly diversified. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes it has the intent and ability to hold these investments until they recover in value.

The Company’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements. In substantially all of the Company’s trusts, trust earnings, which include dividends and interest earned and net capital gains and losses (including losses from other-than-temporary impairments of securities) realized by preneed cemetery trust or escrow accounts net of fees, are allocated to individual contracts when earned or realized. In these trusts, unrealized gains and losses are not allocated to the underlying contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original contract sales price when the underlying service or merchandise is actually performed or delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

 

20


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

 

Cash flows from preneed cemetery merchandise and services contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

(5)     Cemetery Interment Rights and Perpetual Care Trusts

Earnings from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized as current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $2,994 and $2,310 for the three months ended January 31, 2012 and 2011, respectively.

The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of January 31, 2012 are detailed below.

 

     January 31, 2012  
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Market         

Cash, money market and other short- term investments

   $ 22,524      $ —         $ —        $ 22,524     

U.S. Government, agencies and municipalities

     6,263        389        (61     6,591     

Corporate bonds

     25,170        1,062        (930     25,302     

Preferred stocks

     38,274        229        (5,926     32,577     

Common stocks

     89,979        2,040        (21,977     70,042     

Mutual funds:

             

Equity

     13,457        775        (729     13,503     

Fixed income

     64,835        1,054        (1,894     63,995     

Commodity

     4,007        4        (574     3,437     

Real estate investment trusts

     8,834        316        (5     9,145     

Other long-term investments

     247        —           (35     212     
  

 

 

    

 

 

    

 

 

   

 

 

    

Trust investments

   $ 273,590      $ 5,869      $ (32,131   $ 247,328     
  

 

 

    

 

 

    

 

 

      

Market value as a percentage of cost

                90.4
             

 

 

 

Accrued investment income

             910     
          

 

 

    

Trust assets

           $ 248,238     
          

 

 

    

The estimated maturities and market values of debt securities included above are as follows:

 

     January 31, 2012  

Due in one year or less

   $ 2,165  

Due in one to five years

     15,725  

Due in five to ten years

     9,496  

Thereafter

     4,507  
  

 

 

 
   $ 31,893  
  

 

 

 

 

21


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

 

The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2011 are detailed below.

 

     October 31, 2011  
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Market         

Cash, money market and other short- term investments

   $ 20,654      $ —         $ —        $ 20,654     

U.S. Government, agencies and municipalities

     6,928        375        (57     7,246     

Corporate bonds

     27,166        1,044        (876     27,334     

Preferred stocks

     38,211        155        (6,927     31,439     

Common stocks

     82,750        1,751        (24,410     60,091     

Mutual funds:

             

Equity

     13,478        601        (807     13,272     

Fixed income

     61,740        706        (1,990     60,456     

Commodity

     6        5        —          11     

Real estate investment trusts

     8,834        6        (210     8,630     

Master limited partnerships

     10,248        16        (61     10,203     

Other long-term investments

     277        —           (12     265     
  

 

 

    

 

 

    

 

 

   

 

 

    

Trust investments

   $ 270,292      $ 4,659      $ (35,350   $ 239,601     
  

 

 

    

 

 

    

 

 

      

Market value as a percentage of cost

                88.6
             

 

 

 

Accrued investment income

             791     
          

 

 

    

Trust assets

           $ 240,392     
          

 

 

    

The Company periodically manages a covered call program on its equity securities within the cemetery perpetual care trust in order to provide an opportunity for additional income. As of January 31, 2012 and October 31, 2011, the Company had no outstanding covered calls. Covered calls are included at market value in the balance sheet line “cemetery perpetual care trust investments.” For the three months ended January 31, 2012 and 2011, the Company realized trust earnings (losses) of approximately $5 and ($85), respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as other cemetery perpetual care trust earnings and losses and flow through cemetery revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three months ended January 31, 2011, it continued to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $468 for the three months ended January 31, 2011.

Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stocks and mutual funds.

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

The Company’s Level 3 investments include an investment in a partnership. The valuation of partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the partnership investment was determined by using its most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

 

22


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

 

The inputs into the fair value of the Company’s cemetery perpetual care trust investments are categorized as follows:

 

     Quoted Market
Prices in Active
Markets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Fair Market
Value
 

Trust investments—January 31, 2012

   $ 182,646      $ 64,634      $ 48      $ 247,328  

Trust investments—October 31, 2011

   $ 173,317      $ 66,236      $ 48      $ 239,601  

In states where the Company withdraws and recognizes capital gains in its cemetery perpetual care trusts, if it realizes subsequent net capital losses (i.e., losses in excess of capital gains in the trust) and the fair market value of the trust assets is less than the aggregate amounts required to be contributed to the trust, some states may require the Company to make cash deposits to the trusts or may require the Company to stop withdrawing earnings until future earnings restore the initial corpus. As of January 31, 2012 and October 31, 2011, the Company had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $12,184 and $12,017, respectively. The Company recorded an additional $642 and $73 for the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust for the three months ended January 31, 2012 and 2011, respectively. The additional funding obligation in fiscal year 2012 is related to the bankruptcy of Eastman Kodak. The Company had earnings of $475 and $210 for the three months ended January 31, 2012 and 2011, respectively, within the trusts that it did not withdraw from the trusts in order to satisfy a portion of its estimated probable funding obligation. In those states where realized net capital gains have not been withdrawn, the Company believes it is reasonably possible but not probable that additional funding obligations may exist with an estimated amount of $1,795; no charge has been recorded for these amounts as of January 31, 2012.

Activity related to preneed cemetery perpetual care trust investments is as follows:

 

     Three Months Ended January 31,
     2012   2011

Purchases

   $27,979   $40,955

Sales

   28,132   17,865

Realized gains from sales of investments

   2,320   516

Realized losses from sales of investments and other

   (1,203)   (164)

Interest income, dividends and other ordinary income

   2,651   2,905

Deposits

   2,127   1,530

Withdrawals

   2,369   2,221

During the three months ended January 31, 2012 and 2011, cemetery revenues were $52,813 and $55,398, respectively, of which $2,059 and $1,979, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.

The following tables show the gross unrealized losses and fair value of the cemetery perpetual care trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of January 31, 2012 and October 31, 2011.

 

23


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

 

 

     January 31, 2012  
     Less than 12 Months     12 Months or Greater     Total  
     Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
 

U.S. Government, agencies and municipalities

   $ 23      $ (3   $ 65      $ (58   $ 88      $ (61

Corporate bonds

     2,927        (89     1,427        (841     4,354        (930

Preferred stocks

     2,739        (35     20,912        (5,891     23,651        (5,926

Common stocks

     10,287        (67     46,789        (21,910     57,076        (21,977

Mutual funds:

               

Equity

     143        (29     1,970        (700     2,113        (729

Fixed income

     17,061        (320     14,657        (1,574     31,718        (1,894

Commodity

     3,426        (574     —           —          3,426        (574

Real estate investment trusts

     701        (5     —           —          701        (5

Other long-term investments

     —           —          48        (35     48        (35
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 37,307      $ (1,122   $ 85,868      $ (31,009   $ 123,175      $ (32,131
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     October 31, 2011  
     Less than 12 Months     12 Months or Greater     Total  
     Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
    Market
Value
     Unrealized
Losses
 

U.S. Government, agencies and municipalities

   $ 213      $ (1   $ 71      $ (56   $ 284      $ (57

Corporate bonds

     5,959        (150     1,341        (726     7,300        (876

Preferred stocks

     3,611        (91     20,921        (6,836     24,532        (6,927

Common stocks

     1,027        (108     50,539        (24,302     51,566        (24,410

Mutual funds:

               

Equity

     106        (113     1,967        (694     2,073        (807

Fixed income

     39,397        (1,742     1,606        (248     41,003        (1,990

Real estate investment trusts

     7,659        (210     —           —          7,659        (210

Master limited partnerships

     7,936        (61     —           —          7,936        (61

Other long-term investments

     —           —          48        (12     48        (12
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 65,908      $ (2,476   $ 76,493      $ (32,874   $ 142,401      $ (35,350
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the cemetery perpetual care trust portfolio are not considered to be other than temporary. For a discussion of the Company’s policies for determining whether a security is other-than-temporarily impaired, see Note 2(k) to the consolidated financial statements in the Company’s 2011 Form 10-K. Of the total unrealized losses at January 31, 2012, 87 percent, or $27,903, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of investment grade at the time of purchase. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes it has the intent and ability to hold these investments until they recover in value.

Cash flows from cemetery perpetual care contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

 

24


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts’ Corpus

The components of deferred preneed funeral and cemetery receipts held in trust in the condensed consolidated balance sheet at January 31, 2012 are as follows:

 

     Deferred Receipts Held in Trust        
     Preneed
Funeral
    Preneed
Cemetery
    Total  

Trust assets at market value

   $ 387,866     $ 195,731     $ 583,597  

Less:

      

Pending withdrawals

     (7,615     (5,445     (13,060

Pending deposits

     2,259       1,322       3,581  
  

 

 

   

 

 

   

 

 

 

Deferred receipts held in trust

   $ 382,510     $ 191,608     $ 574,118  
  

 

 

   

 

 

   

 

 

 

The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at January 31, 2012 are as follows:

 

     Perpetual Care
Trusts’ Corpus
 

Trust assets at market value

   $ 248,238  

Less:

  

Pending withdrawals

     (2,339

Pending deposits

     580  
  

 

 

 

Perpetual care trusts’ corpus

   $ 246,479  
  

 

 

 

Investment and other income, net

The components of investment and other income, net in the condensed consolidated statements of earnings for the three months ended January 31, 2012 and 2011 are detailed below.

 

     Three Months Ended
January 31,
 
     2012     2011  

Realized gains from sales of investments

   $ 2,867     $ 5,585  

Realized losses from sales of investments and other

     (1,402     (603

Interest income, dividends and other ordinary income

     10,285       8,039  

Trust expenses and income taxes

     (2,311     (2,496
  

 

 

   

 

 

 

Net trust investment income

     9,439       10,525  

Reclassification to deferred preneed funeral and cemetery receipts held in trust

     (6,489     (8,098

Reclassification to perpetual care trusts’ corpus

     (2,950     (2,427
  

 

 

   

 

 

 

Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus

     —          —     

Investment and other income, net (1)

     46       24  
  

 

 

   

 

 

 

Total investment and other income, net

   $ 46     $ 24  
  

 

 

   

 

 

 

 

(1) 

Investment and other income, net generally consists of interest income primarily on the Company’s cash, cash equivalents and marketable securities not held in trust.

 

25


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(7) Commitments and Contingencies

Litigation

The Company is a defendant in a variety of litigation matters that have arisen in the ordinary course of business, which are covered by insurance or otherwise not considered to be material. The Company carries insurance with coverages and coverage limits that it believes to be adequate.

Other Commitments and Contingencies

In those states where the Company has withdrawn realized net capital gains in the past from its cemetery perpetual care trusts, regulators may seek replenishment of subsequent realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. As of January 31, 2012, the Company had $12,184 recorded as a liability for the estimated probable funding obligation. As of January 31, 2012, the Company had net unrealized losses of approximately $31,561 in the cemetery perpetual care trusts in these states that could be subject to a future funding obligation. Because some of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in an additional corresponding funding liability and increase in cemetery costs.

From time to time, contracts are presented to the Company relating to contracts sold prior to the time the Company acquired certain businesses and for which the Company was previously unaware. In addition, from time to time, the Company has identified in its backlog, certain contracts in which services or merchandise have previously been delivered but the revenue was not yet recognized. Using historical trends and statistical analyses, the Company has recorded an estimated net liability for these items of approximately $1.0 million and $2.0 million as of January 31, 2012 and October 31, 2011, respectively.

The Company is required to maintain a bond ($23,456 as of January 31, 2012) to guarantee its obligations relating to funds the Company withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. This amount would become senior secured debt if the Company was required to borrow funds under the senior secured revolving credit facility and return to the trusts the amounts it previously withdrew that relate to the remaining undelivered preneed contracts in lieu of this bond.

 

26


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(8) Reconciliation of Basic and Diluted Per Share Data

 

     Earnings
(Numerator)
    Shares
(Denominator)
     Per Share
Data
 

Three Months Ended January 31, 2012

       

Net earnings

   $ 8,545       

Allocation of earnings to nonvested restricted stock

     (77 )     
  

 

 

      

Basic earnings per common share:

       

Earnings available to common shareholders

   $ 8,468       87,037      $ .10  
  

 

 

      

 

 

 

Effect of dilutive securities:

       

Stock options assumed exercised

       312     
    

 

 

    

Diluted earnings per common share:

       

Earnings available to common shareholders plus stock options assumed exercised

   $ 8,468       87,349      $ .10  
  

 

 

   

 

 

    

 

 

 
     Earnings
(Numerator)
    Shares
(Denominator)
     Per Share
Data
 

Three Months Ended January 31, 2011

       

Net earnings

   $ 8,044       

Allocation of earnings to nonvested restricted stock

     (85     
  

 

 

      

Basic earnings per common share:

       

Earnings available to common shareholders

   $ 7,959       90,867      $ .09  
  

 

 

      

 

 

 

Effect of dilutive securities:

       

Stock options assumed exercised

       310     
    

 

 

    

Diluted earnings per common share:

       

Earnings available to common shareholders plus stock options assumed exercised

   $ 7,959       91,177      $ .09  
  

 

 

   

 

 

    

 

 

 

During the three months ended January 31, 2012, options to purchase 2,720,080 shares of common stock at prices ranging from $6.22 to $8.47 per share were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares for that period. Additionally, weighted-average shares outstanding for the three months ended January 31, 2012 exclude the effect of approximately 17,000 options because such options were not dilutive. These options expire between May 5, 2013 and December 6, 2021.

Options to purchase 1,834,102 shares of common stock at prices ranging from $6.22 to $8.47 per share for the three months ended January 31, 2011 were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares for that period. Additionally, weighted average shares outstanding for the three months ended January 31, 2011 exclude the effect of approximately 2,500 options because such options were not dilutive.

For the three months ended January 31, 2012 and 2011, all of the outstanding 214,500 market based stock options were dilutive as the respective market conditions had been previously achieved.

For the three months ended January 31, 2012 and 2011, a maximum of 13,153,500 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 10,522,798 shares of Class A common stock under the common stock warrants associated with the June 2007 senior convertible debt transaction were not dilutive, as the average prices of the Company’s stock for the three months ended January 31, 2012 and 2011 were less than the conversion price of the senior convertible notes and the strike price of the warrants.

 

27


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(8)     Reconciliation of Basic and Diluted Per Share Data—(Continued)

 

The Company includes Class A and Class B common stock in its diluted shares calculation. As of January 31, 2012, the Company’s Chairman, Frank B. Stewart, Jr., was the record holder of all of the Company’s shares of Class B common stock. The Company’s Class A and B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr.

(9)     Segment Data

The Company has determined that management’s approach to operating the business indicates that there are three operating and reportable segments: a funeral segment, a cemetery segment and a corporate trust management segment. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same. The tables below present information about reported segments for the three months ended January 31, 2012 and 2011.

 

     Total Revenue  
     Three Months
Ended
January 31, 2012
     Three Months
Ended

January  31, 2011
 

Funeral

   $ 67,866       $ 69,772   

Cemetery(1)

     50,521         53,364   

Corporate Trust Management(2)

     6,437         6,128   
  

 

 

    

 

 

 

Total

   $ 124,824       $ 129,264   
  

 

 

    

 

 

 

 

     Total Gross Profit  
     Three  Months
Ended
January 31, 2012
     Three  Months
Ended

January 31, 2011
 

Funeral

   $ 14,726       $ 16,516   

Cemetery(1)

     4,625         6,145   

Corporate Trust Management(2)

     6,045         5,694   
  

 

 

    

 

 

 

Total

   $ 25,396       $ 28,355   
  

 

 

    

 

 

 

 

(1)

Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $2,994 and $2,310 for the three months ended January 31, 2012 and 2011, respectively.

(2) 

Corporate trust management consists of trust management fees and funeral and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to the Company’s subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by the Company’s respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. Trust management fees included in funeral revenue for the three months ended January 31, 2012 and 2011 were $1,292 and $1,190, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended January 31, 2012 and 2011 were $2,853 and $2,905, respectively. Trust management fees included in cemetery revenue for the three months ended January 31, 2012 and 2011 were $1,504 and $1,300, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended January 31, 2012 and 2011 were $788 and $733, respectively.

 

28


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(9)     Segment Data—(Continued)

 

A reconciliation of total segment gross profit to total earnings before income taxes for the three months ended January 31, 2012 and 2011 is as follows:

 

     Three Months Ended January 31,  
     2012     2011  

Gross profit for reportable segments

   $ 25,396     $ 28,355  

Corporate general and administrative expenses

     (7,059     (6,639

Hurricane related charges, net

     —          (50

Net gain on dispositions

     343       —     

Other operating income, net

     194       233  

Interest expense

     (5,867     (5,736

Investment and other income, net

     46       24  
  

 

 

   

 

 

 

Earnings before income taxes

   $ 13,053     $ 16,187  
  

 

 

   

 

 

 

 

     Total Net Preneed Merchandise and
Service Sales(1)
 
     Three Months
Ended
January 31, 2012
     Three  Months
Ended

January 31, 2011
 

Funeral

   $ 22,751       $ 19,446   

Cemetery

     11,807         10,998   
  

 

 

    

 

 

 

Total

   $ 34,558       $ 30,444   
  

 

 

    

 

 

 

 

(1) 

Preneed sales amounts represent total preneed funeral trust and insurance sales and cemetery service and merchandise trust sales generated in the applicable period, net of cancellations.

 

29


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(10)     Supplementary Information

The detail of certain income statement accounts is as follows for the three months ended January 31, 2012 and 2011.

 

     Three Months Ended January 31,  
     2012      2011  

Service revenue

     

Funeral

   $ 49,034       $ 49,634  

Cemetery

     16,219         16,189  
  

 

 

    

 

 

 
     65,253         65,823  

Merchandise revenue

     

Funeral

     21,093         22,417  

Cemetery

     33,230         35,821  
  

 

 

    

 

 

 
     54,323         58,238  

Other revenue

     

Funeral

     1,884         1,815  

Cemetery

     3,364         3,388  
  

 

 

    

 

 

 
     5,248         5,203  
  

 

 

    

 

 

 

Total revenue

   $ 124,824       $ 129,264  
  

 

 

    

 

 

 

Service costs

     

Funeral

   $ 17,021       $ 15,561  

Cemetery

     10,485         10,345  
  

 

 

    

 

 

 
     27,506         25,906  

Merchandise costs

     

Funeral

     13,964         14,145  

Cemetery

     21,684         22,655  
  

 

 

    

 

 

 
     35,648         36,800  

Facility expenses

     

Funeral

     22,369         23,772  

Cemetery

     13,905         14,431  
  

 

 

    

 

 

 
     36,274         38,203  
  

 

 

    

 

 

 

Total costs

   $ 99,428       $ 100,909  
  

 

 

    

 

 

 

Service revenue includes funeral service revenue, funeral trust earnings, insurance commission revenue, burial site openings and closings and perpetual care trust earnings. Merchandise revenue includes funeral merchandise revenue, flower sales, cemetery property sales revenue, cemetery merchandise delivery revenue and merchandise trust earnings. Other revenue consists of finance charge revenue and trust management fees. Service costs include the direct costs associated with service revenue and preneed selling costs associated with preneed service sales. Merchandise costs include the direct costs associated with merchandise revenue and preneed selling costs associated with preneed merchandise sales.

 

30


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(11)     Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes

The following tables present the condensed consolidating historical financial statements as of January 31, 2012 and October 31, 2011 and for the three months ended January 31, 2012 and 2011, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Company’s 6.50 percent senior notes and its 3.125 percent and 3.375 percent senior convertible notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries of the 6.50 percent senior notes and senior convertible notes include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are not 100 percent owned, or are prohibited by law from guaranteeing the 6.50 percent senior notes and senior convertible notes. The guarantor subsidiaries of the 6.50 percent senior notes and senior convertible notes are 100 percent-owned directly or indirectly by the Company. The guarantees are full and unconditional and joint and several. In the condensed consolidating statements of earnings and other comprehensive income, corporate general and administrative expenses and interest expense of the parent are presented net of amounts charged to the guarantor and non-guarantor subsidiaries.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

 

     Three Months Ended January 31, 2012  
     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Funeral

   $ —        $ 67,033     $ 4,978     $ —        $ 72,011  

Cemetery

     —          47,342       5,471       —          52,813  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          114,375       10,449       —          124,824  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Funeral

     —          49,995       3,359       —          53,354  

Cemetery

     —          41,754       4,320       —          46,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          91,749       7,679       —          99,428  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          22,626       2,770       —          25,396  

Corporate general and administrative expenses

     (7,059     —          —          —          (7,059

Net gain on dispositions

     —          343       —          —          343  

Other operating income, net

     15       120       59       —          194  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss)

     (7,044     23,089       2,829       —          18,874  

Interest expense

     (1,530     (3,980     (357     —          (5,867

Investment and other income, net

     46       —          —          —          46  

Equity in subsidiaries

     14,136       306       —          (14,442     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     5,608       19,415       2,472       (14,442     13,053  

Income tax expense (benefit)

     (2,937     6,724       721       —          4,508  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     8,545       12,691       1,751       (14,442     8,545  

Other comprehensive income, net

     5       —          5       (5     5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 8,550     $ 12,691     $ 1,756     $ (14,447   $ 8,550  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


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STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

 

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

 

     Three Months Ended January 31, 2011  
     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Funeral

   $ —        $ 68,699     $ 5,167     $ —        $ 73,866  

Cemetery

     —          49,612       5,786       —          55,398  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          118,311       10,953       —          129,264  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Funeral

     —          50,090       3,388       —          53,478  

Cemetery

     —          42,980       4,451       —          47,431  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          93,070       7,839       —          100,909  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          25,241       3,114       —          28,355  

Corporate general and administrative expenses

     (6,639     —          —          —          (6,639

Hurricane related charges, net

     (50     —          —          —          (50

Other operating income, net

     18       161       54       —          233  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss)

     (6,671     25,402       3,168       —          21,899  

Interest expense

     (826     (4,465     (445     —          (5,736

Investment and other income, net

     24       —          —          —          24  

Equity in subsidiaries

     11,592       170       —          (11,762     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     4,119       21,107       2,723       (11,762     16,187  

Income tax expense (benefit)

     (3,925     8,278       3,790       —          8,143  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     8,044       12,829       (1,067     (11,762     8,044  

Other comprehensive loss, net

     (3     —          (3     3       (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 8,041     $ 12,829     $ (1,070   $ (11,759   $ 8,041  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

 

Condensed Consolidating Balance Sheets

 

     January 31, 2012  
     Parent      Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 51,816      $ 1,190     $ 1,889      $ —        $ 54,895   

Restricted cash and cash equivalents

     8,006        —          —           —          8,006   

Marketable securities

     —           —          419        —          419   

Receivables, net of allowances

     1,807        39,180       7,343        —          48,330   

Inventories

     244        33,730       2,567        —          36,541   

Prepaid expenses

     1,788        5,804       1,601        —          9,193   

Deferred income taxes, net

     10,300        13,518       1,105        —          24,923   

Intercompany receivables

     1,762        —          —           (1,762     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     75,723        93,422       14,924        (1,762     182,307   

Receivables due beyond one year, net of allowances

     —           55,222       11,594        —          66,816   

Preneed funeral receivables and trust investments

     —           410,142       9,476        —          419,618   

Preneed cemetery receivables and trust investments

     —           214,897       7,282        —          222,179   

Goodwill

     —           227,184       19,836        —          247,020   

Cemetery property, at cost

     —           361,716       36,200        —          397,916   

Property and equipment, at cost

     61,356        497,975       43,866        —          603,197   

Less accumulated depreciation

     46,943        243,698       19,481        —          310,122   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net property and equipment

     14,413        254,277       24,385        —          293,075   

Deferred income taxes, net

     6,056        68,473       6,186        —          80,715   

Cemetery perpetual care trust investments

     —           235,010       13,228        —          248,238   

Other assets

     9,183        4,718       1,020        —          14,921   

Intercompany receivables

     658,623        —          —           (658,623     —     

Equity in subsidiaries

     17,262        10,286       —           (27,548     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 781,260      $ 1,935,347     $ 144,131      $ (687,933   $ 2,172,805   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

            

Current liabilities:

            

Current maturities of long-term debt

   $ 5      $ —        $ —         $ —        $ 5   

Accounts payable, accrued expenses and other current liabilities

     14,599        65,310       3,930        —          83,839   

Intercompany payables

     —           —          1,762        (1,762     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     14,604        65,310       5,692        (1,762     83,844   

Long-term debt, less current maturities

     318,813        —          —           —          318,813   

Deferred income taxes, net

     —           4,493       589        —          5,082   

Intercompany payables

     —           645,269       13,354        (658,623     —     

Deferred preneed funeral revenue

     —           192,450       46,683        —          239,133   

Deferred preneed cemetery revenue

     —           230,047       28,751        —          258,798   

Deferred preneed funeral and cemetery receipts held in trust

     —           565,862       8,256        —          574,118   

Perpetual care trusts’ corpus

     —           233,221       13,258        —          246,479   

Other long-term liabilities

     18,754        1,500       —           —          20,254   

Negative equity in subsidiaries

     2,805        —          —           (2,805     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     354,976        1,938,152       116,583        (663,190     1,746,521   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Common stock

     87,196        102       376        (478     87,196   

Other

     339,065        (2,907     27,149        (24,242     339,065   

Accumulated other comprehensive income

     23        —          23        (23     23   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     426,284        (2,805     27,548        (24,743     426,284   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 781,260      $ 1,935,347     $ 144,131      $ (687,933   $ 2,172,805   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

33


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STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

 

Condensed Consolidating Balance Sheets

 

     October 31, 2011  
     Parent      Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 62,388      $ 1,937     $ 1,363      $ —        $ 65,688  

Restricted cash and cash equivalents

     6,250        —          —           —          6,250  

Marketable securities

     —           —          662        —          662  

Receivables, net of allowances

     2,040        40,405       6,701        —          49,146  

Inventories

     318        32,926       2,615        —          35,859  

Prepaid expenses

     1,214        2,289       1,552        —          5,055  

Deferred income taxes, net

     14,815        13,696       1,257        —          29,768  

Intercompany receivables

     1,762        —          —           (1,762     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     88,787        91,253       14,150        (1,762     192,428  

Receivables due beyond one year, net of allowances

     —           55,847       12,132        —          67,979  

Preneed funeral receivables and trust investments

     —           399,731       9,565        —          409,296  

Preneed cemetery receivables and trust investments

     —           209,284       7,298        —          216,582  

Goodwill

     —           227,203       19,835        —          247,038  

Cemetery property, at cost

     —           359,678       36,336        —          396,014  

Property and equipment, at cost

     59,688        495,089       43,215        —          597,992  

Less accumulated depreciation

     45,705        240,906       19,097        —          305,708  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net property and equipment

     13,983        254,183       24,118        —          292,284  

Deferred income taxes, net

     4,947        68,939       5,907        —          79,793  

Cemetery perpetual care trust investments

     —           227,428       12,964        —          240,392  

Other assets

     9,539        4,728       1,025        —          15,292  

Intercompany receivables

     660,246        —          —           (660,246     —     

Equity in subsidiaries

     15,812        9,980       —           (25,792     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 793,314      $ 1,908,254     $ 143,330      $ (687,800   $ 2,157,098  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

            

Current liabilities:

            

Current maturities of long-term debt

   $ 5      $ —        $ —         $ —        $ 5  

Accounts payable, accrued expenses and other current liabilities

     14,320        71,505       4,633        —          90,458  

Intercompany payables

     —           —          1,762        (1,762     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     14,325        71,505       6,395        (1,762     90,463  

Long-term debt, less current maturities

     317,821        —          —           —          317,821  

Deferred income taxes, net

     —           4,521       583        —          5,104  

Intercompany payables

     —           646,588       13,658        (660,246     —     

Deferred preneed funeral revenue

     —           193,452       46,834        —          240,286  

Deferred preneed cemetery revenue

     —           230,291       28,946        —          259,237  

Deferred preneed funeral and cemetery receipts held in trust

     —           550,010       8,184        —          558,194  

Perpetual care trusts’ corpus

     —           226,042       12,938        —          238,980  

Other long-term liabilities

     17,996        1,341       —           —          19,337  

Negative equity in subsidiaries

     15,496        —          —           (15,496     —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     365,638        1,923,750       117,538        (677,504     1,729,422  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Common stock

     87,976        102       376        (478     87,976  

Other

     339,682        (15,598     25,398        (9,800     339,682  

Accumulated other comprehensive income

     18        —          18        (18     18  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     427,676        (15,496     25,792        (10,296     427,676  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 793,314      $ 1,908,254     $ 143,330      $ (687,800   $ 2,157,098  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

34


Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

 

Condensed Consolidating Statements of Cash Flows

 

     Three Months Ended January 31, 2012  
     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operating activities

   $ 816     $ 5,514     $ 1,455     $ —         $ 7,785  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

           

Proceeds from sales of marketable securities

     —          —          250       —           250  

Deposits of restricted funds

     (1,756     —          —          —           (1,756

Proceeds from sale of assets

     —          233       —          —           233  

Additions to property and equipment

     (451     (5,198     (875     —           (6,524

Other

     —          23       —          —           23  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (2,207     (4,942     (625     —           (7,774
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

           

Repayments of long-term debt

     (1     —          —          —           (1

Intercompany receivables (payables)

     1,623       (1,319     (304     —           —     

Debt refinancing costs

     (34     —          —          —           (34

Issuance of common stock

     117       —          —          —           117  

Purchase and retirement of common stock

     (7,847     —          —          —           (7,847

Dividends

     (3,062     —          —          —           (3,062

Excess tax benefits from share-based payment arrangements

     23       —          —          —           23  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (9,181     (1,319     (304     —           (10,804
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash

     (10,572     (747     526       —           (10,793

Cash and cash equivalents, beginning of period

     62,388       1,937       1,363       —           65,688  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 51,816     $ 1,190     $ 1,889     $ —         $ 54,895  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

 

Condensed Consolidating Statements of Cash Flows

 

     Three Months Ended January 31, 2011  
     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operating activities

   $ 3,765     $ 9,698     $ 1,771     $ —         $ 15,234  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

           

Proceeds from sales of certificates of deposit

     10,000       —          —          —           10,000  

Purchases of marketable securities

     —          —          (6     —           (6

Purchase of subsidiaries, net of cash acquired

     —          (1,809     —          —           (1,809

Additions to property and equipment

     (592     (3,749     (263     —           (4,604

Other

     —          28       —          —           28  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     9,408       (5,530     (269     —           3,609  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

           

Repayments of long-term debt

     (1     —          —          —           (1

Intercompany receivables (payables)

     6,056       (4,811     (1,245     —           —     

Issuance of common stock

     341       —          —          —           341  

Purchase and retirement of common stock

     (8,108     —          —          —           (8,108

Dividends

     (2,749     —          —          —           (2,749

Excess tax benefits from share based payment arrangements

     51       —          —          —           51  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (4,410     (4,811     (1,245     —           (10,466
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash

     8,763       (643     257       —           8,377   

Cash and cash equivalents, beginning of period

     48,270       6,055       1,735       —           56,060  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 57,033     $ 5,412     $ 1,992     $ —         $ 64,437  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(12)     Dispositions

The Company recorded a net gain on disposition of $343 for the three months ended January 31, 2012. The Company sold one funeral home from the funeral segment in the first three months of fiscal year 2012. The change in goodwill from October 31, 2011 to January 31, 2012 is a result of this sale.

(13)     Consolidated Comprehensive Income

Consolidated comprehensive income for the three months ended January 31, 2012 and 2011 is as follows:

 

     Three Months Ended January 31,  
     2012     2011  

Net earnings

   $ 8,545     $ 8,044  

Other comprehensive income (loss):

    

Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of ($2) and $2, respectively

     5       (3

Reduction in net unrealized losses associated with available-for-sale securities of the trusts

     18,127       17,081  

Reclassification of the net unrealized losses activity attributable to the deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus

     (18,127     (17,081
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     5       (3
  

 

 

   

 

 

 

Total comprehensive income

   $ 8,550     $ 8,041  
  

 

 

   

 

 

 

(14)     Long-term Debt

 

     January 31, 2012      October 31, 2011  

Long-term debt:

     

3.125% senior convertible notes due 2014, net of unamortized discount of $6,915 and $7,611 as of January 31, 2012 and October 31, 2011, respectively

   $ 79,501      $ 78,805  

3.375% senior convertible notes due 2016, net of unamortized discount of $5,886 and $6,183 as of January 31, 2012 and October 31, 2011, respectively

     39,233        38,936  

Senior secured revolving credit facility

     —           —     

6.50% senior notes due 2019

     200,000        200,000  

Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rate of 8.0% as of January 31, 2012 and October 31, 2011, partially secured by assets of subsidiaries, with maturities through 2022

     84        85  
  

 

 

    

 

 

 

Total long-term debt

     318,818        317,826  

Less current maturities

     5        5  
  

 

 

    

 

 

 
   $ 318,813      $ 317,821  
  

 

 

    

 

 

 

 

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Table of Contents

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

(14)     Long-term Debt—(Continued)

 

Fair Value

As of January 31, 2012, the carrying values of the Company’s 3.125 percent senior convertible notes due 2014 (the “2014 Notes”) and 3.375 percent senior convertible notes due 2016 (the “2016 Notes”), including accrued interest, were $79,620 and $39,301, respectively, compared to fair values of $83,511 and $43,184, respectively. The aggregate principal amounts outstanding of the 2014 Notes and 2016 Notes as of January 31, 2012 were $86,416 and $45,119, respectively. As of January 31, 2012, the carrying value of the Company’s 6.50 percent senior notes, including accrued interest, was $203,792 compared to a fair value of $209,296. Fair values were determined using quoted market prices for those securities and are classified within Level 1 of the three-level valuation hierarchy.

(15)     Income Taxes

Income tax expense for the three months ended January 31, 2012 was impacted by a $600 overall reduction in the tax valuation allowance primarily due to the reduction in the portion of the valuation allowance related to capital losses associated with the positive performance of the Company’s trust portfolio during the three months ended January 31, 2012.

In January 2011, the government of Puerto Rico signed into law corporate tax rate changes that decreased the top tax rate for businesses from 39 percent to 30 percent. The Company will benefit from this reduced rate when paying taxes in the future. However, as a result of this change, the Company was required to revalue its previously recorded Puerto Rican-related deferred tax asset using the 30 percent current top tax rate. During the three months ended January 31, 2011, the Company recorded a one-time, non-cash charge of $2,900 ($4,500 charge less a federal tax benefit of $1,600) in order to decrease the Puerto Rican deferred tax asset balance. The Puerto Rican deferred tax asset balance decreased from approximately $19,100 at the previously required 39 percent tax rate to approximately $14,700 at the newly-enacted 30 percent tax rate. This change in deferred tax assets increased the Company’s income tax expense for the three months ended January 31, 2011 by $2,900. Income tax expense for the three months ended January 31, 2011 was also impacted by a $900 overall reduction in the tax valuation allowance primarily due to the reduction in the portion of the valuation allowance related to capital losses associated with the positive performance of the Company’s trust portfolio during the three months ended January 31, 2011.

(16)     Subsequent Events

As of February 29, 2012, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts improved 2.1 percent, or approximately $17,429, from January 31, 2012.

Subsequent to January 31, 2012 through February 29, 2012, the Company purchased an additional 380,358 shares of its Class A common stock for approximately $2,406 at an average price of $6.32 per share. As of February 29, 2012, there is $33,539 remaining available under the Company’s $125,000 stock repurchase program.

 

38


Table of Contents

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our MD&A and Risk Factors contained in our Form 10-K for the fiscal year ended October 31, 2011 (the “2011 Form 10-K”) and in conjunction with our consolidated financial statements included in this report and in our 2011 Form 10-K.

This report contains forward-looking statements that are generally identifiable through the use of words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “project,” “will” and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Risk Factors in our 2011 Form 10-K and in this report. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

Overview

General

We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. As of January 31, 2012, we owned and operated 217 funeral homes and 141 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral, cremation and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings, finance charges on installment sales contracts and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see MD&A included in Item 7 in our 2011 Form 10-K.

Financial Summary

For the first quarter of fiscal year 2012, net earnings increased $0.4 million to $8.5 million from $8.1 million for the first quarter of fiscal year 2011. Revenue decreased $4.5 million to $124.8 million for the quarter ended January 31, 2012. Funeral revenue decreased $1.9 million to $72.0 million from $73.9 million in the first quarter of 2011. During the first quarter of 2012, we experienced a 4.4 percent decline in same-store funeral services performed, which we believe is generally consistent with industry-wide data in our markets. Our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 3.1 percent, partially offset by a decrease in average revenue per cremation service of 0.9 percent. Cemetery revenue decreased $2.6 million to $52.8 million for the quarter ended January 31, 2012 from $55.4 million for the quarter ended January 31, 2011. As a result of lower average down payments, we experienced a $3.3 million decline in cemetery property revenue due to the revenue recognition requirements for cemetery property sales. In addition, we experienced a $1.3 million decrease related to the timing of construction during the period on various cemetery projects. This $4.6 million decrease was partially offset by a $0.9 million improvement in revenue related to trust activities and a $0.8 million, or 3.7 percent, increase in cemetery property sales.

Consolidated gross profit decreased $3.0 million to $25.4 million for the quarter ending January 31, 2012. Funeral gross profit decreased $1.7 million to $18.7 million for the first quarter of 2012, primarily due to the $1.9 million decrease in revenue. Cemetery gross profit decreased $1.3 million to $6.7 million for the first quarter of 2012, primarily due to the decrease in cemetery revenue. In addition, as a result of Eastman Kodak’s bankruptcy, we recorded a $0.6 million charge to record a probable funding obligation related to our perpetual care trusts.

 

39


Table of Contents

Corporate general and administrative expenses increased $0.4 million to $7.0 million for the first quarter of 2012, compared to $6.6 million for the same period of 2011. During the first quarter of 2012, we invested $1.1 million in continuous improvement,
e-commerce and third-party growth initiatives, compared to $0.4 million for the same period of last year. The effective tax rate for the first quarter of 2012 was 34.5 percent compared to 50.3 percent for the same period in 2011. For the three months ended January 31, 2012, we recorded a benefit of $0.6 million resulting from a reduction in the valuation allowance for capital losses, associated with the positive performance of our trust portfolio. The higher rate for the three months ended January 31, 2011 was primarily due to a change in Puerto Rican tax legislation that decreased the top tax rate for businesses from 39 percent to 30 percent. As a result, we revalued our previously recorded deferred tax assets and recorded a one-time, non-cash charge to income tax expense for $2.9 million, net during the first quarter of 2011. This charge was partially offset by a tax benefit of $0.9 million primarily related to the reduction in the valuation allowance for capital losses associated with the positive performance of our trust portfolio. For additional information, see Note 17 to the consolidated financial statements in our Form 10-K for the year ended October 31, 2011.

During the first quarter of 2012, we repurchased 1.3 million shares of our outstanding Class A common stock for approximately $7.8 million. Subsequent to quarter-end, we repurchased an additional 0.4 million shares of our outstanding Class A common stock for $2.4 million. As of February 29, 2012, we had $33.5 million remaining under the $125.0 million program authorized by the Board of Directors.

For the first quarter of 2012, preneed cemetery property sales increased 3.7 percent compared to the same period of last year. In addition, our net preneed funeral sales increased 17.0 percent during the first quarter of 2012 compared to the first quarter of 2011. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

Our operations provided cash of $7.8 million for the three months ended January 31, 2012, compared to $15.2 million for the same period of last year. During the first quarter of 2012, we invested cash in several cemetery inventory development projects, including our cremation gardens. In addition, the decline in operating cash flow was due in part to the decrease in pre-tax income, the timing of payroll payments, as well as trust withdrawals and deposits.

We are planning to develop cremation gardens and other cremation projects in our cemeteries over the next few years. We have successfully completed 11 cremation projects, and we currently have 16 projects under construction with more than 25 additional projects under feasibility review. We are working to complete a number of these projects in fiscal year 2012 and expect to spend approximately $12 million throughout the fiscal year. Through the first quarter of fiscal year 2012, we have spent approximately $3 million.

During the first quarter of fiscal year 2012, we experienced positive trends in the overall financial markets and in our preneed and perpetual care trusts. Specifically, our preneed funeral and cemetery merchandise and services trusts (“preneed trusts”) experienced a three month total return, including both realized and unrealized gains and losses, of 4.1 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized gains and losses, of 3.9 percent. As of January 31, 2012, the fair market value of our preneed trusts and our cemetery perpetual care trusts was $828.7 million, an improvement of 3.0 percent, or $24.1 million, from October 31, 2011 and 1.5 percent, or $12.6 million, from January 31, 2011.

As of January 31, 2012 and October 31, 2011, the fair market values of the investments in our preneed trusts were $87.4 million and $101.1 million, respectively, lower than our cost basis. In our cemetery perpetual care trusts, as of January 31, 2012 and October 31, 2011, the fair market values of our investments were $26.3 million and $30.7 million, respectively, lower than our cost basis.

The preneed contracts we manage are long-term in nature, and we believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. As of January 31, 2012 and October 31, 2011, we had $181.8 million and $179.0 million, respectively, in distributable earnings in our funeral and cemetery merchandise and services trusts that have been previously realized and allocated to contracts that will be recognized in the future as the underlying contracts are ultimately performed.

As of February 29, 2012, the fair market value of our preneed trusts and our cemetery perpetual care trusts increased 2.1 percent, or approximately $17.4 million from January 31, 2012, which is consistent with the improvement in the overall financial markets.

 

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The sectors in which our trust investment portfolio is invested have not materially changed from that disclosed in our 2011 Form 10-K. The following table presents the material sectors in which our trust portfolio is invested and the percentage of each sector to the total trust portfolio as of January 31, 2012 (in millions):

 

     Preneed Trusts     Cemetery Perpetual Care Trusts  

Sector

   Fair Market
Value
     Percentage of
Portfolio
    Fair Market
Value
     Percentage
of Portfolio
 

Cash and mutual funds

   $ 261.8        45   $ 109.0         44

Financial Services

   $ 65.3        11   $ 43.4         18

Information Technology

   $ 56.9        10   $ 13.4         5

Issuer specific investments in the financial services sector represent $65.3 million of the fair market value of our preneed trust portfolio as of January 31, 2012, of which 61 percent related to investments in preferred stock, 21 percent related to common stock and 18 percent related to fixed-income securities. Issuer specific investments in the financial services sector represented $43.4 million of the fair market value of our cemetery perpetual care trust portfolio as of January 31, 2012, of which 68 percent related to investments in preferred stock, 24 percent related to fixed-income securities and 8 percent related to common stock.

The following table presents the material sectors in which our trust portfolio currently has unrealized losses and the percentage of each sector to the total unrealized losses as of January 31, 2012 (in millions):

 

     Preneed Trusts     Cemetery Perpetual Care Trusts  

Sector

   Unrealized
Losses
     Percentage of
Total
Unrealized
Losses
    Unrealized
Losses
     Percentage of
Total
Unrealized
Losses
 

Financial Services

   $ 8.5        9   $ 5.3         16

Information Technology

   $ 28.3        29   $ 7.3         23

Each quarter we perform a separate analysis to determine whether our preneed contracts are in a loss position and whether a charge to earnings to record a liability for any expected losses is required. No charge has ever been required. For additional information, see Note 2(m) to the consolidated financial statements included in Item 8. and “Overview of Critical Accounting Policies” in the 2011 Form 10-K.

In states where we withdraw and recognize capital gains in our cemetery perpetual care trusts, if we realize subsequent net capital losses (i.e., losses in excess of capital gains in the trust) and the fair market value of the trust assets are less than the aggregate amounts required to be contributed to the trust, some states may require us to make cash deposits to the trusts or may require us to stop withdrawing earnings until future earnings restore the initial corpus. As of January 31, 2012 and October 31, 2011, we had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $12.2 million and $12.0 million, respectively. We recorded an additional $0.6 million and $0.1 million for the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust for the three months ended January 31, 2012 and 2011, respectively. The additional funding obligation in fiscal year 2012 is primarily related to the bankruptcy of Eastman Kodak.

For additional information regarding our preneed trusts and our cemetery perpetual care trusts, including further information on the estimated probable funding obligation, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in this report.

 

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The following table presents our trust portfolio total returns including realized and unrealized gains and losses:

 

     Funeral and Cemetery
Merchandise and
Services Trusts(1)
    Cemetery Perpetual
Care Trusts(1)
 

For the quarter ended January 31, 2012

     4.1 %     3.9 %

For the last twelve months ended January 31, 2012

     3.8 %     6.6 %

For the last three years ended January 31, 2012

     15.4 %     16.7 %

For the last five years ended January 31, 2012

     1.2 %     2.9 %

 

  (1)

Periods less than a year represent actual returns. Periods of one year or more represent average annualized returns.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2011 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2011 Form 10-K.

Results of Operations

The following discussion segregates our financial results into our various segments, grouped by our funeral and cemetery operations. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein.

Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011

Funeral Operations

 

     Three Months Ended January 31,  
     2012      2011      Decrease  
     (In millions)  

Funeral Revenue:

        

Funeral Home Locations

   $ 67.9      $ 69.8       $ (1.9

Corporate Trust Management (1)

     4.1        4.1         —     
  

 

 

    

 

 

    

 

 

 

Total Funeral Revenue

   $ 72.0      $ 73.9       $ (1.9
  

 

 

    

 

 

    

 

 

 

Funeral Costs:

        

Funeral Home Locations

   $ 53.1      $ 53.3       $ (.2

Corporate Trust Management (1)

     .2        .2         —     
  

 

 

    

 

 

    

 

 

 

Total Funeral Costs

   $ 53.3      $ 53.5       $ (.2
  

 

 

    

 

 

    

 

 

 

Funeral Gross Profit:

        

Funeral Home Locations

   $ 14.8      $ 16.5       $ (1.7

Corporate Trust Management (1)

     3.9        3.9         —     
  

 

 

    

 

 

    

 

 

 

Total Funeral Gross Profit

   $ 18.7      $ 20.4       $ (1.7
  

 

 

    

 

 

    

 

 

 

 

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Same-Store Analysis for the Three Months Ended January 31, 2012 and 2011

 

Change in Average Revenue

Per Funeral Service

   Change in  Same-Store
Funeral Services
    Same-Store Cremation
Rate
 
           2012     2011  

1.3% (1)

     (4.4 )%      43.2     41.7

 

(1) 

Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended January 31, 2012 and 2011 were $1.3 million and $1.2 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended January 31, 2012 and 2011 were $2.8 million and $2.9 million, respectively.

Funeral revenue decreased $1.9 million, or 2.6 percent, to $72.0 million in the first quarter of 2012 from $73.9 million in the first quarter of 2011. During the first quarter of 2012 we experienced a 4.4 percent decline in same-store funeral services performed, which we believe is generally consistent with industry-wide data in our markets. In addition, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 3.1 percent, partially offset by a decrease in average revenue per cremation service of 0.9 percent. These changes resulted in an overall improvement in same-store average revenue per funeral service of 1.3 percent. The cremation rate for our same-store operations was 43.2 percent for the first quarter of 2012 compared to 41.7 percent for the first quarter of 2011.

Funeral gross profit decreased $1.7 million to $18.7 million for the first quarter of 2012 compared to $20.4 million for the same period of 2011, primarily due to the $1.9 million decrease in revenue, as noted above.

Cemetery Operations

 

     Three Months Ended January 31,  
     2012      2011      Increase
(Decrease)
 
     (In millions)  

Cemetery Revenue:

        

Cemetery Locations

   $ 50.5      $ 53.4       $ (2.9

Corporate Trust Management (1)

     2.3        2.0         .3  
  

 

 

    

 

 

    

 

 

 

Total Cemetery Revenue

   $ 52.8      $ 55.4       $ (2.6
  

 

 

    

 

 

    

 

 

 

Cemetery Costs:

        

Cemetery Locations

   $ 45.9      $ 47.2       $ (1.3

Corporate Trust Management (1)

     .2        .2         —     
  

 

 

    

 

 

    

 

 

 

Total Cemetery Costs

   $ 46.1      $ 47.4       $ (1.3
  

 

 

    

 

 

    

 

 

 

Cemetery Gross Profit:

        

Cemetery Locations

   $ 4.6      $ 6.2       $ (1.6

Corporate Trust Management (1)

     2.1        1.8         .3  
  

 

 

    

 

 

    

 

 

 

Total Cemetery Gross Profit

   $ 6.7      $ 8.0       $ (1.3
  

 

 

    

 

 

    

 

 

 

 

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(1) 

Corporate trust management consists of trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended January 31, 2012 and 2011 were $1.5 million and $1.3 million, respectively, and cemetery trust earnings included in cemetery revenue for the three months ended January 31, 2012 and 2011 were $0.8 million and $0.7 million. Perpetual care trust earnings were $3.0 million and $2.3 million for the three months ended January 31, 2012 and 2011, respectively, and are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.

Cemetery revenue decreased $2.6 million, or 4.7 percent, to $52.8 million for the quarter ended January 31, 2012 from $55.4 million for the quarter ended January 31, 2011. As a result of lower average down payments, we experienced a $3.3 million decline in cemetery property revenue due to the revenue recognition requirements for cemetery property sales. In addition, we experienced a $1.3 million decrease related to the timing of construction during the period on various cemetery projects. This $4.6 million decrease was partially offset by a $0.9 million improvement in revenue related to trust activities and a $0.8 million, or 3.7 percent, increase in cemetery property sales.

Cemetery gross profit decreased $1.3 million to $6.7 million for the first quarter of 2012, primarily due to the decrease in cemetery revenue. In addition, as a result of Eastman Kodak’s bankruptcy we recorded a $0.6 million charge to record a probable funding obligation related to our perpetual care trusts.

Other

Corporate general and administrative expenses increased $0.4 million to $7.0 million for the first quarter of 2012, compared to $6.6 million for the same period of 2011. During the first quarter of 2012, we invested $1.1 million in continuous improvement, e-commerce and third-party growth initiatives, compared to $0.4 million for the same period of last year.

The effective tax rate for the first quarter of 2012 was 34.5 percent compared to 50.3 percent for the same period in 2011. For the three months ended January 31, 2012, we recorded a benefit of $0.6 million resulting from a reduction in the valuation allowance for capital losses, associated with the improved performance of our trust portfolio. The higher rate for the three months ended January 31, 2011 was primarily due to a change in Puerto Rican tax legislation that decreased the top tax rate for businesses from 39 percent to 30 percent. As a result, we revalued our previously recorded deferred tax assets and recorded a one-time, non-cash charge to income tax expense for $2.9 million, net during the first quarter of 2011. This charge was partially offset by a tax benefit of $0.9 million primarily related to the reduction in the valuation allowance for capital losses associated with the improved performance of our trust portfolio in the first quarter of 2011. For additional information, see Note 17 to the consolidated financial statements in our 2011 Form 10-K.

During the first quarter of 2012, we repurchased 1.3 million shares of our outstanding Class A common stock for $7.8 million. Subsequent to quarter-end, we repurchased an additional 0.4 million shares of our outstanding Class A common stock for $2.4 million. As of February 29, 2012, we had $33.5 million remaining under the $125.0 million program authorized by the Board of Directors.

Cash and cash equivalents decreased $10.8 million from October 31, 2011 to January 31, 2012 primarily due to $7.8 million in purchases made under our stock repurchase program and $3.1 million of dividends paid during the first quarter of fiscal year 2012. Prepaid expenses increased $4.1 million from October 31, 2011 to January 31, 2012 primarily due to annual premiums paid in the first quarter of fiscal year 2012 for property, general liability and other insurance. Deferred income taxes decreased $4.8 million from October 31, 2011 to January 31,

 

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2012 primarily due to a decrease in the current portion of the net operating loss. Preneed funeral receivables and trust investments, preneed cemetery receivables and trust investments, cemetery perpetual care trust investments, deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus were all positively impacted by the improvement in the market value of our trust assets during the three months ended January 31, 2012. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.

Accrued payroll decreased $4.4 million from October 31, 2011 to January 31, 2012 primarily due to fiscal year 2011 incentive compensation paid in the first quarter of 2012 and due to the timing of the payroll period at quarter end. Other current liabilities decreased $3.0 million from October 31, 2011 to January 31, 2012 primarily due to the timing of our property taxes, which are typically paid at the end of the calendar year.

Preneed Sales into the Backlog

Net preneed funeral sales increased 17.0 percent during the first quarter of 2012 compared to the corresponding period in 2011. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We had $34.6 million in net preneed funeral and cemetery merchandise and services sales (including $17.1 million related to insurance-funded preneed funeral contracts) during the first quarter of 2012 to be recognized in the future as these prepaid products and services are actually delivered, compared to net preneed funeral and cemetery merchandise and services sales of $30.4 million (including $16.5 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2011. Insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in the condensed consolidated balance sheets.

Liquidity and Capital Resources

General

We generate cash in our operations primarily from at-need sales, preneed sales that turn at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn at-need, monies collected on preneed sales that are not required to be placed in trust and items such as cemetery perpetual care trust earnings and finance charges. Over the last five years, we have generated more than $60 million each year in cash flow from operations. We have historically satisfied our working capital requirements with cash flows from operations. We believe that our current level of cash on hand, projected cash flows from operations and available capacity under our $150.0 million senior secured revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future.

As of January 31, 2012, we had no amounts drawn on the $150.0 million senior secured revolving credit facility, and our availability under the facility, after giving consideration to $0.7 million outstanding letters of credit and the $23.4 million Florida bond, was $125.9 million. In addition, we also have outstanding $131.5 million principal amount in senior convertible notes as of January 31, 2012, of which $86.4 million is scheduled to mature in 2014 and $45.1 million is scheduled to mature in 2016. We have outstanding $200.0 million principal amount in senior notes set to mature in 2019. See the table below under “Contractual Obligations and Commercial Commitments” for further information on our long-term debt obligations.

Beginning in the third quarter of fiscal year 2011, we increased our quarterly cash dividend on our Class A and B common stock from three cents per share to three and one-half cents per share. Dividends amounted to $3.1 million for the three months ended January 31, 2012 compared to $2.7 million during the same period in fiscal year 2011. The declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance. In June 2011 and September 2011, we increased our stock repurchase program by $25.0 million resulting in a $125.0 million program. Under the program, we purchased 1.3 million shares of our Class A common stock for approximately $7.8 million during the three months ended January 31, 2012. In February 2012, we purchased an additional 0.4 million shares of our Class A

 

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common stock for approximately $2.4 million and as of February 29, 2012, had $33.5 million remaining available under the program. Repurchases under the program are limited to our Class A common stock, and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors.

We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. We believe that the use of our cash to make acquisitions of or investments in death care or related businesses, construct funeral homes on existing cemeteries, cemeteries of unaffiliated third parties or in strategic locations, develop inventory, pay dividends and repurchase debt and stock are all attractive options. We believe that growing our organization through acquisitions and investments remains a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our existing infrastructure. We are working on several e-commerce initiatives that we expect will provide new revenue opportunities in the future and are continuing to invest in further improving our business processes. We are planning to develop cremation gardens and other cremation projects in our cemeteries over the next few years. We have completed 11 cremation projects, and we currently have 16 projects under construction with more than 25 additional projects under feasibility review. We are working to complete a number of these projects in fiscal year 2012 and expect to spend up to $12 million in fiscal year 2012. Through the first quarter of fiscal year 2012, we have spent approximately $3 million. We regularly review acquisition and other strategic opportunities, which may require us to draw on our senior secured revolving credit facility or pursue additional debt or equity financing. We are also looking at ways to improve our organization and cost structure.

We are continuing to review all of our tax accounting methods to determine opportunities to improve our current tax position. Several possible changes are being considered that could result in potential reductions in future tax payments. At this time, we cannot predict with certainty what, if any, reductions in future tax payments we will obtain. However, we currently do not expect that these potential reductions in future tax payments, if obtained, will be as substantial as those obtained in fiscal years 2009 and 2010. We expect to have federal net operating losses available to us through most of fiscal year 2012 which will allow us to have only minimal federal cash taxes but expect to become a federal cash tax payer in fiscal year 2013.

Cash Flow

Our operations provided cash of $7.8 million for the three months ended January 31, 2012, compared to $15.2 million for the same period of last year. During the first quarter of 2012, we invested cash in several cemetery inventory development projects, including our cremation gardens. In addition, the decline in operating cash flow was due in part to the decrease in pre-tax income, the timing of payroll payments, as well as trust withdrawals and deposits.

Our investing activities resulted in a net cash outflow of $7.8 million for the three months ended January 31, 2012, compared to a net cash inflow of $3.6 million for the comparable period in 2011. The change is primarily due to an $11.5 million net change related to purchases and sales of certificates of deposit, marketable securities and restricted cash equivalents. We also purchased a funeral and cemetery business in the first three months of fiscal year 2011 resulting in a net cash outflow of $1.8 million. For the three months ended January 31, 2012, capital expenditures amounted to $6.5 million, which included $4.0 million for maintenance capital expenditures, $0.6 million for the construction of new funeral homes, $0.4 million related to the implementation of new business systems and $1.5 million for the purchase of land and a new building for an existing business. For the three months ended January 31, 2011, capital expenditures were $4.6 million, which included $4.0 million for maintenance capital expenditures, $0.5 million for the construction of new funeral homes and $0.1 million related to the implementation of new business systems.

Our financing activities resulted in a net cash outflow of $10.8 million for the three months ended January 31, 2012, compared to a net cash outflow of $10.5 million for the comparable period in 2011. Dividends paid increased from $2.7 million in the first quarter of 2011 to $3.1 million in the first quarter of 2012. In the third quarter of fiscal year 2011, we increased our quarterly cash dividend from three cents per share to three and one-half cents per share. In addition, stock repurchases during the three months ended January 31, 2012 amounted $7.8 million compared to $8.1 million in the same period of 2011.

 

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Contractual Obligations and Commercial Commitments

We have contractual obligations requiring future cash payments under existing contractual arrangements. The following table details our known future cash payments (in millions) related to various contractual obligations as of January 31, 2012:

 

     Payments Due by Period  

Contractual Obligations

   Total      Less than
1 year
     1 – 3 years      3 – 5 years      More than
5 years
 

Long-term debt obligations (1)

   $ 331.6      $ —         $ 86.4      $ 45.1      $ 200.1  

Interest on long-term debt (2)

     111.1        17.2        33.1        28.3        32.5  

Operating and capital lease obligations (3)

     33.6        4.3        8.7        5.8        14.8  

Non-competition and other agreements (4)

     0.7        0.1        0.2        0.2        0.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 477.0      $ 21.6      $ 128.4      $ 79.4      $ 247.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

As of January 31, 2012, our outstanding long-term debt obligations amounted to $331.6 million, consisting of $86.4 million of 3.125 percent senior convertible notes due 2014, $45.1 million of 3.375 percent senior convertible notes due 2016, $200.0 million of 6.50 percent senior notes due 2019 and $0.1 million of other debt. There were no amounts drawn on the senior secured revolving credit facility.

(2) 

Includes contractual interest payments for our senior convertible notes, senior notes and third-party debt.

(3) 

Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 19 years, except for eight leases that expire between 2032 and 2039. This category also includes leases under our vehicle fleet leasing program. In the first quarter of 2012, we entered into a capital lease for equipment with a three-year term for approximately $0.6 million. Our future minimum lease payments as of January 31, 2012 are $4.3 million, $4.8 million, $3.9 million, $3.2 million, $2.6 million and $14.8 million for the years ending October 31, 2012, 2013, 2014, 2015, 2016 and later years, respectively.

(4)

This category includes payments pursuant to non-competition agreements with prior owners and key employees of acquired businesses.

The following table details our known potential or possible future cash payments related to the contingent obligations specified below (in millions) as of January 31, 2012.

 

     Expiration by Period  

Contingent Obligations

   Total      Less than
1 year
     1 – 3 years      3 – 5 years      More than
5 years
 

Cemetery perpetual care trust funding obligations (1)

   $ 12.2       $ 12.2       $ —         $ —         $ —     

Long-term obligations related to uncertain tax positions (2)

     1.5         —           —           —           1.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13.7       $ 12.2       $ —         $ —         $ 1.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

In those states where we have withdrawn realized net capital gains in the past from our cemetery perpetual care trusts, regulators may seek replenishment of the subsequent realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. The estimated probable funding obligation in the cemetery perpetual care trusts in these states was $12.2 million as of January 31, 2012. As of January 31, 2012, we had net unrealized losses of $31.6 million in the trusts in these states that could be subject to a future funding obligation. Because some of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs. In those states where realized net capital gains have not been withdrawn, we believe it is reasonably possible but not probable that additional funding obligations may exist with an estimated amount of approximately $1.8 million; no charge has been recorded for these amounts as of January 31, 2012.

 

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(2)

In accordance with the required accounting guidance on uncertain tax positions, as of January 31, 2012, we have recorded $1.5 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty regarding the timing and completion of audits and possible outcomes, it is not possible to estimate the range of increase and decrease and the timing of any potential cash payments.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of January 31, 2012 consist of the following items:

 

  (1) the $23.4 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed above and in Note 19 to the consolidated financial statements in our 2011 Form 10-K; and

 

  (2) the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our condensed consolidated balance sheets, and are discussed in Note 2(i) to the consolidated financial statements in our 2011 Form 10-K.

Recent Accounting Standards

See Note 2 to the condensed consolidated financial statements included herein.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is presented in Item 7A in our 2011 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on December 15, 2011. There have been no material changes in the Company’s market risk from that disclosed in our 2011 Form 10-K. For a discussion of fair market value as of January 31, 2012 of investments in our trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included herein.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s Disclosure Committee and management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We and certain of our subsidiaries are parties to a number of legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We carry insurance with coverages and coverage limits that we believe to be adequate. Although there can be no assurance that such insurance is sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our 2011 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities

 

Period

   Total number
of shares
purchased
     Average
price paid
per share
     Total number of
shares
purchased as
part of publicly-
announced plans
or programs
     Maximum
approximate dollar
value of shares that
may yet be
purchased under the
plans or programs(1)
 

November 1, 2011 through November 30, 2011

     516,500       $ 6.19         516,500       $ 40,560,454   

December 1, 2011 through December 31, 2011

     288,400       $ 5.64         288,400       $ 38,932,461   

January 1, 2012 through January 31, 2012

     507,575       $ 5.89         507,575       $ 35,944,379   
  

 

 

       

 

 

    

Total

     1,312,475       $ 5.95         1,312,475       $ 35,944,379   
  

 

 

       

 

 

    

 

(1) 

We announced a $25.0 million stock repurchase program in September 2007, which was increased by $25.0 million in December 2007, June 2008, June 2011 and September 2011, resulting in a $125.0 million program. As of January 31, 2012, we had repurchased 13.2 million shares for $89.1 million at an average price of $6.74 per share since the inception of the program in 2007. In February 2012, we repurchased an additional 0.4 million shares for $2.4 million at an average price of $6.32 per share and, as of February 29, 2012, had $33.5 million remaining available under the program.

Item 6. Exhibits

 

3.1 Amended and Restated Articles of Incorporation of the Company, as amended and restated as of April 3, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2008)

 

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3.2 By-laws of the Company, as amended and restated as of September 8, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2008)

 

4.1 See Exhibits 3.1 and 3.2 for provisions of the Company’s Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock

 

4.2 Specimen of Class A common stock certificate (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A/A filed with the Commission on June 21, 2007)

 

4.3 Third Amended and Restated Credit Agreement dated April 20, 2011 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 21, 2011)

 

4.4 Indenture dated as of April 18, 2011 by and among Stewart Enterprises, Inc., the Guarantors and U.S. Bank National Association, as Trustee, with respect to the 6.50 percent Senior Notes due 2019 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 19, 2011)

 

4.5 Form of 6.50 percent Senior Note due 2019 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed April 19, 2011)

 

4.6 Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.125 percent Senior Convertible Notes due 2014 (including Form of 3.125 percent Senior Convertible Notes due 2014) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 27, 2007)

 

4.7 Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.375 percent Senior Convertible Notes due 2016 (including Form of 3.375 percent Senior Convertible Notes due 2016) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed June 27, 2007)

 

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer

 

31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer

 

32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer, and Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer

 

101 The following materials from Stewart Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2012 formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statement of Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

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STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

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.

 

   

STEWART ENTERPRISES, INC.

 

March 7, 2012     /s/ LEWIS J. DERBES, JR.
    Lewis J. Derbes, Jr.
    Senior Vice President,
    Chief Financial Officer and Treasurer

 

March 7, 2012     /s/ ANGELA M. LACOUR
    Angela M. Lacour
    Senior Vice President of Finance
    and Chief Accounting Officer

 

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Exhibit Index

 

31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer
31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer
32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer, and Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer
101    The following materials from Stewart Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2012 formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statement of Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

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