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 July 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 August 31, 2012, was 81,828,448 and 3,555,020, respectively.
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
2
Table of Contents
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 July 31, | ||||||||
2012 | 2011 | |||||||
Revenues: | ||||||||
Funeral | $ | 68,883 | $ | 68,761 | ||||
Cemetery | 60,356 | 55,596 | ||||||
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129,239 | 124,357 | |||||||
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Costs and expenses: | ||||||||
Funeral | 53,128 | 54,380 | ||||||
Cemetery | 49,125 | 48,225 | ||||||
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102,253 | 102,605 | |||||||
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Gross profit | 26,986 | 21,752 | ||||||
Corporate general and administrative expenses | (7,326 | ) | (6,704 | ) | ||||
Restructuring and other charges | (305 | ) | — | |||||
Hurricane related recoveries, net | — | 12,349 | ||||||
Net gain on dispositions | — | 11 | ||||||
Other operating income, net | 191 | 512 | ||||||
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Operating earnings | 19,546 | 27,920 | ||||||
Interest expense | (5,873 | ) | (5,500 | ) | ||||
Loss on early extinguishment of debt | — | (73 | ) | |||||
Investment and other income, net | 57 | 30 | ||||||
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Earnings from continuing operations before income taxes | 13,730 | 22,377 | ||||||
Income taxes | 3,834 | 10,146 | ||||||
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Earnings from continuing operations | 9,896 | 12,231 | ||||||
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Discontinued operations: | ||||||||
Loss from discontinued operations before income taxes | (380 | ) | (365 | ) | ||||
Income tax benefit | (122 | ) | (120 | ) | ||||
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Loss from discontinued operations | (258 | ) | (245 | ) | ||||
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Net earnings | $ | 9,638 | $ | 11,986 | ||||
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Basic earnings per common share: | ||||||||
Earnings from continuing operations | $ | .11 | $ | .13 | ||||
Loss from discontinued operations | — | — | ||||||
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Net earnings | $ | .11 | $ | .13 | ||||
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Diluted earnings per common share: | ||||||||
Earnings from continuing operations | $ | .11 | $ | .13 | ||||
Loss from discontinued operations | — | — | ||||||
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Net earnings | $ | .11 | $ | .13 | ||||
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Weighted average common shares outstanding (in thousands): | ||||||||
Basic | 85,798 | 90,182 | ||||||
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Diluted | 86,178 | 90,741 | ||||||
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Dividends declared per common share | $ | .040 | $ | .035 | ||||
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See accompanying notes to condensed consolidated financial statements.
3
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended July 31, | ||||||||
2012 | 2011 | |||||||
Revenues: | ||||||||
Funeral | $ | 213,646 | $ | 215,601 | ||||
Cemetery | 173,015 | 167,685 | ||||||
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386,661 | 383,286 | |||||||
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Costs and expenses: | ||||||||
Funeral | 160,685 | 162,784 | ||||||
Cemetery | 144,456 | 144,754 | ||||||
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305,141 | 307,538 | |||||||
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Gross profit | 81,520 | 75,748 | ||||||
Corporate general and administrative expenses | (20,264 | ) | (19,548 | ) | ||||
Restructuring and other charges | (2,852 | ) | — | |||||
Hurricane related recoveries, net | — | 12,245 | ||||||
Net gain (loss) on dispositions | 332 | (389 | ) | |||||
Other operating income, net | 773 | 1,193 | ||||||
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Operating earnings | 59,509 | 69,249 | ||||||
Interest expense | (17,544 | ) | (16,968 | ) | ||||
Loss on early extinguishment of debt | — | (1,884 | ) | |||||
Investment and other income, net | 148 | 394 | ||||||
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Earnings from continuing operations before income taxes | 42,113 | 50,791 | ||||||
Income taxes | 13,773 | 20,262 | ||||||
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Earnings from continuing operations | 28,340 | 30,529 | ||||||
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Discontinued operations: | ||||||||
Loss from discontinued operations before income taxes | (2,065 | ) | (810 | ) | ||||
Income tax benefit | (644 | ) | (309 | ) | ||||
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Loss from discontinued operations | (1,421 | ) | (501 | ) | ||||
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Net earnings | $ | 26,919 | $ | 30,028 | ||||
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Basic earnings per common share: | ||||||||
Earnings from continuing operations | $ | .32 | $ | .33 | ||||
Loss from discontinued operations | (.01 | ) | — | |||||
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Net earnings | $ | .31 | $ | .33 | ||||
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Diluted earnings per common share: | ||||||||
Earnings from continuing operations | $ | .32 | $ | .33 | ||||
Loss from discontinued operations | (.01 | ) | — | |||||
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Net earnings | $ | .31 | $ | .33 | ||||
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Weighted average common shares outstanding (in thousands): | ||||||||
Basic | 86,295 | 90,497 | ||||||
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Diluted | 86,619 | 91,058 | ||||||
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Dividends declared per common share | $ | .115 | $ | .095 | ||||
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See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
July 31, 2012 | October 31, 2011 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 78,077 | $ | 65,688 | ||||
Restricted cash and cash equivalents | 6,250 | 6,250 | ||||||
Marketable securities | 727 | 662 | ||||||
Receivables, net of allowances | 50,379 | 49,146 | ||||||
Inventories | 36,384 | 35,859 | ||||||
Prepaid expenses | 6,220 | 5,055 | ||||||
Deferred income taxes, net | 17,624 | 29,768 | ||||||
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Total current assets | 195,661 | 192,428 | ||||||
Receivables due beyond one year, net of allowances | 70,929 | 67,979 | ||||||
Preneed funeral receivables and trust investments | 428,604 | 409,296 | ||||||
Preneed cemetery receivables and trust investments | 220,629 | 216,582 | ||||||
Goodwill | 249,584 | 247,038 | ||||||
Cemetery property, at cost | 400,697 | 396,014 | ||||||
Property and equipment, at cost: | ||||||||
Land | 47,652 | 46,538 | ||||||
Buildings | 356,651 | 353,688 | ||||||
Equipment and other | 203,022 | 197,766 | ||||||
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607,325 | 597,992 | |||||||
Less accumulated depreciation | 318,258 | 305,708 | ||||||
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Net property and equipment | 289,067 | 292,284 | ||||||
Deferred income taxes, net | 85,110 | 79,793 | ||||||
Cemetery perpetual care trust investments | 259,440 | 240,392 | ||||||
Other assets | 14,153 | 15,292 | ||||||
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Total assets | $ | 2,213,874 | $ | 2,157,098 | ||||
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(continued)
5
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
July 31, 2012 | October 31, 2011 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 6 | $ | 5 | ||||
Accounts payable and accrued expenses | 21,539 | 24,547 | ||||||
Accrued payroll and other benefits | 19,417 | 18,181 | ||||||
Accrued insurance | 22,452 | 22,398 | ||||||
Accrued interest | 4,310 | 2,129 | ||||||
Estimated obligation to fund cemetery perpetual care trust | 12,064 | 12,017 | ||||||
Other current liabilities | 9,733 | 10,013 | ||||||
Income taxes payable | 4,074 | 1,173 | ||||||
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Total current liabilities | 93,595 | 90,463 | ||||||
Long-term debt, less current maturities | 320,850 | 317,821 | ||||||
Deferred income taxes, net | 5,509 | 5,104 | ||||||
Deferred preneed funeral revenue | 240,648 | 240,286 | ||||||
Deferred preneed cemetery revenue | 265,635 | 259,237 | ||||||
Deferred preneed funeral and cemetery receipts held in trust | 580,147 | 558,194 | ||||||
Perpetual care trusts’ corpus | 257,706 | 238,980 | ||||||
Other long-term liabilities | 20,427 | 19,337 | ||||||
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Total liabilities | 1,784,517 | 1,729,422 | ||||||
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Commitments and contingencies | ||||||||
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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 82,281,197 and 84,421,416 shares at July 31, 2012 and October 31, 2011, respectively | 82,281 | 84,421 | ||||||
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at July 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 | 492,153 | 515,274 | ||||||
Accumulated deficit | (148,673 | ) | (175,592 | ) | ||||
Accumulated other comprehensive income: | ||||||||
Unrealized appreciation of investments | 41 | 18 | ||||||
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Total accumulated other comprehensive income | 41 | 18 | ||||||
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Total shareholders’ equity | 429,357 | 427,676 | ||||||
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Total liabilities and shareholders’ equity | $ | 2,213,874 | $ | 2,157,098 | ||||
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See accompanying notes to condensed consolidated financial statements.
6
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 | — | — | 26,919 | — | 26,919 | |||||||||||||||
Other comprehensive income: | ||||||||||||||||||||
Unrealized appreciation of investments, net of deferred tax expense of ($13) | — | — | — | 23 | 23 | |||||||||||||||
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Total other comprehensive income | — | — | — | 23 | 23 | |||||||||||||||
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Total comprehensive income | — | — | 26,919 | 23 | 26,942 | |||||||||||||||
Restricted stock activity | 407 | 677 | — | — | 1,084 | |||||||||||||||
Issuance of common stock | 109 | 545 | — | — | 654 | |||||||||||||||
Stock options exercised | 287 | 929 | — | — | 1,216 | |||||||||||||||
Stock option expense | — | 1,076 | — | — | 1,076 | |||||||||||||||
Tax benefit associated with stock activity | — | (261 | ) | — | — | (261 | ) | |||||||||||||
Purchase and retirement of common stock | (2,943 | ) | (16,132 | ) | — | — | (19,075 | ) | ||||||||||||
Dividends ($.115 per share) | — | (9,955 | ) | — | — | (9,955 | ) | |||||||||||||
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Balance July 31, 2012 | $ | 85,836 | $ | 492,153 | $ | (148,673 | ) | $ | 41 | $ | 429,357 | |||||||||
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(1) | Amount includes 82,281 and 84,421 shares (in thousands) of Class A common stock with a stated value of $1 per share as of July 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.
7
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended July 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 26,919 | $ | 30,028 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Net loss on dispositions | 539 | 389 | ||||||
Loss on early extinguishment of debt | — | 1,884 | ||||||
Non-cash restructuring charge | 1,236 | — | ||||||
Premiums paid on early extinguishment of debt | — | (850 | ) | |||||
Depreciation and amortization | 19,859 | 20,308 | ||||||
Non-cash interest and amortization of discount on senior convertible notes | 4,127 | 3,957 | ||||||
Provision for doubtful accounts | 3,041 | 3,859 | ||||||
Share-based compensation | 2,630 | 2,275 | ||||||
Excess tax benefits from share-based payment arrangements | (23 | ) | (154 | ) | ||||
Provision for deferred income taxes | 6,935 | 16,566 | ||||||
Estimated obligation to fund cemetery perpetual care trust | 567 | 72 | ||||||
Other | 90 | (206 | ) | |||||
Changes in assets and liabilities: | ||||||||
Increase in receivables | (7,380 | ) | (14,014 | ) | ||||
Increase in prepaid expenses | (1,165 | ) | (1,359 | ) | ||||
Increase in inventories and cemetery property | (5,636 | ) | (2,844 | ) | ||||
Federal income tax refunds | — | 1,698 | ||||||
Increase (decrease) in accounts payable and accrued expenses | 1,307 | (2,029 | ) | |||||
Net effect of preneed funeral production and maturities: | ||||||||
Decrease in preneed funeral receivables and trust investments | 1,703 | 4,683 | ||||||
Increase (decrease) in deferred preneed funeral revenue | 503 | (4,082 | ) | |||||
Decrease in deferred preneed funeral receipts held in trust | (2,959 | ) | (1,098 | ) | ||||
Net effect of preneed cemetery production and deliveries: | ||||||||
(Increase) decrease in preneed cemetery receivables and trust investments | 409 | (5,342 | ) | |||||
Increase (decrease) in deferred preneed cemetery revenue | 6,398 | (1,503 | ) | |||||
Increase (decrease) in deferred preneed cemetery receipts held in trust | (695 | ) | 8,959 | |||||
Increase (decrease) in other | 334 | (730 | ) | |||||
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Net cash provided by operating activities | 58,739 | 60,467 | ||||||
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Cash flows from investing activities: | ||||||||
Proceeds from sales of certificates of deposit and marketable securities and release of restricted funds | 2,006 | 10,000 | ||||||
Deposits of restricted funds and purchases of restricted cash equivalents and marketable securities | (2,036 | ) | (6,912 | ) | ||||
Proceeds from sale of assets | 533 | 332 | ||||||
Purchase of subsidiaries and other investments, net of cash acquired | (3,113 | ) | (9,110 | ) | ||||
Additions to property and equipment | (16,215 | ) | (15,688 | ) | ||||
Other | 87 | 103 | ||||||
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Net cash used in investing activities | (18,738 | ) | (21,275 | ) | ||||
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Cash flows from financing activities: | ||||||||
Proceeds of long term debt | — | 200,000 | ||||||
Repayments of long-term debt | (4 | ) | (200,004 | ) | ||||
Debt refinancing costs | (34 | ) | (5,933 | ) | ||||
Issuance of common stock | 1,433 | 1,386 | ||||||
Purchase and retirement of common stock | (19,075 | ) | (15,622 | ) | ||||
Dividends | (9,955 | ) | (8,662 | ) | ||||
Excess tax benefits from share-based payment arrangements | 23 | 154 | ||||||
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Net cash used in financing activities | (27,612 | ) | (28,681 | ) | ||||
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Net increase in cash | 12,389 | 10,511 | ||||||
Cash and cash equivalents, beginning of period | 65,688 | 56,060 | ||||||
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Cash and cash equivalents, end of period | $ | 78,077 | $ | 66,571 | ||||
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Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Income taxes, net | $ | 2,542 | $ | 2,215 | ||||
Interest | $ | 11,452 | $ | 13,613 | ||||
Non-cash investing and financing activities: | ||||||||
Issuance of common stock to directors | $ | 437 | $ | 456 | ||||
Issuance of restricted stock, net of forfeitures | $ | 1,084 | $ | 924 |
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 July 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 July 31, 2012, and for the three and nine months ended July 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 and nine months ended July 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. Stock option expense is reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $358 and $281 for the three months ended July 31, 2012 and 2011, respectively, and $1,076 and $842 for the nine months ended July 31, 2012 and 2011, respectively. As of July 31, 2012, there was $3,305 of total unrecognized compensation costs related to stock options that is expected to be recognized over a weighted-average period of 2.8 years. Total stock option expense for fiscal year 2012 is expected to be $1,385. The expense related to restricted stock is reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $385 and $333 for the three months ended July 31, 2012 and 2011,
9
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) |
respectively, and $1,117 and $977 for the nine months ended July 31, 2012 and 2011, respectively. As of July 31, 2012, there was $1,311 of remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2012 is expected to be $1,539.
During the nine months ended July 31, 2012, 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. During the nine months ended July 31, 2011, 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 issued 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 nine months ended July 31, 2012:
Grant Type | Number of Shares Granted | Weighted Average Price per Share | Vesting Period | Vesting Condition | ||||||||||
Stock options | 1,215,000 | $ | 6.26 | Equal one-fourth portions over 4 years | Service condition | |||||||||
Restricted stock | 449,500 | $ | 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 nine months ended July 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 nine months ended July 31, 2012, the Company granted 449,500 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 nine months ended July 31, 2012, the Company repurchased 2,942,840 shares of its Class A common stock for $18,994 at an average price of $6.45 per share. As of July 31, 2012, the Company has repurchased 14,844,763 shares of its Class A common stock since the start of the program for $100,235 at an average price of $6.75 per share and has $24,765 still authorized under this program.
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) |
(g) | Dividends |
In March 2005, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of Class A and B common stock. In September 2009, June 2011 and March 2012, the Company announced that it had increased its quarterly dividend rate by one half cent per share. Effective March 2012, the quarterly dividend rate is four cents per share of Class A and B common stock. Although the Company intends to pay regular quarterly cash dividends for the foreseeable future, 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 the Company’s financial performance. For the nine months ended July 31, 2012, and 2011, the Company paid $9,955 and $8,662, respectively, in dividends.
(h) | 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 July 31, 2012 and October 31, 2011, the Company’s receivables and related allowances were as follows:
Receivables as of July 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 | $ | 8,651 | $ | 8,317 | ||||
Current receivables – other | 45,777 | 45,455 | ||||||
Receivables, due beyond one year – other | 76,234 | 75,097 | ||||||
Preneed funeral receivables | 44,069 | 43,457 | ||||||
Preneed cemetery receivables | 29,057 | 30,270 | ||||||
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|
|
| |||||
Total | $ | 203,788 | $ | 202,596 | ||||
|
|
|
| |||||
Total current receivables | 54,428 | 53,772 | ||||||
Total noncurrent receivables | 149,360 | 148,824 | ||||||
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| |||||
Total | $ | 203,788 | $ | 202,596 | ||||
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11
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) |
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 July 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 | $ | (4,049 | ) | $ | (4,626 | ) | ||
Receivables, due beyond one year – other | (5,305 | ) | (7,118 | ) | ||||
Preneed funeral receivables | (10,728 | ) | (11,359 | ) | ||||
Preneed cemetery receivables | (2,138 | ) | (3,366 | ) | ||||
|
|
|
| |||||
Total | $ | (22,220 | ) | $ | (26,469 | ) | ||
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|
|
| |||||
Total current receivables | (4,049 | ) | (4,626 | ) | ||||
Total noncurrent receivables | (18,171 | ) | (21,843 | ) | ||||
|
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|
| |||||
Total | $ | (22,220 | ) | $ | (26,469 | ) | ||
|
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|
|
Allowance for Doubtful Accounts and Cancellations Rollforward | ||||||||||||||||
Balance – October 31, 2011 | Charged to costs and expenses | Write-offs | Balance – July 31, 2012 | |||||||||||||
Current receivables – at-need funeral and other | $ | 4,626 | 1,316 | (1,893 | ) | $ | 4,049 | |||||||||
Receivables, due beyond one year – other | 7,118 | 1,725 | (3,538 | ) | 5,305 | |||||||||||
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| |||||||||
$ | 11,744 | 3,041 | (5,431 | ) | $ | 9,354 | ||||||||||
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|
Allowance for Doubtful Accounts and Cancellations Rollforward | ||||||||||||||||
Balance – October 31, 2010 | Charged to costs and expenses | Write-offs | Balance – July 31, 2011 | |||||||||||||
Current receivables – at-need funeral and other | $ | 5,738 | 1,568 | (2,013 | ) | $ | 5,293 | |||||||||
Receivables, due beyond one year – other | 8,324 | 2,291 | (2,883 | ) | 7,732 | |||||||||||
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| |||||||||
$ | 14,062 | 3,859 | (4,896 | ) | $ | 13,025 | ||||||||||
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|
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.
12
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) |
The following summarizes the Company’s receivables aging analysis:
Receivables Aging Analysis as of July 31, 2012 | ||||||||||||||||||||
1 to 30 Days | 31 to 60 Days | 61 to 90 Days | Greater than 90 Days | Total | ||||||||||||||||
Receivables – at-need funeral | $ | 5,045 | $ | 1,215 | $ | 450 | $ | 1,941 | $ | 8,651 | ||||||||||
Receivables – other | 104,096 | 4,156 | 2,147 | 11,612 | 122,011 | |||||||||||||||
Preneed funeral receivables | 31,817 | 867 | 370 | 11,015 | 44,069 | |||||||||||||||
Preneed cemetery receivables | 24,943 | 1,036 | 519 | 2,559 | 29,057 | |||||||||||||||
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| |||||||||||
$ | 165,901 | $ | 7,274 | $ | 3,486 | $ | 27,127 | $ | 203,788 | |||||||||||
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(i) | Reclassifications |
Certain reclassifications have been made to the 2011 condensed consolidated financial statements in order for these periods to be comparable due to the reclassification of discontinued operations. 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 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 was 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 corresponded to the Company’s second fiscal quarter beginning February 1, 2012. The adoption of this guidance by the Company had 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
13
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 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 of this guidance 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 of this guidance will have on its consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02 regarding subsequent measurement guidance for long lived intangibles. This guidance is meant to reduce the cost and complexity of performing an impairment test for indefinite- lived intangible assets. This guidance is effective for annual and interim tests performed for fiscal years beginning after September 15, 2012, which corresponds to the Company’s first fiscal quarter beginning November 1, 2013. The Company is currently evaluating the impact the adoption of this guidance 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 July 31, 2012 and October 31, 2011 are as follows:
July 31, 2012 | October 31, 2011 | |||||||
Trust assets | $ | 395,263 | $ | 377,198 | ||||
Receivables from customers | 44,069 | 43,457 | ||||||
|
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| |||||
439,332 | 420,655 | |||||||
Allowance for cancellations | (10,728 | ) | (11,359 | ) | ||||
|
|
|
| |||||
Preneed funeral receivables and trust investments | $ | 428,604 | $ | 409,296 | ||||
|
|
|
|
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 cost basis and market values associated with preneed funeral merchandise and services trust assets as of July 31, 2012 are detailed below.
July 31, 2012 | ||||||||||||||||||||
Cost Basis | Unrealized Gains | Unrealized Losses | Market | |||||||||||||||||
Cash, money market and other short- term investments | $ | 23,131 | $ | — | $ | — | $ | 23,131 | ||||||||||||
U.S. Government, agencies and municipalities | 1,658 | 87 | — | 1,745 | ||||||||||||||||
Corporate bonds | 20,064 | 1,592 | (1 | ) | 21,655 | |||||||||||||||
Preferred stocks | 34,896 | 641 | (671 | ) | 34,866 | |||||||||||||||
Common stocks | 200,896 | 3,152 | (43,071 | ) | 160,977 | |||||||||||||||
Mutual funds: | ||||||||||||||||||||
Equity | 19,249 | 839 | (1,839 | ) | 18,249 | |||||||||||||||
Fixed income | 95,687 | 2,936 | (802 | ) | 97,821 | |||||||||||||||
Commodity | 13,428 | — | (2,836 | ) | 10,592 | |||||||||||||||
Real estate investment trusts | 8,737 | 813 | (1 | ) | 9,549 | |||||||||||||||
Master limited partnerships | 2,860 | — | (56 | ) | 2,804 | |||||||||||||||
Insurance contracts and other long-term investments | 12,344 | 215 | — | 12,559 | ||||||||||||||||
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|
|
|
|
|
| |||||||||||||
Trust investments | $ | 432,950 | $ | 10,275 | $ | (49,277 | ) | $ | 393,948 | |||||||||||
|
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|
|
|
| |||||||||||||||
Market value as a percentage of cost | 91.0 | % | ||||||||||||||||||
|
| |||||||||||||||||||
Accrued investment income | 1,315 | |||||||||||||||||||
|
| |||||||||||||||||||
Trust assets | $ | 395,263 | ||||||||||||||||||
|
|
The estimated maturities and market values of debt securities included above are as follows:
July 31, 2012 | ||||
Due in one year or less | $ | 5,657 | ||
Due in one to five years | 14,367 | |||
Due in five to ten years | 2,856 | |||
Thereafter | 520 | |||
|
| |||
$ | 23,400 | |||
|
|
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) |
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 | ||||||||||||||||
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| |||||||||||||
Trust investments | $ | 436,138 | $ | 4,262 | $ | (64,421 | ) | $ | 375,979 | |||||||||||
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| |||||||||||||||
Market value as a percentage of cost | 86.2 | % | ||||||||||||||||||
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| |||||||||||||||||||
Accrued investment income | 1,219 | |||||||||||||||||||
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Trust assets | $ | 377,198 | ||||||||||||||||||
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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 July 31, 2012 and October 31, 2011, the Company had outstanding covered calls with a market value of $466 and $0, respectively. Covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended July 31, 2012 and 2011, the Company realized trust earnings of approximately $180 and $75, respectively, related to the covered call program. For the nine months ended July 31, 2012 and 2011, the Company realized trust earnings (losses) of $336 and ($152), 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 nine months ended July 31, 2011, it continued to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $1,983 for the nine months ended July 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.
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) |
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—July 31, 2012 | $ | 329,918 | $ | 58,268 | $ | 5,762 | $ | 393,948 | ||||||||
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 July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Fair market value, beginning balance | $ | 5,698 | $ | 6,075 | $ | 5,868 | $ | 6,784 | ||||||||
Total unrealized gains (losses) included in other comprehensive income(1) | 56 | (590 | ) | 56 | (590 | ) | ||||||||||
Distributions and other, net | 8 | 558 | (162 | ) | (151 | ) | ||||||||||
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Fair market value, ending balance | $ | 5,762 | $ | 6,043 | $ | 5,762 | $ | 6,043 | ||||||||
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(1) | All gains (losses) recognized in other comprehensive income for funeral trust investments are attributable to the Company’s preneed customers and are offset by a corresponding increase (decrease) in deferred preneed funeral receipts held in trust. |
Activity related to preneed funeral trust investments is as follows:
Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Purchases | $ | 22,182 | $ | 45,026 | $ | 56,092 | $ | 117,074 | ||||||||
Sales | 14,587 | 48,397 | 51,669 | 119,026 | ||||||||||||
Realized gains from sales of investments | 1,320 | 3,058 | 4,491 | 7,467 | ||||||||||||
Realized losses from sales of investments and other | (1,605 | ) | (1,335 | ) | (2,709 | ) | (2,015 | ) | ||||||||
Interest income, dividends and other ordinary income | 2,952 | 3,107 | 10,914 | 9,920 | ||||||||||||
Deposits(1) | 6,462 | 5,770 | 18,828 | 15,800 | ||||||||||||
Withdrawals(1) | 10,905 | 10,017 | 29,995 | 32,332 |
17
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) |
(1) | The Company historically sold a significant portion of its preneed funeral sales through trust-funded price-guaranteed contracts. Over time, the mix has shifted to a more significant portion being sold using 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 July 31, 2012 and October 31, 2011.
July 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 | $ | 115 | $ | (1 | ) | $ | — | $ | — | $ | 115 | $ | (1 | ) | ||||||||||
Preferred stocks | 1,424 | (32 | ) | 14,154 | (639 | ) | 15,578 | (671 | ) | |||||||||||||||
Common stocks | 16,734 | (349 | ) | 97,603 | (42,722 | ) | 114,337 | (43,071 | ) | |||||||||||||||
Mutual funds: | ||||||||||||||||||||||||
Equity | 1,179 | (10 | ) | 6,478 | (1,829 | ) | 7,657 | (1,839 | ) | |||||||||||||||
Fixed income | 8,150 | (213 | ) | 2,387 | (589 | ) | 10,537 | (802 | ) | |||||||||||||||
Commodity | 5,593 | (693 | ) | 4,998 | (2,143 | ) | 10,591 | (2,836 | ) | |||||||||||||||
Real estate investment trusts | 34 | — | 62 | (1 | ) | 96 | (1 | ) | ||||||||||||||||
Master limited partnerships | 2,804 | (56 | ) | — | — | 2,804 | (56 | ) | ||||||||||||||||
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| |||||||||||||
Total | $ | 36,033 | $ | (1,354 | ) | $ | 125,682 | $ | (47,923 | ) | $ | 161,715 | $ | (49,277 | ) | |||||||||
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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 | ) | ||||||||||||||||
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| |||||||||||||
Total | $ | 79,815 | $ | (2,566 | ) | $ | 161,039 | $ | (61,855 | ) | $ | 240,854 | $ | (64,421 | ) | |||||||||
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|
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 July 31, 2012, 87 percent, or $43,071, 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
18
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) |
allocated to individual contracts as 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.
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 July 31, 2012 and October 31, 2011 are as follows:
July 31, 2012 | October 31, 2011 | |||||||
Trust assets | $ | 193,710 | $ | 189,678 | ||||
Receivables from customers | 29,057 | 30,270 | ||||||
|
|
|
| |||||
222,767 | 219,948 | |||||||
Allowance for cancellations | (2,138 | ) | (3,366 | ) | ||||
|
|
|
| |||||
Preneed cemetery receivables and trust investments | $ | 220,629 | $ | 216,582 | ||||
|
|
|
|
The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of July 31, 2012 are detailed below.
July 31, 2012 | ||||||||||||||||||||
Cost Basis | Unrealized Gains | Unrealized Losses | Market | |||||||||||||||||
Cash, money market and other short- term investments | $ | 9,065 | $ | — | $ | — | $ | 9,065 | ||||||||||||
U.S. Government, agencies and municipalities | 1,883 | 127 | — | 2,010 | ||||||||||||||||
Corporate bonds | 2,006 | 143 | (3 | ) | 2,146 | |||||||||||||||
Preferred stocks | 12,540 | 146 | (292 | ) | 12,394 | |||||||||||||||
Common stocks | 107,520 | 942 | (29,350 | ) | 79,112 | |||||||||||||||
Mutual funds: | ||||||||||||||||||||
Equity | 23,526 | 108 | (7,068 | ) | 16,566 | |||||||||||||||
Fixed income | 53,870 | 1,106 | (312 | ) | 54,664 | |||||||||||||||
Commodity | 8,693 | — | (1,970 | ) | 6,723 | |||||||||||||||
Master limited partnerships | 6,797 | — | (132 | ) | 6,665 | |||||||||||||||
Real estate investment trusts | 2,986 | 54 | — | 3,040 | ||||||||||||||||
Other long-term investments | 637 | — | — | 637 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Trust investments | $ | 229,523 | $ | 2,626 | $ | (39,127 | ) | $ | 193,022 | |||||||||||
|
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|
|
| |||||||||||||||
Market value as a percentage of cost | 84.1 | % | ||||||||||||||||||
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| |||||||||||||||||||
Accrued investment income | 688 | |||||||||||||||||||
|
| |||||||||||||||||||
Trust assets | $ | 193,710 | ||||||||||||||||||
|
|
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) |
The estimated maturities and market values of debt securities included above are as follows:
July 31, 2012 | ||||
Due in one year or less | $ | 103 | ||
Due in one to five years | 2,244 | |||
Due in five to ten years | 1,397 | |||
Thereafter | 412 | |||
|
| |||
$ | 4,156 | |||
|
|
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 | ||||||||||||||||
|
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|
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|
|
|
| |||||||||||||
Trust investments | $ | 229,991 | $ | 1,934 | $ | (42,892 | ) | $ | 189,033 | |||||||||||
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| |||||||||||||||
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 July 31, 2012 and October 31, 2011, the Company had outstanding covered calls with a market value of $152 and $0, respectively. Covered calls are included at market value in the balance sheet line “preneed cemetery receivables and trust investments.” For the three months ended July 31, 2012 and 2011, the Company realized trust earnings of approximately $89 and $61, respectively, related to the covered call program. For the nine months ended July 31, 2012 and 2011, the Company realized trust earnings (losses) of $203 and ($69), 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 nine months ended July 31, 2011, it continued to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $732 for the nine months ended July 31, 2011.
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) |
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—July 31, 2012 | $ | 176,321 | $ | 16,701 | $ | — | $ | 193,022 | ||||||||
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 July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Purchases | $ | 17,953 | $ | 27,460 | $ | 29,186 | $ | 79,354 | ||||||||
Sales | 5,480 | 27,557 | 31,144 | 75,330 | ||||||||||||
Realized gains from sales of investments | 653 | 2,165 | 3,001 | 5,488 | ||||||||||||
Realized losses from sales of investments and other | (176 | ) | (658 | ) | (381 | ) | (1,207 | ) | ||||||||
Interest income, dividends and other ordinary income | 1,978 | 1,897 | 6,285 | 5,307 | ||||||||||||
Deposits | 4,127 | 4,451 | 12,769 | 12,459 | ||||||||||||
Withdrawals | 8,601 | 5,341 | 19,847 | 14,813 |
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 July 31, 2012 and October 31, 2011.
21
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) |
July 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 | $ | 56 | $ | (3 | ) | $ | — | $ | — | $ | 56 | $ | (3 | ) | ||||||||||
Preferred stocks | 587 | (13 | ) | 5,889 | (279 | ) | 6,476 | (292 | ) | |||||||||||||||
Common stocks | 13,197 | (1,050 | ) | 51,323 | (28,300 | ) | 64,520 | (29,350 | ) | |||||||||||||||
Mutual funds: | ||||||||||||||||||||||||
Equity | — | — | 12,910 | (7,068 | ) | 12,910 | (7,068 | ) | ||||||||||||||||
Fixed income | 10,722 | (311 | ) | 1,590 | (1 | ) | 12,312 | (312 | ) | |||||||||||||||
Commodity | 2,403 | (285 | ) | 4,320 | (1,685 | ) | 6,723 | (1,970 | ) | |||||||||||||||
Master limited partnerships | 6,665 | (132 | ) | — | — | 6,665 | (132 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 33,630 | $ | (1,794 | ) | $ | 76,032 | $ | (37,333 | ) | $ | 109,662 | $ | (39,127 | ) | |||||||||
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|
|
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|
|
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 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 53,802 | $ | (2,383 | ) | $ | 81,586 | $ | (40,509 | ) | $ | 135,388 | $ | (42,892 | ) | |||||||||
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|
|
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 July 31, 2012, 93 percent, or $36,418, 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 as 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.
22
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 $1,815 and $1,988 for the three months ended July 31, 2012 and 2011, respectively, and $7,098 and $5,981 for the nine months ended July 31, 2012 and 2011, respectively.
The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of July 31, 2012 are detailed below.
July 31, 2012 | ||||||||||||||||||||
Cost Basis | Unrealized Gains | Unrealized Losses | Market | |||||||||||||||||
Cash, money market and other short- term investments | $ | 15,359 | $ | — | $ | — | $ | 15,359 | ||||||||||||
U.S. Government, agencies and municipalities | 5,643 | 265 | (63 | ) | 5,845 | |||||||||||||||
Corporate bonds | 25,837 | 1,212 | (874 | ) | 26,175 | |||||||||||||||
Preferred stocks | 33,519 | 438 | (2,662 | ) | 31,295 | |||||||||||||||
Common stocks | 91,967 | 2,894 | (19,905 | ) | 74,956 | |||||||||||||||
Mutual funds: | ||||||||||||||||||||
Equity | 15,001 | 1,115 | (583 | ) | 15,533 | |||||||||||||||
Fixed income | 73,758 | 1,768 | (1,178 | ) | 74,348 | |||||||||||||||
Commodity | 5,727 | 4 | (471 | ) | 5,260 | |||||||||||||||
Real estate investment trusts | 8,818 | 866 | — | 9,684 | ||||||||||||||||
Other long-term investments | 98 | — | (51 | ) | 47 | |||||||||||||||
|
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|
|
|
|
|
| |||||||||||||
Trust investments | $ | 275,727 | $ | 8,562 | $ | (25,787 | ) | $ | 258,502 | |||||||||||
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|
| |||||||||||||
Market value as a percentage of cost | 93.8 | % | ||||||||||||||||||
|
| |||||||||||||||||||
Accrued investment income | 938 | |||||||||||||||||||
|
| |||||||||||||||||||
Trust assets | $ | 259,440 | ||||||||||||||||||
|
|
The estimated maturities and market values of debt securities included above are as follows:
July 31, 2012 | ||||
Due in one year or less | $ | 4,689 | ||
Due in one to five years | 14,339 | |||
Due in five to ten years | 8,826 | |||
Thereafter | 4,166 | |||
|
| |||
$ | 32,020 | |||
|
|
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) |
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 | |||||||||||||||
|
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|
|
|
|
|
| |||||||||||||
Trust investments | $ | 270,292 | $ | 4,659 | $ | (35,350 | ) | $ | 239,601 | |||||||||||
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| |||||||||||||
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 July 31, 2012 and October 31, 2011, the Company had outstanding covered calls with a market value of $170 and $0, respectively. Covered calls are included at market value in the balance sheet line “cemetery perpetual care trust investments.” For the three months ended July 31, 2012 and 2011, the Company realized trust earnings of approximately $73 and $37, respectively, related to the covered call program. For the nine months ended July 31, 2012 and 2011, the Company realized trust earnings (losses) of approximately $147 and ($81), 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 nine months ended July 31, 2011, it continued to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $700 for the nine months ended July 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
24
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) |
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.
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—July 31, 2012 | $ | 195,140 | $ | 63,315 | $ | 47 | $ | 258,502 | ||||||||
Trust investments—October 31, 2011 | $ | 173,317 | $ | 66,236 | $ | 48 | $ | 239,601 |
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 July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Fair market value, beginning balance | $ | 48 | $ | 88 | $ | 48 | $ | 88 | ||||||||
Total unrealized losses included in other comprehensive income(1) | (1 | ) | (24 | ) | (1 | ) | (24 | ) | ||||||||
|
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|
|
|
|
|
| |||||||||
Fair market value, ending balance | $ | 47 | $ | 64 | $ | 47 | $ | 64 | ||||||||
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|
|
(1) | All gains (losses) recognized in other comprehensive income for perpetual care trust investments are attributable to the Company’s preneed customers and are offset by a corresponding increase (decrease) in perpetual care trusts’ corpus. |
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 July 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 $12,064 and $12,017, respectively. The Company recorded an additional $567 and $72 for the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust for the nine months ended July 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 $520 and $918 for the nine months ended July 31, 2012 and 2011, 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 $2,006; no charge has been recorded for these amounts as of July 31, 2012.
25
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) |
Activity related to preneed cemetery perpetual care trust investments is as follows:
Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Purchases | $ | 19,529 | $ | 29,705 | $ | 83,809 | $ | 110,949 | ||||||||
Sales | 18,313 | 27,560 | 75,211 | 80,094 | ||||||||||||
Realized gains from sales of investments | 660 | 1,112 | 4,715 | 2,044 | ||||||||||||
Realized losses from sales of investments and other | (963 | ) | (72 | ) | (2,902 | ) | (510 | ) | ||||||||
Interest income, dividends and other ordinary income | 2,523 | 2,171 | 7,958 | 7,495 | ||||||||||||
Deposits | 2,180 | 2,024 | 6,849 | 5,424 | ||||||||||||
Withdrawals | 2,299 | 1,374 | 7,211 | 5,018 |
During the three months ended July 31, 2012 and 2011, cemetery revenues were $60,356 and $55,596, respectively, of which $2,373 and $2,334, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses. During the nine months ended July 31, 2012 and 2011, cemetery revenues were $173,015 and $167,685, respectively, of which $6,701 and $6,640, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and costs.
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 July 31, 2012 and October 31, 2011.
July 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 | $ | — | $ | — | $ | 61 | $ | (63 | ) | $ | 61 | $ | (63 | ) | ||||||||||
Corporate bonds | 2,445 | (173 | ) | 1,674 | (701 | ) | 4,119 | (874 | ) | |||||||||||||||
Preferred stocks | 2,255 | (58 | ) | 15,051 | (2,604 | ) | 17,306 | (2,662 | ) | |||||||||||||||
Common stocks | 6,519 | (184 | ) | 38,021 | (19,721 | ) | 44,540 | (19,905 | ) | |||||||||||||||
Mutual funds: | ||||||||||||||||||||||||
Equity | 1,011 | (43 | ) | 1,076 | (540 | ) | 2,087 | (583 | ) | |||||||||||||||
Fixed income | 8,772 | (224 | ) | 16,745 | (954 | ) | 25,517 | (1,178 | ) | |||||||||||||||
Commodity | 5,243 | (471 | ) | — | — | 5,243 | (471 | ) | ||||||||||||||||
Other long-term investments | — | — | 47 | (51 | ) | 47 | (51 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 26,245 | $ | (1,153 | ) | $ | 72,675 | $ | (24,634 | ) | $ | 98,920 | $ | (25,787 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 | ) | |||||||||
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|
26
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 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 July 31, 2012, 87 percent, or $22,567, 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.
27
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 July 31, 2012 are as follows:
Deferred Receipts Held in Trust | ||||||||||||
Preneed Funeral | Preneed Cemetery | Total | ||||||||||
Trust assets at market value | $ | 395,263 | $ | 193,710 | $ | 588,973 | ||||||
Less: | ||||||||||||
Pending withdrawals | (6,290 | ) | (5,801 | ) | (12,091 | ) | ||||||
Pending deposits | 2,059 | 1,206 | 3,265 | |||||||||
|
|
|
|
|
| |||||||
Deferred receipts held in trust | $ | 391,032 | $ | 189,115 | $ | 580,147 | ||||||
|
|
|
|
|
|
The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at July 31, 2012 are as follows:
Perpetual Care Trusts’ Corpus | ||||
Trust assets at market value | $ | 259,440 | ||
Less: | ||||
Pending withdrawals | (2,083 | ) | ||
Pending deposits | 349 | |||
|
| |||
Perpetual care trusts’ corpus | $ | 257,706 | ||
|
|
Investment and other income, net
The components of investment and other income, net in the condensed consolidated statements of earnings for the three and nine months ended July 31, 2012 and 2011 are detailed below.
Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Realized gains from sales of investments | $ | 2,633 | $ | 6,335 | $ | 12,207 | $ | 14,999 | ||||||||
Realized losses from sales of investments and other | (2,744 | ) | (2,065 | ) | (5,992 | ) | (3,732 | ) | ||||||||
Interest income, dividends and other ordinary income | 7,453 | 7,175 | 25,157 | 22,722 | ||||||||||||
Trust expenses and income taxes | (2,966 | ) | (2,808 | ) | (8,792 | ) | (7,737 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net trust investment income | 4,376 | 8,637 | 22,580 | 26,252 | ||||||||||||
Reclassification to deferred preneed funeral and cemetery receipts held in trust | (3,112 | ) | (6,319 | ) | (15,802 | ) | (19,876 | ) | ||||||||
Reclassification to perpetual care trusts’ corpus | (1,264 | ) | (2,318 | ) | (6,778 | ) | (6,376 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus | — | — | — | — | ||||||||||||
Investment and other income, net(1) | 57 | 30 | 148 | 394 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment and other income, net | $ | 57 | $ | 30 | $ | 148 | $ | 394 | ||||||||
|
|
|
|
|
|
|
|
(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. For the nine months ended July 31, 2011, the balance includes approximately $327 of interest income related to the resolution of an audit by the Internal Revenue Service. |
28
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 July 31, 2012, the Company had $12,064 recorded as a liability for the estimated probable funding obligation. As of July 31, 2012, the Company had net unrealized losses of approximately $28,243 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 debit (credit) for these items of approximately $0.3 million and ($2.0) million as of July 31, 2012 and October 31, 2011, respectively.
The Company is required to maintain a bond ($23,456 as of July 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.
During the second quarter of fiscal year 2012, the Company entered into an agreement to purchase within a year the land and building of an existing business that it currently leases for $2,800.
29
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 July 31, 2012 | ||||||||||||
Earnings from continuing operations | $ | 9,896 | ||||||||||
Allocation of earnings to nonvested restricted stock | (87 | ) | ||||||||||
|
| |||||||||||
Basic earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders | $ | 9,809 | 85,798 | $ | .11 | |||||||
|
|
|
| |||||||||
Effect of dilutive securities: | ||||||||||||
Stock options assumed exercised | 380 | |||||||||||
|
| |||||||||||
Diluted earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders plus stock options assumed exercised | $ | 9,809 | 86,178 | $ | .11 | |||||||
|
|
|
|
|
| |||||||
Earnings (Numerator) | Shares (Denominator) | Per Share Data | ||||||||||
Three Months Ended July 31, 2011 | ||||||||||||
Earnings from continuing operations | $ | 12,231 | ||||||||||
Allocation of earnings to nonvested restricted stock | (105 | ) | ||||||||||
|
| |||||||||||
Basic earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders | $ | 12,126 | 90,182 | $ | .13 | |||||||
|
|
|
| |||||||||
Effect of dilutive securities: | ||||||||||||
Stock options assumed exercised | 559 | |||||||||||
|
| |||||||||||
Diluted earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders plus stock options assumed exercised | $ | 12,126 | 90,741 | $ | .13 | |||||||
|
|
|
|
|
| |||||||
Earnings (Numerator) | Shares (Denominator) | Per Share Data | ||||||||||
Nine Months Ended July 31, 2012 | ||||||||||||
Earnings from continuing operations | $ | 28,340 | ||||||||||
Allocation of earnings to nonvested restricted stock | (251 | ) | ||||||||||
|
| |||||||||||
Basic earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders | $ | 28,089 | 86,295 | $ | .32 | |||||||
|
|
|
| |||||||||
Effect of dilutive securities: | ||||||||||||
Stock options assumed exercised | 324 | |||||||||||
|
| |||||||||||
Diluted earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders plus stock options assumed exercised | $ | 28,089 | 86,619 | $ | .32 | |||||||
|
|
|
|
|
|
30
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) |
Earnings (Numerator) | Shares (Denominator) | Per Share Data | ||||||||||
Nine Months Ended July 31, 2011 | ||||||||||||
Earnings from continuing operations | $ | 30,529 | ||||||||||
Allocation of earnings to nonvested restricted stock | (267 | ) | ||||||||||
|
| |||||||||||
Basic earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders | $ | 30,262 | 90,497 | $ | .33 | |||||||
|
|
|
| |||||||||
Effect of dilutive securities: | ||||||||||||
Stock options assumed exercised | 561 | |||||||||||
|
| |||||||||||
Diluted earnings per common share: | ||||||||||||
Earnings from continuing operations available to common shareholders plus stock options assumed exercised | $ | 30,262 | 91,058 | $ | .33 | |||||||
|
|
|
|
|
|
During the three months ended July 31, 2012, options to purchase 390,290 shares of common stock at prices ranging from $6.83 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 July 31, 2012 exclude the effect of approximately 2,140,192 options because such options were not dilutive. These options expire between January 8, 2014 and May 5, 2022.
During the nine months ended July 31, 2012, options to purchase 877,683 shares of common stock at prices ranging from $6.33 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 nine months ended July 31, 2012 exclude the effect of approximately 1,936,384 options because such options were not dilutive. These options expire between January 8, 2014 and December 6, 2021.
Options to purchase 435,253 shares of common stock at prices ranging from $7.57 to $8.47 per share for the three months ended July 31, 2011 and options to purchase 500,573 shares of common stock at prices ranging from $7.31 to $8.47 per share for the nine months ended July 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 those periods. Additionally, weighted average shares outstanding for the three months ended July 31, 2011 exclude the effect of approximately 1,086,000 options because such options were not dilutive.
For the three and nine months ended July 31, 2012, all of the outstanding 94,500 market based stock options were dilutive as the respective market conditions had been previously achieved. For the three and nine months ended July 31, 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 and nine months ended July 31, 2012, 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 10,637,882 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 and nine months ended July 31, 2012
31
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) |
were less than the conversion price of the senior convertible notes and the strike price of the warrants. For the three and nine months ended July 31, 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 associated common stock warrants were also not dilutive.
The Company includes Class A and Class B common stock in its diluted shares calculation. As of July 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 and nine months ended July 31, 2012 and 2011 for the Company’s continuing operations.
Total Revenue | Total Revenue | |||||||||||||||
Three Months Ended July 31, 2012 | Three Months Ended July 31, 2011 | Nine Months Ended July 31, 2012 | Nine Months Ended July 31, 2011 | |||||||||||||
Funeral | $ | 65,468 | $ | 64,846 | $ | 201,960 | $ | 203,254 | ||||||||
Cemetery(1) | 57,918 | 53,544 | 165,809 | 161,370 | ||||||||||||
Corporate Trust Management(2) | 5,853 | 5,967 | 18,892 | 18,662 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 129,239 | $ | 124,357 | $ | 386,661 | $ | 383,286 | ||||||||
|
|
|
|
|
|
|
|
Total Gross Profit | Total Gross Profit | |||||||||||||||
Three Months Ended July 31, 2012 | Three Months Ended July 31, 2011 | Nine Months Ended July 31, 2012 | Nine Months Ended July 31, 2011 | |||||||||||||
Funeral | $ | 12,628 | $ | 10,703 | $ | 41,973 | $ | 41,139 | ||||||||
Cemetery(1) | 9,061 | 5,544 | 22,019 | 17,255 | ||||||||||||
Corporate Trust Management(2) | 5,297 | 5,505 | 17,528 | 17,354 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 26,986 | $ | 21,752 | $ | 81,520 | $ | 75,748 | ||||||||
|
|
|
|
|
|
|
|
(1) | Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $1,815 and $1,988 for the three months ended July 31, 2012 and 2011, respectively, and $7,098 and $5,981 for the nine months ended July 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 July 31, 2012 and 2011 were $1,335 and $1,201, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended July 31, 2012 and 2011 were $2,080 and $2,714, respectively. Trust management fees included in cemetery |
32
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) |
revenue for the three months ended July 31, 2012 and 2011 were $1,555 and $1,349, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended July 31, 2012 and 2011 were $883 and $703, respectively. |
Trust management fees included in funeral revenue for the nine months ended July 31, 2012 and 2011 were $3,993 and $3,614, respectively, and funeral trust earnings for the nine months ended July 31, 2012 and 2011 were $7,693 and $8,733, respectively. Trust management fees included in cemetery revenue for the nine months ended July 31, 2012 and 2011 were $4,649 and $4,000, respectively, and cemetery trust earnings for the nine months ended July 31, 2012 and 2011 were $2,557 and $2,315, respectively.
A reconciliation of total segment gross profit to total earnings from continuing operations before income taxes for the three and nine months ended July 31, 2012 and 2011 is as follows:
Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Gross profit for reportable segments | $ | 26,986 | $ | 21,752 | $ | 81,520 | $ | 75,748 | ||||||||
Corporate general and administrative expenses | (7,326 | ) | (6,704 | ) | (20,264 | ) | (19,548 | ) | ||||||||
Restructuring and other charges | (305 | ) | — | (2,852 | ) | — | ||||||||||
Hurricane related recoveries, net | — | 12,349 | — | 12,245 | ||||||||||||
Net gain (loss) on dispositions | — | 11 | 332 | (389 | ) | |||||||||||
Other operating income, net | 191 | 512 | 773 | 1,193 | ||||||||||||
Interest expense | (5,873 | ) | (5,500 | ) | (17,544 | ) | (16,968 | ) | ||||||||
Loss on early extinguishment of debt | — | (73 | ) | — | (1,884 | ) | ||||||||||
Investment and other income, net | 57 | 30 | 148 | 394 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings from continuing operations before income taxes | $ | 13,730 | $ | 22,377 | $ | 42,113 | $ | 50,791 | ||||||||
|
|
|
|
|
|
|
|
The table below presents total net preneed merchandise and services sales for the three and nine months ended July 31, 2012 and 2011.
Total Net Preneed Merchandise and Service Sales(1) | Total Net Preneed Merchandise and Service Sales(1) | |||||||||||||||
Three Months Ended July 31, 2012 | Three Months Ended July 31, 2011 | Nine Months Ended July 31, 2012 | Nine Months Ended July 31, 2011 | |||||||||||||
Funeral | $ | 28,013 | $ | 26,283 | $ | 79,714 | $ | 70,287 | ||||||||
Cemetery | 12,949 | 13,162 | 38,109 | 37,380 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 40,962 | $ | 39,445 | $ | 117,823 | $ | 107,667 | ||||||||
|
|
|
|
|
|
|
|
(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. Preneed funeral and cemetery merchandise and service sales are deferred until a future period and have no impact on current revenues. |
33
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 and nine months ended July 31, 2012 and 2011.
Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Service revenue | ||||||||||||||||
Funeral | $ | 47,688 | $ | 47,078 | $ | 146,675 | $ | 146,096 | ||||||||
Cemetery | 14,459 | 14,642 | 45,706 | 45,266 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
62,147 | 61,720 | 192,381 | 191,362 | |||||||||||||
Merchandise revenue | ||||||||||||||||
Funeral | 19,333 | 19,816 | 61,265 | 63,808 | ||||||||||||
Cemetery | 42,781 | 37,479 | 117,514 | 112,031 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
62,114 | 57,295 | 178,779 | 175,839 | |||||||||||||
Other revenue | ||||||||||||||||
Funeral | 1,862 | 1,867 | 5,706 | 5,697 | ||||||||||||
Cemetery | 3,116 | 3,475 | 9,795 | 10,388 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
4,978 | 5,342 | 15,501 | 16,085 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 129,239 | $ | 124,357 | $ | 386,661 | $ | 383,286 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Service costs | ||||||||||||||||
Funeral | $ | 16,535 | $ | 16,722 | $ | 50,032 | $ | 48,838 | ||||||||
Cemetery | 11,024 | 11,313 | 31,891 | 32,084 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
27,559 | 28,035 | 81,923 | 80,922 | |||||||||||||
Merchandise costs | ||||||||||||||||
Funeral | 13,292 | 13,414 | 41,216 | 41,650 | ||||||||||||
Cemetery | 24,181 | 23,197 | 70,266 | 69,981 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
37,473 | 36,611 | 111,482 | 111,631 | |||||||||||||
Facility expenses | ||||||||||||||||
Funeral | 23,301 | 24,244 | 69,437 | 72,296 | ||||||||||||
Cemetery | 13,920 | 13,715 | 42,299 | 42,689 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
37,221 | 37,959 | 111,736 | 114,985 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total costs | $ | 102,253 | $ | 102,605 | $ | 305,141 | $ | 307,538 | ||||||||
|
|
|
|
|
|
|
|
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.
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 |
The following tables present the condensed consolidating historical financial statements as of July 31, 2012 and October 31, 2011 and for the three and nine months ended July 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 July 31, 2012 | ||||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Funeral | $ | — | $ | 63,813 | $ | 5,070 | $ | — | $ | 68,883 | ||||||||||
Cemetery | — | 54,252 | 6,104 | — | 60,356 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 118,065 | 11,174 | — | 129,239 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Costs and expenses: | ||||||||||||||||||||
Funeral | — | 49,452 | 3,676 | — | 53,128 | |||||||||||||||
Cemetery | — | 44,372 | 4,753 | — | 49,125 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 93,824 | 8,429 | — | 102,253 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | — | 24,241 | 2,745 | — | 26,986 | |||||||||||||||
Corporate general and administrative expenses | (7,326 | ) | — | — | — | (7,326 | ) | |||||||||||||
Restructuring and other charges | (305 | ) | — | — | — | (305 | ) | |||||||||||||
Other operating income, net | 10 | 126 | 55 | — | 191 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating earnings (loss) | (7,621 | ) | 24,367 | 2,800 | — | 19,546 | ||||||||||||||
Interest expense | (1,869 | ) | (3,669 | ) | (335 | ) | — | (5,873 | ) | |||||||||||
Investment and other income, net | 57 | — | — | — | 57 | |||||||||||||||
Equity in subsidiaries | 15,417 | 607 | — | (16,024 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations before income taxes | 5,984 | 21,305 | 2,465 | (16,024 | ) | 13,730 | ||||||||||||||
Income tax expense (benefit) | (3,654 | ) | 6,411 | 1,077 | — | 3,834 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations | 9,638 | 14,894 | 1,388 | (16,024 | ) | 9,896 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Discontinued operations: | ||||||||||||||||||||
Loss from discontinued operations before income taxes | — | (380 | ) | — | — | (380 | ) | |||||||||||||
Income tax benefit | — | (122 | ) | — | — | (122 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loss from discontinued operations | — | (258 | ) | — | — | (258 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net earnings | 9,638 | 14,636 | 1,388 | (16,024 | ) | 9,638 | ||||||||||||||
Other comprehensive income, net | 15 | — | 15 | (15 | ) | 15 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income | $ | 9,653 | $ | 14,636 | $ | 1,403 | $ | (16,039 | ) | $ | 9,653 | |||||||||
|
|
|
|
|
|
|
|
|
|
35
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 Earnings and Other Comprehensive Income
Three Months Ended July 31, 2011 | ||||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Funeral | $ | — | $ | 63,745 | $ | 5,016 | $ | — | $ | 68,761 | ||||||||||
Cemetery | — | 49,599 | 5,997 | — | 55,596 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 113,344 | 11,013 | — | 124,357 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Costs and expenses: | ||||||||||||||||||||
Funeral | — | 51,102 | 3,278 | — | 54,380 | |||||||||||||||
Cemetery | — | 43,764 | 4,461 | — | 48,225 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 94,866 | 7,739 | — | 102,605 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | — | 18,478 | 3,274 | — | 21,752 | |||||||||||||||
Corporate general and administrative expenses | (6,704 | ) | — | — | — | (6,704 | ) | |||||||||||||
Hurricane related recoveries, net | 4,174 | 6,683 | 1,492 | — | 12,349 | |||||||||||||||
Net gain on dispositions | — | 11 | — | — | 11 | |||||||||||||||
Other operating income, net | 13 | 419 | 80 | — | 512 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating earnings (loss) | (2,517 | ) | 25,591 | 4,846 | — | 27,920 | ||||||||||||||
Interest expense | (764 | ) | (4,247 | ) | (489 | ) | — | (5,500 | ) | |||||||||||
Loss on early extinguishment of debt | (73 | ) | — | — | — | (73 | ) | |||||||||||||
Investment and other income, net | 30 | — | — | — | 30 | |||||||||||||||
Equity in subsidiaries | 12,156 | 218 | — | (12,374 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations before income taxes | 8,832 | 21,562 | 4,357 | (12,374 | ) | 22,377 | ||||||||||||||
Income tax expense (benefit) | (3,154 | ) | 11,605 | 1,695 | — | 10,146 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations | 11,986 | 9,957 | 2,662 | (12,374 | ) | 12,231 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Discontinued operations: | ||||||||||||||||||||
Loss from discontinued operations before income taxes | — | (365 | ) | — | — | (365 | ) | |||||||||||||
Income tax benefit | — | (120 | ) | — | — | (120 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loss from discontinued operations | — | (245 | ) | — | — | (245 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net earnings | 11,986 | 9,712 | 2,662 | (12,374 | ) | 11,986 | ||||||||||||||
Other comprehensive loss, net | (3 | ) | — | (3 | ) | 3 | (3 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income | $ | 11,983 | $ | 9,712 | $ | 2,659 | $ | (12,371 | ) | $ | 11,983 | |||||||||
|
|
|
|
|
|
|
|
|
|
36
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 Earnings and Other Comprehensive Income
Nine Months Ended July 31, 2012 | ||||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Funeral | $ | — | $ | 198,789 | $ | 14,857 | $ | — | $ | 213,646 | ||||||||||
Cemetery | — | 155,460 | 17,555 | — | 173,015 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 354,249 | 32,412 | — | 386,661 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Costs and expenses: | ||||||||||||||||||||
Funeral | — | 150,421 | 10,264 | — | 160,685 | |||||||||||||||
Cemetery | — | 131,144 | 13,312 | — | 144,456 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 281,565 | 23,576 | — | 305,141 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | — | 72,684 | 8,836 | — | 81,520 | |||||||||||||||
Corporate general and administrative expenses | (20,264 | ) | — | — | — | (20,264 | ) | |||||||||||||
Restructuring and other charges | (1,616 | ) | (1,071 | ) | (165 | ) | — | (2,852 | ) | |||||||||||
Net gain on dispositions | — | 332 | — | — | 332 | |||||||||||||||
Other operating income, net | 67 | 529 | 177 | — | 773 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating earnings (loss) | (21,813 | ) | 72,474 | 8,848 | — | 59,509 | ||||||||||||||
Interest expense | (5,212 | ) | (11,296 | ) | (1,036 | ) | — | (17,544 | ) | |||||||||||
Investment and other income, net | 148 | — | — | — | 148 | |||||||||||||||
Equity in subsidiaries | 42,487 | 1,161 | — | (43,648 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations before income taxes | 15,610 | 62,339 | 7,812 | (43,648 | ) | 42,113 | ||||||||||||||
Income tax expense (benefit) | (11,309 | ) | 22,224 | 2,858 | — | 13,773 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations | 26,919 | 40,115 | 4,954 | (43,648 | ) | 28,340 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Discontinued operations: | ||||||||||||||||||||
Loss from discontinued operations before income taxes | — | (2,065 | ) | — | — | (2,065 | ) | |||||||||||||
Income tax benefit | — | (644 | ) | — | — | (644 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loss from discontinued operations | — | (1,421 | ) | — | — | (1,421 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net earnings | 26,919 | 38,694 | 4,954 | (43,648 | ) | 26,919 | ||||||||||||||
Other comprehensive income, net | 23 | — | 23 | (23 | ) | 23 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income | $ | 26,942 | $ | 38,694 | $ | 4,977 | $ | (43,671 | ) | $ | 26,942 | |||||||||
|
|
|
|
|
|
|
|
|
|
37
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 Earnings and Other Comprehensive Income
Nine Months Ended July 31, 2011 | ||||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Funeral | $ | — | $ | 200,353 | $ | 15,248 | $ | — | $ | 215,601 | ||||||||||
Cemetery | — | 149,980 | 17,705 | — | 167,685 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 350,333 | 32,953 | — | 383,286 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Costs and expenses: | ||||||||||||||||||||
Funeral | — | 152,849 | 9,935 | — | 162,784 | |||||||||||||||
Cemetery | — | 131,239 | 13,515 | — | 144,754 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
— | 284,088 | 23,450 | — | 307,538 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | — | 66,245 | 9,503 | — | 75,748 | |||||||||||||||
Corporate general and administrative expenses | (19,548 | ) | — | — | — | (19,548 | ) | |||||||||||||
Hurricane related recoveries, net | 4,070 | 6,683 | 1,492 | — | 12,245 | |||||||||||||||
Net loss on dispositions | — | (389 | ) | — | — | (389 | ) | |||||||||||||
Other operating income, net | 141 | 853 | 199 | — | 1,193 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating earnings (loss) | (15,337 | ) | 73,392 | 11,194 | — | 69,249 | ||||||||||||||
Interest expense | (2,599 | ) | (12,968 | ) | (1,401 | ) | — | (16,968 | ) | |||||||||||
Loss on early extinguishment of debt | (1,884 | ) | — | — | — | (1,884 | ) | |||||||||||||
Investment and other income, net | 394 | — | — | — | 394 | |||||||||||||||
Equity in subsidiaries | 36,718 | 605 | — | (37,323 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations before income taxes | 17,292 | 61,029 | 9,793 | (37,323 | ) | 50,791 | ||||||||||||||
Income tax expense (benefit) | (12,736 | ) | 26,458 | 6,540 | — | 20,262 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings from continuing operations | 30,028 | 34,571 | 3,253 | (37,323 | ) | 30,529 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Discontinued operations: | ||||||||||||||||||||
Loss from discontinued operations before income taxes | — | (810 | ) | — | — | (810 | ) | |||||||||||||
Income tax benefit | — | (309 | ) | — | — | (309 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loss from discontinued operations | — | (501 | ) | — | — | (501 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net earnings | 30,028 | 34,070 | 3,253 | (37,323 | ) | 30,028 | ||||||||||||||
Other comprehensive income, net | 6 | — | 6 | (6 | ) | 6 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income | $ | 30,034 | $ | 34,070 | $ | 3,259 | $ | (37,329 | ) | $ | 30,034 | |||||||||
|
|
|
|
|
|
|
|
|
|
38
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
July 31, 2012 | ||||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 75,361 | $ | 1,164 | $ | 1,552 | $ | — | $ | 78,077 | ||||||||||
Restricted cash and cash equivalents | 6,250 | — | — | — | 6,250 | |||||||||||||||
Marketable securities | — | — | 727 | — | 727 | |||||||||||||||
Receivables, net of allowances | 1,838 | 41,770 | 6,771 | — | 50,379 | |||||||||||||||
Inventories | 203 | 33,599 | 2,582 | — | 36,384 | |||||||||||||||
Prepaid expenses | 1,569 | 2,983 | 1,668 | — | 6,220 | |||||||||||||||
Deferred income taxes, net | 3,000 | 13,612 | 1,012 | — | 17,624 | |||||||||||||||
Intercompany receivables | 1,457 | — | — | (1,457 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current assets | 89,678 | 93,128 | 14,312 | (1,457 | ) | 195,661 | ||||||||||||||
Receivables due beyond one year, net of allowances | — | 59,314 | 11,615 | — | 70,929 | |||||||||||||||
Preneed funeral receivables and trust investments | — | 419,159 | 9,445 | — | 428,604 | |||||||||||||||
Preneed cemetery receivables and trust investments | — | 213,535 | 7,094 | — | 220,629 | |||||||||||||||
Goodwill | — | 229,749 | 19,835 | — | 249,584 | |||||||||||||||
Cemetery property, at cost | — | 364,886 | 35,811 | — | 400,697 | |||||||||||||||
Property and equipment, at cost | 62,707 | 500,030 | 44,588 | — | 607,325 | |||||||||||||||
Less accumulated depreciation | 49,459 | 248,300 | 20,499 | — | 318,258 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net property and equipment | 13,248 | 251,730 | 24,089 | — | 289,067 | |||||||||||||||
Deferred income taxes, net | 8,564 | 69,615 | 6,931 | — | 85,110 | |||||||||||||||
Cemetery perpetual care trust investments | — | 245,639 | 13,801 | — | 259,440 | |||||||||||||||
Other assets | 8,566 | 4,434 | 1,153 | — | 14,153 | |||||||||||||||
Intercompany receivables | 629,010 | — | — | (629,010 | ) | — | ||||||||||||||
Equity in subsidiaries | 38,062 | 11,141 | — | (49,203 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets | $ | 787,128 | $ | 1,962,330 | $ | 144,086 | $ | (679,670 | ) | $ | 2,213,874 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Current maturities of long-term debt | $ | 6 | $ | — | $ | — | $ | — | $ | 6 | ||||||||||
Accounts payable, accrued expenses and other current liabilities | 17,974 | 71,312 | 4,303 | — | 93,589 | |||||||||||||||
Intercompany payables | — | — | 1,457 | (1,457 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total current liabilities | 17,980 | 71,312 | 5,760 | (1,457 | ) | 93,595 | ||||||||||||||
Long-term debt, less current maturities | 320,850 | — | — | — | 320,850 | |||||||||||||||
Deferred income taxes, net | — | 4,929 | 580 | — | 5,509 | |||||||||||||||
Intercompany payables | — | 615,339 | 13,671 | (629,010 | ) | — | ||||||||||||||
Deferred preneed funeral revenue | — | 193,683 | 46,965 | — | 240,648 | |||||||||||||||
Deferred preneed cemetery revenue | — | 236,478 | 29,157 | — | 265,635 | |||||||||||||||
Deferred preneed funeral and cemetery receipts held in trust | — | 571,984 | 8,163 | — | 580,147 | |||||||||||||||
Perpetual care trusts’ corpus | — | 243,921 | 13,785 | — | 257,706 | |||||||||||||||
Other long-term liabilities | 18,941 | 1,486 | — | — | 20,427 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities | 357,771 | 1,939,132 | 118,081 | (630,467 | ) | 1,784,517 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Common stock | 85,836 | 102 | 376 | (478 | ) | 85,836 | ||||||||||||||
Other | 343,480 | 23,096 | 25,588 | (48,684 | ) | 343,480 | ||||||||||||||
Accumulated other comprehensive income | 41 | — | 41 | (41 | ) | 41 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total shareholders’ equity | 429,357 | 23,198 | 26,005 | (49,203 | ) | 429,357 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities and shareholders’ equity | $ | 787,128 | $ | 1,962,330 | $ | 144,086 | $ | (679,670 | ) | $ | 2,213,874 | |||||||||
|
|
|
|
|
|
|
|
|
|
39
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
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 | |||||||||
|
|
|
|
|
|
|
|
|
|
40
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
Nine Months Ended July 31, 2012 | ||||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by operating activities | $ | 7,049 | $ | 45,188 | $ | 6,502 | $ | — | $ | 58,739 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Proceeds from sales of marketable securities and release of restricted funds | 1,756 | — | 250 | — | 2,006 | |||||||||||||||
Deposits of restricted funds and purchases of marketable securities | (1,756 | ) | — | (280 | ) | — | (2,036 | ) | ||||||||||||
Proceeds from sale of assets | — | 533 | — | — | 533 | |||||||||||||||
Purchase of subsidiaries and other investments, net of cash acquired | (100 | ) | (3,013 | ) | — | — | (3,113 | ) | ||||||||||||
Additions to property and equipment | (2,669 | ) | (12,319 | ) | (1,227 | ) | — | (16,215 | ) | |||||||||||
Other | — | 87 | — | — | 87 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash used in investing activities | (2,769 | ) | (14,712 | ) | (1,257 | ) | — | (18,738 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Repayments of long-term debt | (4 | ) | — | — | — | (4 | ) | |||||||||||||
Intercompany receivables (payables) | 36,305 | (31,249 | ) | (5,056 | ) | — | — | |||||||||||||
Debt refinancing costs | (34 | ) | — | — | — | (34 | ) | |||||||||||||
Issuance of common stock | 1,433 | — | — | — | 1,433 | |||||||||||||||
Purchase and retirement of common stock | (19,075 | ) | — | — | — | (19,075 | ) | |||||||||||||
Dividends | (9,955 | ) | — | — | — | (9,955 | ) | |||||||||||||
Excess tax benefits from share-based payment arrangements | 23 | — | — | — | 23 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used in) financing activities | 8,693 | (31,249 | ) | (5,056 | ) | — | (27,612 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net increase (decrease) in cash | 12,973 | (773 | ) | 189 | — | 12,389 | ||||||||||||||
Cash and cash equivalents, beginning of period | 62,388 | 1,937 | 1,363 | — | 65,688 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash and cash equivalents, end of period | $ | 75,361 | $ | 1,164 | $ | 1,552 | $ | — | $ | 78,077 | ||||||||||
|
|
|
|
|
|
|
|
|
|
41
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
Nine Months Ended July 31, 2011 | ||||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by operating activities | $ | 13,590 | $ | 41,931 | $ | 4,946 | $ | — | $ | 60,467 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Proceeds from sales of certificates of deposit | 10,000 | — | — | — | 10,000 | |||||||||||||||
Purchases of restricted cash equivalents and marketable securities | (6,250 | ) | — | (662 | ) | — | (6,912 | ) | ||||||||||||
Proceeds from sale of assets | — | 332 | — | — | 332 | |||||||||||||||
Purchase of subsidiaries, net of cash acquired | — | (9,110 | ) | — | — | (9,110 | ) | |||||||||||||
Additions to property and equipment | (1,730 | ) | (12,920 | ) | (1,038 | ) | — | (15,688 | ) | |||||||||||
Other | — | 103 | — | — | 103 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used in) investing activities | 2,020 | (21,595 | ) | (1,700 | ) | — | (21,275 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from long-term debt | 200,000 | — | — | — | 200,000 | |||||||||||||||
Repayments of long-term debt | (200,004 | ) | — | — | — | (200,004 | ) | |||||||||||||
Intercompany receivables (payables) | 16,249 | (12,429 | ) | (3,820 | ) | — | — | |||||||||||||
Debt refinancing costs | (5,933 | ) | — | — | — | (5,933 | ) | |||||||||||||
Issuance of common stock | 1,386 | — | — | — | 1,386 | |||||||||||||||
Purchase and retirement of common stock | (15,622 | ) | — | — | — | (15,622 | ) | |||||||||||||
Dividends | (8,662 | ) | — | — | — | (8,662 | ) | |||||||||||||
Excess tax benefits from share based payment arrangements | 154 | — | — | — | 154 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash used in financing activities | (12,432 | ) | (12,429 | ) | (3,820 | ) | — | (28,681 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net increase (decrease) in cash | 3,178 | 7,907 | (574 | ) | — | 10,511 | ||||||||||||||
Cash and cash equivalents, beginning of period | 48,270 | 6,055 | 1,735 | — | 56,060 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash and cash equivalents, end of period | $ | 51,448 | $ | 13,962 | $ | 1,161 | $ | — | $ | 66,571 | ||||||||||
|
|
|
|
|
|
|
|
|
|
42
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(12) | Acquisitions and Dispositions |
Acquisitions
During the nine months ended July 31, 2012, the Company acquired a new funeral business for approximately $3,013. This acquisition was accounted for under the purchase method, and the acquired assets and liabilities (primarily goodwill of approximately $2,564 and property, plant and equipment of approximately $670) were valued at their estimated fair values. The results of operations for this business, which are considered immaterial, have been included in consolidated results since the acquisition date.
Dispositions
During the nine months ended July 31, 2012 and 2011, the Company recorded net gains (losses) on dispositions of $332 and ($389), respectively. The amount recorded for the nine months ended July 31, 2012 includes a $343 net gain on disposition due to the sale of a funeral home.
In April 2012, the Company designated a business as held for sale, recorded impairment charges related to the business and classified its operations as discontinued operations for all periods presented. The Company recorded net losses on dispositions of $31 and $871 in discontinued operations during the three and nine months ended July 31, 2012, respectively. The loss from discontinued operations before income taxes for the three months ended July 31, 2012 and 2011 were $380 and $365, respectively, and for the nine months ended July 31, 2012 and 2011 were $2,065 and $810, respectively.
Goodwill and changes to goodwill by operating segment from October 31, 2011 to July 31, 2012 is presented below:
October 31, 2011 | Changes | July 31, 2012 | ||||||||||
Funeral | $ | 198,317 | $ | 2,546 | (1) | $ | 200,863 | |||||
Cemetery | 48,721 | — | 48,721 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 247,038 | $ | 2,546 | $ | 249,584 | ||||||
|
|
|
|
|
|
(1) | The change is due to the purchase of a funeral home and the sale of a funeral home during the nine months ended July 31, 2012. |
43
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(13) | Consolidated Comprehensive Income |
Consolidated comprehensive income for the three and nine months ended July 31, 2012 and 2011 is as follows:
Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net earnings | $ | 9,638 | $ | 11,986 | $ | 26,919 | $ | 30,028 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of ($9), $2, ($13), and ($3), respectively | 15 | (3 | ) | 23 | 6 | |||||||||||
(Increase) reduction in net unrealized losses associated with available-for-sale securities of the trusts | 3,737 | (31,772 | ) | 39,080 | 11,209 | |||||||||||
Reclassification of the net unrealized losses activity attributable to the deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus | (3,737 | ) | 31,772 | (39,080 | ) | (11,209 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total other comprehensive income (loss) | 15 | (3 | ) | 23 | 6 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total comprehensive income | $ | 9,653 | $ | 11,983 | $ | 26,942 | $ | 30,034 | ||||||||
|
|
|
|
|
|
|
|
(14) | Restructuring and Other Charges |
In April 2012, the Company announced an organizational restructuring as well as a separate workforce reduction. The announcement was made following a comprehensive evaluation to identify Best-in-Class sales practices, additional opportunities to further integrate operations and sales and additional efficiencies realized from the Company’s ongoing continuous improvement initiative. The organizational changes include a restructure of the sales organization and realignment of the Company’s geographic regions and regional management. The new organization reduced the layers of sales management. As a result of the organizational changes the Company has made, as well as the investments made in technology over the last couple of years, the Company has been able to improve processes and procedures allowing for this restructuring and reorganization. As a result, the Company also eliminated approximately 60 positions in its corporate support services. The organizational change was made to improve customers’ experiences by strengthening the relationship between the operations and sales teams, and positioning management closer to the customer. Total expenses related to the organizational restructuring and workforce reduction consist primarily of separation pay and termination benefits and other non-cash asset impairments associated with the sales restructuring. The restructuring is expected to be completed during the Company’s fourth quarter of fiscal year 2012. The Company recorded $305 and $2,852 in charges related to the restructuring and workforce reduction during the three and nine months ended July 31, 2012, respectively. These charges are in the “restructuring and other charges” line in the condensed consolidated statements of earnings. As of July 31, 2012, the Company does not expect to incur any material additional costs related to the restructuring. The following table summarizes the activity related to the restructuring as of July 31, 2012:
44
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(14) | Restructuring and Other Charges—(Continued) |
Employee Termination Costs | Non-cash Asset Impairment and Other Costs | Total | ||||||||||
Costs incurred | $ | 990 | $ | 1,862 | $ | 2,852 | ||||||
Cash payments | (990 | ) | (537 | ) | (1,527 | ) | ||||||
Non-cash items | — | (1,236 | ) | (1,236 | ) | |||||||
|
|
|
|
|
| |||||||
Restructuring liability as of July 31, 2012 | $ | — | $ | 89 | $ | 89 | ||||||
|
|
|
|
|
|
(15) | Long-term Debt |
July 31, 2012 | October 31, 2011 | |||||||
Long-term debt: | ||||||||
3.125% senior convertible notes due 2014, net of unamortized discount of $5,484 and $7,611 as of July 31, 2012 and October 31, 2011, respectively | $ | 80,932 | $ | 78,805 | ||||
3.375% senior convertible notes due 2016, net of unamortized discount of $5,276 and $6,183 as of July 31, 2012 and October 31, 2011, respectively | 39,843 | 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 July 31, 2012 and October 31, 2011, partially secured by assets of subsidiaries, with maturities through 2022 | 81 | 85 | ||||||
|
|
|
| |||||
Total long-term debt | 320,856 | 317,826 | ||||||
Less current maturities | 6 | 5 | ||||||
|
|
|
| |||||
$ | 320,850 | $ | 317,821 | |||||
|
|
|
|
Fair Value
As of July 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 $81,051 and $39,911, respectively, compared to fair values of $86,282 and $44,223, respectively. The aggregate principal amounts outstanding of the 2014 Notes and 2016 Notes as of July 31, 2012 were $86,416 and $45,119, respectively. As of July 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 $213,802. Fair values were determined using quoted market prices for those securities and are classified within Level 1 of the three-level valuation hierarchy.
(16) | Income Taxes |
Income tax expense for the three and nine months ended July 31, 2012 was positively impacted by $1,125 and $2,075, respectively, overall reductions in the tax valuation allowance due to the reduction of a portion of the valuation allowance related to capital losses associated with the Company’s trust portfolio, as a result of the positive performance of the portfolio during those periods. Realized capital losses in the trusts for which the Company is the grantor, in which insufficient offsetting capital gains are expected, can require the Company to record a valuation allowance against the related deferred tax asset (capital loss carryforward). Reductions in the valuation allowance result when the Company realizes capital gains, which has been the case for the three and nine months ended July 31, 2012. As of July 31, 2012, the Company had a $2,900 valuation allowance remaining on $6,905 of realized capital losses.
45
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(16) | Income Taxes—(Continued) |
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 nine months ended July 31, 2011, the Company recorded a one-time, non-cash charge of $2,915 ($4,484 charge less a federal tax benefit of $1,569) in order to decrease the Puerto Rican deferred tax asset balance. The Puerto Rican deferred tax asset balance decreased from approximately $19,427 at the previously required 39 percent tax rate to approximately $14,943 at the newly-enacted 30 percent tax rate. This change in deferred tax assets increased the Company’s income tax expense for the nine months ended July 31, 2011 by $2,915. Income tax expense for the three months ended July 31, 2011 was impacted by a $1,625 increase in the tax valuation allowance for capital losses. Income tax expense for the nine months ended July 31, 2011 was also positively impacted by a $1,812 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 Company’s trust portfolio, as a result of the positive performance of the portfolio during that period.
(17) | Subsequent Events |
In August 2012, the Company received approval from the Internal Revenue Service for a change in tax accounting method resulting in the deferral of approximately $52,000 in revenue, thereby increasing the Company’s net operating loss carryforward. This increase in the net operating loss will result in approximately $21,000 of reduced future tax payments in 2012 and 2013.
On August 29, 2012, Hurricane Isaac made landfall in southern Louisiana. Although impacted by the event, the Company’s corporate headquarters building and its New Orleans funeral homes and cemeteries were able to restore operations shortly thereafter. The Company’s buildings and operations are insured against damages resulting from such events subject to standard deductibles.
As of August 31, 2012, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts increased 1.2 percent, or approximately $10,449, from July 31, 2012.
Subsequent to July 31, 2012 through August 31, 2012, the Company purchased an additional 465,499 shares of its Class A common stock for approximately $3,222 at an average price of $6.92 per share. As of August 31, 2012, there is a $21,543 remaining available under the Company’s $125,000 stock repurchase program.
46
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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 included in Item 1A 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 July 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 third quarter of 2012, we achieved a 3.9 percent increase in revenue, a 23.9 percent increase in gross profit and a 340 basis point improvement in gross profit margin. Total revenue increased to $129.3 million for the third quarter of 2012, compared to $124.4 million for the same period of the prior year, and total gross profit increased to $27.0 million for the third quarter of 2012, compared to $21.8 million for the prior year period. Our cemetery segment generated a 51.4 percent improvement in cemetery gross profit and a 520 basis point improvement in cemetery gross profit margin compared to the third quarter of 2011. Our funeral segment generated a 9.7 percent improvement in funeral gross profit and a 200 basis point improvement in funeral gross profit margin compared to the same period of last year.
We reported net earnings of $9.6 million and earnings from continuing operations of $9.9 million, or $.11 per share for the third quarter of 2012. We reported net earnings of $12.0 million and earnings from continuing operations of $12.2 million, or $.13 per share for the third quarter of 2011. Earnings from continuing operations for the three months ended July 31, 2011 include a $12.4 million insurance settlement related to the successful resolution of our litigation related to Hurricane Katrina damages, which increased net earnings for the third quarter of 2011 by approximately $7.3 million.
Cemetery revenue improved $4.8 million, or 8.6 percent, to $60.4 million for the quarter ended July 31, 2012. This increase is primarily due to a $2.6 million improvement in revenue due to an increase in construction on various cemetery projects, coupled with a $1.5 million improvement in cemetery property revenue due to revenue recognition requirements for cemetery property sales being met. In addition, we experienced a $0.3 million improvement in the reserve for cancellations and a $0.3 million improvement in cemetery services performed. Cemetery property sales increased $0.3 million, or 1.0 percent compared to the third quarter of 2011. We generated $68.9 million in funeral revenue during the third quarter of 2012, a $0.1 million increase from the third quarter of 2011. This
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increase is primarily attributable to a 0.5 percent increase in same-store funeral services performed, which we believe compares favorably to industry-wide data in our markets. The increase was partially offset by a 0.2 percent decrease in same-store average revenue per funeral service. Our net preneed funeral sales increased 6.6 percent during the third quarter of 2012 compared to the third quarter of 2011. Preneed funeral sales are deferred until a future period and have no impact on current revenue.
Cemetery gross profit increased $3.8 million, or 51.4 percent, to $11.2 million for the third quarter of 2012 and funeral gross profit increased $1.4 million, or 9.7 percent, to $15.8 million for the third quarter of 2012, due to our continuing focus on effectively controlling our costs. Cemetery gross profit margin increased 520 basis points to 18.5 percent for the third quarter of 2012, while funeral gross profit margin increased 200 basis points to 22.9 percent for the third quarter of 2012.
During the third quarter of 2012, we repurchased 1.0 million shares of our Class A common stock for $7.4 million under our stock repurchase program. As of July 31, 2012, we had $24.8 million remaining under the $125.0 million program authorized by the Board of Directors.
During the nine months ended July 31, 2012, we maintained our strong balance sheet while generating the highest nine-month revenue and gross profit in four years. For the first nine months of fiscal year 2012, we reported net earnings of $26.9 million, earnings from continuing operations of $28.3 million, or $.32 per share, total revenue of $386.7 million and total gross profit of $81.5 million. Our earnings from continuing operations for the first nine months of 2012 include a $2.9 million ($1.8 million after-tax) charge due to the organizational restructuring and a separate reduction in workforce occurring primarily in the second quarter of fiscal year 2012. In addition, we decided to hold one of our e-commerce businesses for sale resulting in a net loss from discontinued operations of $1.4 million. For the first nine months of 2011, we reported net earnings of $30.0 million, earnings from continuing operations of $30.5 million, or $.33 per share, total revenue of $383.3 million and total gross profit of $75.7 million. Earnings from continuing operations for the nine months ended July 31, 2011 include a $12.4 million ($7.3 million after-tax) insurance settlement related to the successful resolution of our litigation related to Hurricane Katrina damages. Our earnings from continuing operations for the first nine months of 2011 also included a $1.9 million ($1.1 million after-tax) charge for the early extinguishment of debt as a result of the refinancing of our senior notes and revolving credit facility in April 2011.
Cemetery revenue improved $5.3 million, or 3.2 percent, to $173.0 million for the nine months ended July 31, 2012. Cemetery property sales improved $3.6 million, or 4.8 percent, compared to the first nine months of 2011. In addition, we experienced a $2.0 million increase in revenue related to trust activities and a $0.7 million improvement in the reserve for cancellations. These improvements were partially offset by a $1.2 million decline in finance charges as a result of reduced interest rates in this low interest rate environment. We generated $213.7 million in funeral revenue during the first nine months of 2012, a $1.9 million decline from the same period of 2011. The decrease is primarily due to a 1.8 percent decline in same-store funeral services performed, which we believe is generally consistent with industry-wide data in our markets, coupled with a $0.6 million decline in revenue related to trust activities. The decline in funeral services was partially offset by a 0.5 percent improvement in same-store average revenue per funeral service. In addition, we experienced a $0.6 million, or 5.1 percent, improvement in insurance commission revenue, primarily due to the increase in net preneed funeral sales. Our net preneed funeral sales increased 13.4 percent during the first nine months of 2012 compared to the same period of 2011. Preneed funeral sales are deferred until a future period and have no impact on current revenue.
Cemetery gross profit increased $5.6 million, or 24.5 percent, to $28.5 million for the nine months ended July 31, 2012, primarily due to the increase in cemetery revenue, coupled with our continuing focus on effectively controlling our costs. Cemetery gross profit margin improved 280 basis points to 16.5 percent for the first nine months of 2012. Funeral gross profit increased $0.2 million, or 0.4 percent, to $53.0 million for the nine months ended July 31, 2012, primarily as a result of our continuing focus on effectively controlling our costs. Funeral gross profit margin improved 30 basis points to 24.8 percent for the first nine months of fiscal year 2012.
During the first nine months of 2012, we repurchased 2.9 million shares of our outstanding Class A common stock for $19.0 million. As a result of our stock repurchase program, our weighted average diluted shares outstanding decreased to 86.6 million shares for the nine months ended July 31, 2012 compared to 91.1 million shares for the same period of 2011. This decrease is primarily a result of our stock repurchase program, which yielded a positive impact on our earnings per share. Purchases of Class A common stock under our share repurchase program have resulted in a 4.9 percent decrease in total shares outstanding in the last twelve months. In June 2011 and March 2012, we announced that we had increased our quarterly dividend rate by one-half cent per share. We declared dividends of $0.04 per share in the third quarter of 2012.
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Cash flow provided by operating activities for the first nine months of 2012 was $58.7 million compared to $60.5 million for the same period of last year. During the first nine months of 2012, we invested $16.2 million in several cemetery inventory development projects, compared to $11.6 million for the same period of last year. This spending includes a $7.2 million investment in our cremation inventory development projects during the first nine months of fiscal 2012, or a $5.2 million increase over the same period of last year. In addition, we experienced changes in working capital during the first nine months of 2012, partly driven by the timing of 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 24 cremation projects, and we currently have 12 projects either under construction or expected to begin construction this fiscal year and approximately 20 additional projects currently under feasibility review. We are working to complete a number of these projects in fiscal year 2012 and expect to spend approximately $10 million to $12 million in fiscal year 2012. For the nine months ended July 31, 2012, we have spent $7.2 million in our cremation inventory development projects, compared to spending $2.0 million during the first nine months of fiscal year 2011. Cemetery cremation sales improved 20.0 percent during the nine months ended July 31, 2012 compared to the same period of last year, highlighting the positive returns of our ongoing cremation initiative.
During the third quarter of 2012, our Board of Directors appointed Dr. John B. Elstrott, Jr. to the newly created position of lead independent director. Among his primary responsibilities as lead independent director, Dr. Elstrott will act as the principal liaison between the independent directors and the CEO, assist the CEO and the Chairman of the Board with developing Board agendas and preside at Board meetings and executive sessions of the independent directors.
Supplemental Trust Portfolio Information
During the third quarter of fiscal year 2012, we continued to experience 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 1.0 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized gains and losses, of 2.4 percent. For the nine month period ended July 31, 2012, we experienced a total return, including both realized and unrealized gains and losses, of 9.1 percent in our preneed trusts and a 10.6 percent total return in our cemetery perpetual care trusts. As of July 31, 2012, the fair market value of our preneed trusts and our cemetery perpetual care trusts was $845.5 million, an improvement of 5.1 percent, or $40.9 million, from October 31, 2011.
As of July 31, 2012 and October 31, 2011, the fair market values of the investments in our preneed trusts were $75.5 million and $101.1 million, respectively, lower than our cost basis. In our cemetery perpetual care trusts, as of July 31, 2012 and October 31, 2011, the fair market values of our investments were $17.2 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 July 31, 2012 and October 31, 2011, we had $187.6 million and $179.0 million, respectively, in trust earnings, net of losses that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.
As of August 31, 2012, the fair market value of our preneed trusts and our cemetery perpetual care trusts improved 1.2 percent, or approximately $10.4 million from July 31, 2012, which is consistent with the overall financial markets.
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 July 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 | $ | 256.6 | 44 | % | $ | 117.4 | 45 | % | ||||||||
Financial Services | $ | 66.5 | 11 | % | $ | 43.5 | 17 | % | ||||||||
Information Technology | $ | 52.2 | 9 | % | $ | 12.7 | 5 | % |
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Issuer specific investments in the financial services sector represent $66.5 million of the fair market value of our preneed trust portfolio as of July 31, 2012, of which 61 percent related to investments in preferred stock, 22 percent related to common stock and 17 percent related to fixed-income securities. Issuer specific investments in the financial services sector represented $43.5 million of the fair market value of our cemetery perpetual care trust portfolio as of July 31, 2012, of which 69 percent related to investments in preferred stock, 24 percent related to fixed-income securities and 7 percent related to common stock.
Issuer specific investments in the information technology sector represent $52.2 million of the fair market value of our preneed trust portfolio as of July 31, 2012, of which 97 percent related to investments in common stock and 3 percent related to fixed-income securities. Issuer specific investments in the information technology sector represent $12.7 million of the fair market value of our cemetery perpetual care trust portfolio as of July 31, 2012, of which 93 percent related to investments in common stock and 7 percent related to fixed-income securities.
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 July 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 | $ | 4.3 | 5 | % | $ | 2.2 | 9 | % | ||||||||
Information Technology | $ | 33.0 | 37 | % | $ | 8.1 | 31 | % |
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 July 31, 2012 and October 31, 2011, we had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $12.1 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 nine months ended July 31, 2012 and 2011, respectively. The additional funding obligation in fiscal year 2012 is primarily related to the bankruptcy of Eastman Kodak Company.
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 Item 1.
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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 July 31, 2012 | 1.0 | % | 2.4 | % | ||||
For the nine months ended July 31, 2012 | 9.1 | % | 10.6 | % | ||||
For the last three years ended July 31, 2012 | 10.5 | % | 11.5 | % | ||||
For the last five years ended July 31, 2012 | 2.0 | % | 4.2 | % |
(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 July 31, 2012 Compared to Three Months Ended July 31, 2011
Funeral Operations
Three Months Ended July 31, | ||||||||||||
2012 | 2011 | Increase (Decrease) | ||||||||||
(In millions) | ||||||||||||
Funeral Revenue: | ||||||||||||
Funeral Home Locations | $ | 65.5 | $ | 64.9 | $ | .6 | ||||||
Corporate Trust Management(1) | 3.4 | 3.9 | (.5 | ) | ||||||||
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Total Funeral Revenue | $ | 68.9 | $ | 68.8 | $ | .1 | ||||||
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Funeral Costs: | ||||||||||||
Funeral Home Locations | $ | 52.9 | $ | 54.2 | $ | (1.3 | ) | |||||
Corporate Trust Management(1) | .2 | .2 | — | |||||||||
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Total Funeral Costs | $ | 53.1 | $ | 54.4 | $ | (1.3 | ) | |||||
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Funeral Gross Profit: | ||||||||||||
Funeral Home Locations | $ | 12.6 | $ | 10.7 | $ | 1.9 | ||||||
Corporate Trust Management(1) | 3.2 | 3.7 | (.5 | ) | ||||||||
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Total Funeral Gross Profit | $ | 15.8 | $ | 14.4 | $ | 1.4 | ||||||
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Same-Store Analysis for the Three Months Ended July 31, 2012 and 2011
Change in Average Revenue Per Funeral Service | Change in Same-Store Funeral Services | Same-Store Cremation Rate | ||||
2012 | 2011 | |||||
(0.2)% (1) | 0.5% | 43.3% | 43.1% |
(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 July 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 July 31, 2012 and 2011 were $2.1 million and $2.7 million, respectively. |
Funeral revenue increased $0.1 million, or 0.1 percent, to $68.9 million in the third quarter of 2012 from $68.8 million in the third quarter of 2011. Same-store services increased 0.5 percent, or 65 events, which we believe compares favorably to industry-wide data. This increase was partially offset by a 0.2 percent decrease in same-store average revenue per funeral service. The cremation rate for our same-store operations was 43.3 percent for the third quarter of 2012 compared to 43.1 percent for the third quarter of 2011.
Funeral gross profit increased $1.4 million, or 9.7 percent, to $15.8 million for the third quarter of 2012 compared to $14.4 million for the same period of 2011, primarily due to our continuing focus on effectively controlling our costs. Funeral gross profit margin improved 200 basis points to 22.9 percent for the third quarter of 2012 from 20.9 percent for the third quarter of 2011.
Cemetery Operations
Three Months Ended July 31, | ||||||||||||
2012 | 2011 | Increase | ||||||||||
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Cemetery Revenue: | ||||||||||||
Cemetery Locations | $ | 57.9 | $ | 53.5 | $ | 4.4 | ||||||
Corporate Trust Management(1) | 2.5 | 2.1 | .4 | |||||||||
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Total Cemetery Revenue | $ | 60.4 | $ | 55.6 | $ | 4.8 | ||||||
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Cemetery Costs: | ||||||||||||
Cemetery Locations | $ | 48.9 | $ | 48.0 | $ | .9 | ||||||
Corporate Trust Management(1) | .3 | .2 | .1 | |||||||||
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Total Cemetery Costs | $ | 49.2 | $ | 48.2 | $ | 1.0 | ||||||
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Cemetery Gross Profit: | ||||||||||||
Cemetery Locations | $ | 9.0 | $ | 5.5 | $ | 3.5 | ||||||
Corporate Trust Management(1) | 2.2 | 1.9 | .3 | |||||||||
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Total Cemetery Gross Profit | $ | 11.2 | $ | 7.4 | $ | 3.8 | ||||||
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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 |
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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 July 31, 2012 and 2011 were $1.6 million and $1.4 million, respectively, and cemetery trust earnings included in cemetery revenue for the three months ended July 31, 2012 and 2011 were $0.9 million and $0.7 million, respectively. Perpetual care trust earnings were $1.8 million and $2.0 million for the three months ended July 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 increased $4.8 million, or 8.6 percent, to $60.4 million for the third quarter of 2012. This increase is primarily due to a $2.6 million improvement in revenue due to an increase in construction on various cemetery projects, coupled with a $1.5 million improvement in cemetery property revenue due to revenue recognition requirements for cemetery property sales being met. In addition, we experienced a $0.3 million improvement in the reserve for cancellations and a $0.3 million improvement in cemetery services performed. Cemetery property sales increased $0.3 million, or 1.0 percent, compared to the third quarter of 2011.
Cemetery gross profit increased $3.8 million, or 51.4 percent, to $11.2 million for the third quarter of 2012 compared to $7.4 million for the same period of 2011. This increase is primarily attributable to the increase in cemetery revenue, as previously noted, coupled with our continuing focus on effectively controlling our costs. Cemetery gross profit margin improved 520 basis points to 18.5 percent for the third quarter of 2012 from 13.3 percent for the same period of 2011.
Other
Corporate general and administrative expenses increased $0.5 million to $7.3 million for the third quarter of 2012, compared to $6.8 million for the same period of 2011. Due to the strong operating results for the third quarter of 2012, we increased our accrual for incentive compensation during the period. While we increased the accrual in the quarter, it is consistent with the incentive accrual for the nine months ended July 31, 2011.
Results for the third quarter of 2011 include $12.4 million related to the settlement of Hurricane Katrina insurance litigation. The settlement increased pre-tax earnings for the third quarter of 2011 by $12.4 million, net earnings by approximately $7.3 million and diluted earnings per share by $.08.
The effective tax rate for continuing operations for the quarter ended July 31, 2012 was 27.9 percent compared to 45.3 percent for the same period in 2011. The increased rate in the third quarter of 2011 was primarily due to a $1.6 million tax expense resulting from an increase in the valuation allowance for capital losses. In the third quarter of 2012, we recorded a tax benefit of $1.1 million resulting from a reduction in the valuation allowance for capital losses, associated with the improved performance of our trust portfolio.
During the third quarter of 2012, we repurchased 1.0 million shares of our Class A common stock for $7.4 million under our stock repurchase program.
Preneed Sales into the Backlog
Net preneed funeral sales increased 6.6 percent during the third 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 $41.0 million in net preneed funeral and cemetery merchandise and services sales (including $21.3 million related to insurance-funded preneed funeral
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contracts) during the third 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 $39.4 million (including $20.7 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.
Nine Months Ended July 31, 2012 Compared to Nine Months Ended July 31, 2011
Funeral Operations
Nine Months Ended July 31, | ||||||||||||
2012 | 2011 | Increase (Decrease) | ||||||||||
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Funeral Revenue: | ||||||||||||
Funeral Home Locations | $ | 202.0 | $ | 203.3 | $ | (1.3 | ) | |||||
Corporate Trust Management(1) | 11.7 | 12.3 | (.6 | ) | ||||||||
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Total Funeral Revenue | $ | 213.7 | $ | 215.6 | $ | (1.9 | ) | |||||
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Funeral Costs: | ||||||||||||
Funeral Home Locations | $ | 160.0 | $ | 162.1 | $ | (2.1 | ) | |||||
Corporate Trust Management(1) | .7 | .7 | — | |||||||||
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Total Funeral Costs | $ | 160.7 | $ | 162.8 | $ | (2.1 | ) | |||||
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Funeral Gross Profit: | ||||||||||||
Funeral Home Locations | $ | 42.0 | $ | 41.2 | $ | .8 | ||||||
Corporate Trust Management(1) | 11.0 | 11.6 | (.6 | ) | ||||||||
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Total Funeral Gross Profit | $ | 53.0 | $ | 52.8 | $ | .2 | ||||||
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Same-Store Analysis for the Nine Months Ended July 31, 2012 and 2011
Change in Average Revenue Per Funeral Service | Change in Same-Store Funeral Services | Same-Store Cremation Rate | ||||
2012 | 2011 | |||||
0.5% (1) | (1.8)% | 43.0% | 42.6% |
(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 nine months ended July 31, 2012 and 2011 were $4.0 million and $3.6 million, respectively. Funeral trust earnings recognized in funeral revenue for the nine months ended July 31, 2012 and 2011 were $7.7 million and $8.7 million, respectively. |
Funeral revenue declined $1.9 million, or 0.9 percent, to $213.7 million for the first nine months of fiscal 2012. This decline is primarily due to a 1.8 percent decrease in same-store funeral services, which we believe is generally consistent with industry-wide data in our markets, coupled with a $0.6 million decline in revenue related to trust activities. This decrease was partially offset by a 0.5 percent improvement in same-store average revenue per funeral service. In addition, we experienced a $0.6 million, or 5.1 percent, improvement in insurance commission revenue, primarily due to the increase in net preneed funeral sales. The cremation rate for our same-store operations was 43.0 percent for the nine months ended July 31, 2012 compared to 42.6 percent for the same period in 2011.
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Funeral gross profit increased $0.2 million, or 0.4 percent, to $53.0 million for the first nine months of fiscal 2012 compared to $52.8 million for the same period of 2011, primarily as a result of our continuing focus on effectively controlling our costs. Funeral gross profit margin increased 30 basis points to 24.8 percent for the nine months ended July 31, 2012 from 24.5 percent for the same period of 2011.
Cemetery Operations
Nine Months Ended July 31, | ||||||||||||
2012 | 2011 | Increase (Decrease) | ||||||||||
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Cemetery Revenue: | ||||||||||||
Cemetery Locations | $ | 165.8 | $ | 161.4 | $ | 4.4 | ||||||
Corporate Trust Management(1) | 7.2 | 6.3 | .9 | |||||||||
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Total Cemetery Revenue | $ | 173.0 | $ | 167.7 | $ | 5.3 | ||||||
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Cemetery Costs: | ||||||||||||
Cemetery Locations | $ | 143.8 | $ | 144.2 | $ | (.4 | ) | |||||
Corporate Trust Management(1) | .7 | .6 | .1 | |||||||||
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Total Cemetery Costs | $ | 144.5 | $ | 144.8 | $ | (.3 | ) | |||||
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Cemetery Gross Profit: | ||||||||||||
Cemetery Locations | $ | 22.0 | $ | 17.2 | $ | 4.8 | ||||||
Corporate Trust Management(1) | 6.5 | 5.7 | .8 | |||||||||
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Total Cemetery Gross Profit | $ | 28.5 | $ | 22.9 | $ | 5.6 | ||||||
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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 nine months ended July 31, 2012 and 2011 were $4.6 million and $4.0 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the nine months ended July 31, 2012 and 2011 were $2.6 million and $2.3 million, respectively. Perpetual care trust earnings were $7.1 million and $6.0 million for the nine months ended July 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 increased $5.3 million, or 3.2 percent, to $173.0 million for the first nine months of fiscal 2012. We experienced an increase in cemetery property sales of $3.6 million, or 4.8 percent, compared to the first nine months of 2011. In addition, cemetery revenue increased primarily due to a $2.0 million increase in revenue related to trust activities and a $0.7 million improvement in the reserve for cancellations. These improvements were partially offset by a $1.2 million decline in finance charges as a result of reduced interest rates in this low interest rate environment.
Cemetery gross profit increased $5.6 million, or 24.5 percent, to $28.5 million for the first nine months of 2012, primarily attributable to the increase in cemetery revenue, as previously noted, coupled with our continuing focus on effectively controlling our costs. Cemetery gross profit margin improved 280 basis points to 16.5 percent for the first nine months of 2012 from 13.7 percent for the same period of 2011.
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Other
Corporate general and administrative expenses increased $0.7 million to $20.2 million for the first nine months of 2012, compared to $19.5 million for the same period of 2011. During the first nine months of 2012, we experienced an increase in spending in continuous improvement and third-party growth initiatives, compared to the same period of last year.
Results for the nine months ended July 31, 2011 include $12.4 million related to the settlement of Hurricane Katrina insurance litigation. The settlement increased prior year’s pre-tax earnings by $12.4 million and net earnings by $7.3 million.
We recorded $2.9 million in restructuring and other charges during the first nine months of fiscal year 2012. This charge was primarily related to separation pay, termination benefits and a non-cash asset impairment due to the restructuring of the sales and operations of the organization, as well as a separate reduction in workforce associated with our ongoing continuous improvement initiative. For the three and nine months ended July 31, 2012, the decline in costs associated with the restructuring of our sales and operations, as well as our reduction in force are consistent with our previously announced expectations of approximately $10 million on an annual basis. For additional information, see Note 14 to the condensed consolidated financial statements included in Item1.
As a result of the prior year refinancing of our senior notes and revolving credit facility in April 2011, we recorded a $1.9 million charge for the early extinguishment of debt during the nine months ended July 31,2011.
The effective tax rate for continuing operations for the nine months ended July 31, 2012 was 32.7 percent compared to 39.9 percent for the same period in 2011. For the nine months ended July 31, 2012, we recorded a benefit of $2.1 million resulting from a reduction in the valuation allowance for capital losses, associated with the positive performance of our trust portfolio. During the nine months ended July 31, 2011, we recorded a benefit of $1.8 million resulting primarily from a reduction in the valuation allowance for capital losses associated with the positive performance of the trust portfolio. This benefit was partially offset by a $2.9 million one-time, non-cash charge to income tax expense, as a result of the revaluation of its Puerto Rican deferred tax assets due to a change in Puerto Rican tax legislation.
During the nine months ended July 31, 2012, we acquired a new funeral business. This acquisition was accounted for under the purchase method, and the acquired assets and liabilities were valued at their estimated fair values. The results of operations for this business, which are considered immaterial, have been included in consolidated results since the acquisition date. For additional information, see Note 12 to the condensed consolidated financial statements included in Item 1.
During the first nine months of 2012, we decided to hold one of our e-commerce businesses for sale with the results of its operations and the related impairment included in discontinued operations.
During the first nine months of 2012, we repurchased 2.9 million shares of our Class A common stock for $19.0 million under our stock repurchase program. As of July 31, 2012, we have $24.8 million remaining under our $125.0 million program.
Our weighted average diluted shares outstanding decreased to 86.6 million shares for the nine months ended July 31, 2012 compared to 91.1 million shares for the same period of 2011. The decrease is primarily a result of our stock repurchase program, which has yielded a positive impact on our earnings per share.
Cash and cash equivalents increased $12.4 million from October 31, 2011 to July 31, 2012 primarily due to cash provided by operations, offset by $19.1 million in purchases made under our stock repurchase program, $16.2 million in additions to property, plant and equipment and $10.0 million of dividends paid. Current deferred income taxes decreased $12.1 million from October 31, 2011 to July 31, 2012 primarily due to the utilization of net operating losses. Goodwill increased $2.5 million from October 31, 2011 to July 31, 2012 primarily due to an acquisition made in the second quarter of 2012. Cemetery property increased $4.7 million from October 31, 2011 to July 31, 2012 primarily due to the continued investments in numerous construction projects. Long-term deferred taxes increased $5.3 million primarily due to an increase in our federal alternative minimum tax. 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
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impacted by the improvement in the market value of our trust assets during the nine months ended July 31, 2012. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.
Accounts payable decreased $3.0 million from October 31, 2011 to July 31, 2012 primarily due to the timing of payables related to property, plant and equipment and inventory. Accrued payroll increased $1.2 million from October 31, 2011 to July 31, 2012 primarily due to the timing of the payroll at quarter end. Income taxes payable increased $2.9 million from October 31, 2011 to July 31, 2012, primarily due to an increase in our federal alternative minimum tax.
Preneed Sales into the Backlog
Net preneed funeral sales increased 13.4 percent during the nine months ended July 31, 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 $117.8 million in net preneed funeral and cemetery merchandise and services sales (including $60.0 million related to insurance-funded preneed funeral contracts) during the nine months ended July 31, 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 $107.7 million (including $56.8 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 July 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 $0.8 million outstanding letters of credit and the $23.5 million Florida bond, was $125.7 million. In addition, we also have outstanding $131.5 million principal amount in senior convertible notes as of July 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 second quarter of fiscal year 2012, we increased our quarterly cash dividend on our Class A and B common stock from three and one-half cents per share to four cents per share. Dividends amounted to $10.0 million for the nine months ended July 31, 2012 compared to $8.7 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 2.9 million shares of our Class A common stock for approximately $19.0 million during the nine months ended July 31, 2012. In August 2012, we purchased an additional 0.5 million shares of our Class A common stock for approximately $3.2 million and as of August 31, 2012 had $21.5 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.
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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 including cremation projects, 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 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 successfully completed 24 cremation projects, and we currently have 12 projects either under construction or expected to begin construction this fiscal year and approximately 20 additional projects under feasibility review. We are working to complete a number of these projects in fiscal year 2012 and expect to spend approximately $10 million to $12 million in fiscal year 2012. Through the nine months ended July 31, 2012, we have spent $7.2 million to develop our cremation inventory projects. 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 continuing to look at ways to improve our organization and cost structure.
In August 2012, we received approval from the Internal Revenue Service for a change in tax accounting method resulting in the deferral of approximately $52 million in revenue, thereby increasing our net operating loss carryforward. This increase in the net operating loss will result in approximately $21 million of reduced future tax payments. We are continuing to review all of our tax accounting methods to determine opportunities to further 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 through 2012, which resulted in a combination of refunds and reductions of federal income tax payments totaling in excess of $100 million. Based on the currently approved changes, we expect to have federal net operating losses and certain tax credits which will allow us to have nominal federal cash taxes in fiscal years 2012, 2013 and 2014.
Cash Flow
Cash flow provided by operating activities for the first nine months of fiscal year 2012 was $58.7 million compared to $60.5 million for the same period of last year. During the first nine months of fiscal year 2012, we invested $16.2 million in several cemetery inventory development projects, compared to $11.6 million for the same period of last year. This spending includes a $7.2 million investment in our cremation inventory development projects during the first nine months of fiscal 2012, or a $5.2 million increase over the same period of last year. In addition, we experienced changes in working capital during the first nine months of fiscal year 2012, partly driven by the timing of trust withdrawals and deposits.
Our investing activities resulted in a net cash outflow of $18.7 million for the nine months ended July 31, 2012, compared to a net cash outflow of $21.3 million for the comparable period in 2011. The change is primarily due to the fact that we purchased two funeral and cemetery businesses for $9.1 million during the nine months ended July 31, 2011 compared to purchasing one funeral business for $3.0 million during the nine months ended July 31, 2012. For the nine months ended July 31, 2012, capital expenditures amounted to $16.2 million, which included $11.4 million for maintenance capital expenditures, $1.7 million for the construction of new funeral homes, $1.3 million related to the implementation of new business systems and $1.8 million for the purchase of land and a new building for an existing business. For the nine months ended July 31, 2011, capital expenditures were $15.7 million, which included $12.9 million for maintenance capital expenditures, $2.1 million for the construction of new funeral homes and $0.7 million related to the implementation of new business systems.
Our financing activities resulted in a net cash outflow of $27.6 million for the nine months ended July 31, 2012, compared to a net cash outflow of $28.7 million for the comparable period in 2011. Stock repurchases during the nine months ended July 31, 2012 amounted to $19.1 million compared to $15.6 million in the same period of 2011. Dividends paid increased from $8.7 million in the first nine months of fiscal year 2011 to $10.0 million in the
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first nine months of fiscal year 2012. In the second quarter of fiscal year 2012, we increased our quarterly cash dividend from three and one-half cents per share to four cents per share. During the nine months ended July 31, 2011, we issued $200.0 million of 6.50 percent senior notes due 2019 and repurchased and redeemed $200.0 million of 6.25 percent senior notes due 2013. We also paid $5.9 million in debt refinancing costs during the nine months ended July 31, 2011 related to the senior notes transactions and refinancing of the senior secured revolving credit facility.
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 July 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) | 109.0 | 17.2 | 31.8 | 27.5 | 32.5 | |||||||||||||||
Operating and capital lease obligations(3) | 30.7 | 1.5 | 8.7 | 5.7 | 14.8 | |||||||||||||||
Non-competition and other agreements(4) | 1.2 | 0.1 | 0.5 | 0.4 | 0.2 | |||||||||||||||
Purchase obligation(5) | 2.8 | 2.8 | — | — | — | |||||||||||||||
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Total | $ | 475.3 | $ | 21.6 | $ | 127.4 | $ | 78.7 | $ | 247.6 | ||||||||||
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(1) | As of July 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. Our future minimum lease payments as of July 31, 2012 are $1.5 million, $4.8 million, $3.9 million, $3.1 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. |
(5) | This category represents a purchase obligation related to an agreement we entered into to purchase the land and building of an existing business that we currently lease. |
The following table details our known potential or possible future cash payments related to the contingent obligations specified below (in millions) as of July 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) | $ | 12.1 | $ | 12.1 | $ | — | $ | — | $ | — | ||||||||||
Long-term obligations related to uncertain tax positions(2) | 1.5 | — | — | — | 1.5 | |||||||||||||||
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$ | 13.6 | $ | 12.1 | $ | — | $ | — | $ | 1.5 | |||||||||||
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(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 |
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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 $12.1 million as of July 31, 2012. As of July 31, 2012, we had net unrealized losses of $28.2 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 $2.0 million; no charge has been recorded for these amounts as of July 31, 2012. |
(2) | In accordance with the required accounting guidance on uncertain tax positions, as of July 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 July 31, 2012 consist of the following items:
(1) | the $23.5 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 July 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.
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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 July 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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) | ||||||||||||
May 1, 2012 through May 31, 2012 | — | $ | — | — | $ | 32,194,032 | ||||||||||
June 1, 2012 through June 30, 2012 | 59,000 | $ | 6.79 | 59,000 | $ | 31,793,235 | ||||||||||
July 1, 2012 through July 31, 2012 | 964,557 | $ | 7.29 | 964,557 | $ | 24,765,345 | ||||||||||
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Total | 1,023,557 | $ | 7.26 | 1,023,557 | $ | 24,765,345 | ||||||||||
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(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 July 31, 2012, we had repurchased 14.8 million shares for $100.2 million at an average price of $6.75 per share since the inception of the program in 2007. In August 2012, we repurchased an additional 0.5 million shares for $3.2 million at an average price of $6.92 per share and, as of August 31, 2012, had $21.5 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) | |
10.1 | Amendment No. 2 to the Amended and Restated Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan effective June 1, 2012 | |
10.2 | Amended and Restated Stewart Enterprises, Inc. Retention Plan and Summary Plan Description | |
10.3 | Amendment No. 3 to the Amended and Restated Stewart Enterprises, Inc. Supplemental Executive Retirement Plan effective June 20, 2012 | |
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 July 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. |
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
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. | ||
September 5, 2012 | /s/ Lewis J. Derbes, Jr. | |
Lewis J. Derbes, Jr. | ||
Senior Vice President, | ||
Chief Financial Officer and Treasurer | ||
September 5, 2012 | /s/ Angela M. Lacour | |
Angela M. Lacour | ||
Senior Vice President of Finance | ||
and Chief Accounting Officer |
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Exhibit Index
10.1 | Amendment No. 2 to the Amended and Restated Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan effective June 1, 2012 | |
10.2 | Amended and Restated Stewart Enterprises, Inc. Retention Plan and Summary Plan Description | |
10.3 | Amendment No. 3 to the Amended and Restated Stewart Enterprises, Inc. Supplemental Executive Retirement Plan effective June 20, 2012 | |
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 July 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. |
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