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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
( ) 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: 0-19508
-------------------------
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 VETERANS MEMORIAL BOULEVARD
METAIRIE, LOUISIANA 70005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 837-5880
-------------------------
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
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
March 13, 1998 was 46,964,097 and 1,777,510, respectively.
===============================================================================
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Earnings -
Three Months Ended January 31, 1998 and 1997.............. 3
Consolidated Balance Sheets -
January 31, 1998 and October 31, 1997..................... 4
Consolidated Statements of Cash Flows -
Three Months Ended January 31, 1998 and 1997.............. 6
Notes to Consolidated Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 17
Item 5. Other Information.................................... 17
Item 6. Exhibits and Reports on Form 8-K..................... 20
SIGNATURES................................................... 21
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JANUARY 31,
-------------------------------
1998 1997
--------------- -------------
Revenues:
Funeral................................... $ 86,918 $ 66,576
Cemetery.................................. 62,391 56,136
--------------- -------------
149,309 122,712
--------------- -------------
Costs and expenses:
Funeral................................... 58,861 46,405
Cemetery.................................. 44,331 41,010
--------------- -------------
103,192 87,415
--------------- -------------
Gross profit.............................. 46,117 35,297
Corporate general and administrative expenses 4,024 3,855
--------------- -------------
Operating earnings........................ 42,093 31,442
Interest expense............................. (9,946) (8,962)
Investment and other income.................. 1,358 785
--------------- -------------
Earnings before income taxes and cumulative
effect of change in accounting principles 33,505 23,265
Income taxes................................. 11,559 8,258
--------------- -------------
Earnings before cumulative effect of change
in accounting principles............... 21,946 15,007
Cumulative effect of change in accounting
principles (net of $2,230 income tax
benefit) (Note 2)....................... -- (2,324)
--------------- -------------
Net earnings.............................. $ 21,946 $ 12,683
=============== =============
Basic earnings per share:
Earnings before cumulative effect of change
in accounting principles............... $ .45 $ .36
Cumulative effect of change in accounting
principles............................. -- (.06)
--------------- -------------
Net earnings.............................. $ .45 $ .30
=============== =============
Diluted earnings per share:
Earnings before cumulative effect of
change in accounting principles........ $ .45 $ .35
Cumulative effect of change in accounting
principles............................. -- (.05)
--------------- -------------
Net earnings.............................. $ .45 $ .30
=============== =============
Weighted average shares outstanding
(in thousands):
Basic..................................... 48,701 41,853
=============== =============
Diluted................................... 49,068 42,403
=============== =============
Dividends per share.......................... $ .02 $ .02
=============== =============
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 31, OCTOBER 31,
ASSETS 1998 1997
------ ----------- -----------
Current assets:
Cash and cash equivalent investments......... $ 23,559 $ 31,640
Marketable securities........................ 3,519 4,615
Receivables, net of allowances............... 140,574 129,760
Inventories.................................. 44,264 43,044
Prepaid expenses............................. 7,047 7,111
----------- -----------
Total current assets...................... 218,963 216,170
Receivables due beyond one year,
net of allowances.............................. 205,263 200,285
Intangible assets............................... 436,450 415,723
Deferred charges................................ 78,570 77,371
Cemetery property, at cost...................... 313,035 307,494
Property and equipment, at cost:
Land......................................... 66,318 67,579
Buildings.................................... 249,717 244,421
Equipment and other.......................... 104,750 102,592
----------- -----------
420,785 414,592
Less accumulated depreciation................ 87,195 85,188
----------- -----------
Net property and equipment................... 333,590 329,404
Long-term investments........................... 59,444 57,345
Other assets.................................... 30,613 25,478
----------- -----------
$1,675,928 $1,629,270
============ ============
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 31, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------------------------ ------------ -----------
Current liabilities:
Current maturities of long-term debt.............. $ 35,784 $ 33,973
Accounts payable.................................. 17,891 16,705
Accrued payroll................................... 12,459 16,241
Accrued insurance................................. 6,573 10,428
Accrued interest.................................. 3,628 7,581
Accrued other..................................... 16,263 14,908
Income taxes payable.............................. 6,221 --
Deferred income taxes............................. 10,043 9,720
----------- -----------
Total current liabilities...................... 108,862 109,556
Long-term debt, less current maturities.............. 570,674 524,351
Deferred income taxes................................ 83,499 85,454
Deferred revenue..................................... 70,979 79,494
Other long-term liabilities.......................... 9,363 10,845
----------- -----------
Total liabilities.............................. 843,377 809,700
----------- -----------
Commitments and contingencies (Notes 4 and 7)
Preferred stock, $1.00 par value, 5,000,000 shares
authorized; no shares issued....................... -- --
Shareholders' equity:
Common stock, $1.00 stated value:
Class A authorized 150,000,000 shares;
issued and outstanding 46,963,569 and
46,903,784 shares at January 31, 1998
and October 31, 1997, respectively.......... 46,964 46,904
Class B authorized 5,000,000 shares; issued
and outstanding 1,777,510 shares at
January 31, 1998 and October 31, 1997;
10 votes per share; convertible into an equal
number of Class A shares.................... 1,778 1,778
Additional paid-in capital........................ 527,761 526,180
Retained earnings................................. 300,074 279,104
Cumulative foreign translation adjustment......... (46,532) (36,609)
Unrealized appreciation of investments............ 2,506 2,213
----------- ----------
Total shareholders' equity..................... 832,551 819,570
----------- ----------
$1,675,928 $1,629,270
============ ===========
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
-------------- ------------
Cash flows from operating activities:
Net earnings................................. $ 21,946 $ 12,683
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization............. 7,226 7,186
Provision for doubtful accounts........... 6,729 6,157
Cumulative effect of change in accounting
principles............................... -- 2,324
Net gains on sales of marketable
securities............................... (1,030) (402)
Benefit for deferred income taxes......... (1,401) (526)
Changes in assets and liabilities net of
effects from acquisitions:
Increase in prearranged funeral trust
receivables............................. (2,795) (5,831)
Increase in other receivables............ (18,373) (16,834)
Increase in deferred charges and
intangible assets....................... (5,932) (2,977)
Increase in inventories and
cemetery property....................... (255) (2,639)
Decrease in accounts payable and
accrued expenses........................ (4,179) (2,625)
Decrease in estimated costs to
complete mausoleums and lawn crypts,
and to deliver merchandise.............. (4,880) (4,608)
Increase (decrease) in deferred
revenue................................. (5,254) 920
Decrease in other........................ (1,779) (1,297)
-------------- ------------
Net cash used in operating activities (9,977) (8,469)
-------------- ------------
Cash flows from investing activities:
Proceeds from sales of marketable
securities.................................. 6,355 2,501
Purchases of marketable securities and
long-term investments....................... (6,430) (2,335)
Purchases of subsidiaries, net of cash,
seller financing and stock issued........... (26,041) (17,268)
Additions to property and equipment.......... (10,180) (8,991)
Other........................................ 1,846 294
-------------- ------------
Net cash used in investing activities..... (34,450) (25,799)
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
-------------- ------------
Cash flows from financing activities:
Proceeds from long-term debt................. $ 61,504 $ 158,000
Repayments of long-term debt................. (24,772) (123,439)
Issuance of common stock..................... 1,462 3,884
Purchase and retirement of common stock...... (24) (5,526)
Dividends.................................... (975) (839)
-------------- ------------
Net cash provided by financing activities. 37,195 32,080
-------------- ------------
Effect of exchange rates on cash and
cash equivalents............................... (849) (359)
-------------- ------------
Net decrease in cash............................ (8,081) (2,547)
Cash and cash equivalents, beginning of period.. 31,640 24,580
-------------- ------------
Cash and cash equivalents, end of period........ $ 23,559 $ 22,033
============== ============
Supplemental cash flow information:
Cash paid during the period for:
Income taxes.............................. $ 1,900 $ 11,400
Interest.................................. $ 13,900 $ 8,600
Noncash investing and financing activity:
Subsidiaries acquired with common stock... $ 200 $ 1,342
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
(a) The Company
Stewart Enterprises, Inc. (the "Company") is the third largest provider of
products and services in the death care industry in North America. Through its
subsidiaries, the Company offers a complete line of funeral merchandise and
services, along with cemetery property, merchandise and services.
As of January 31, 1998, the Company owned and operated 426 funeral homes and
132 cemeteries in 25 states within the United States, and in Puerto Rico,
Mexico, Australia, New Zealand, Canada, Spain, Portugal and the Netherlands.
For the three months ended January 31, 1998, foreign operations contributed
approximately 16% of total revenue and, as of January 31, 1998, represented
approximately 19% of total assets.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(c) Interim Disclosures
The information as of January 31, 1998, and for the three months ended
January 31, 1998 and 1997, is unaudited, but, in the opinion of management,
reflects all adjustments, which are of a normal recurring nature, necessary for
a fair presentation of financial position and results of operations for the
interim periods. The accompanying 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, 1997.
The results of operations for the three months ended January 31, 1998 are
not necessarily indicative of the results to be expected for the fiscal year
ending October 31, 1998.
(d) Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," all assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at the exchange rate in
effect at the end of the period, and revenues and expenses are translated at
average exchange rates prevailing during the period. The resulting translation
adjustments are reflected in a separate component of shareholders' equity,
except for translation adjustments arising from operations in highly
inflationary economies.
During the first quarter of fiscal year 1997, the Company changed its method
of reporting foreign currency translation adjustments for its Mexican
operations to the method prescribed for highly inflationary economies. Under
that method, foreign currency translation adjustments are reflected in results
of operations, instead of in shareholders' equity. This change did not have a
material effect on the Company's results of operations for fiscal year 1997 or
the first quarter of fiscal year 1998, and management does not expect this
change to have a material effect on the Company's results of operations for
fiscal year 1998.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION--(CONTINUED)
(e) Per Share Data
Effective November 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share," which requires the
presentation of basic and diluted earnings per share. Basic earnings per share
is computed by dividing net earnings by the weighted average number of common
shares outstanding during each period. Diluted earnings per share is computed
by dividing net earnings by the weighted average number of common shares
outstanding plus the number of additional common shares that would have been
outstanding if the dilutive potential common shares (in this case, exercise of
certain of the Company's stock options) had been issued during each period.
See Note 6.
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(g) Reclassifications
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the presentation used in the 1998 consolidated
financial statements. These reclassifications had no effect on net earnings or
shareholders' equity.
(2) CHANGE IN ACCOUNTING PRINCIPLES
Effective November 1, 1996, the Company changed certain of its accounting
methods with respect to prearranged funeral and cemetery sales in order to
provide a better matching of revenues and costs. For further details, refer to
the Company's Annual Report on Form 10-K for the year ended October 31, 1997.
(3) ACQUISITION OF SUBSIDIARIES
During the three months ended January 31, 1998, the Company purchased 18
funeral homes and two cemeteries, compared to 13 funeral homes and one cemetery
purchased during the three months ended January 31, 1997.
These acquisitions have been accounted for by the purchase method, and their
results of operations are included in the accompanying consolidated financial
statements from the dates of acquisition. The purchase price allocations for
certain of these acquisitions are based on preliminary information.
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired during the three months
ended January 31, 1998, as if such acquisitions had taken place at the
beginning of the respective periods presented. Appropriate adjustments have
been made to reflect the accounting basis used in recording the acquisitions.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations that would have
resulted had the combinations been in effect on the dates indicated, that have
resulted since the dates of acquisition, or that may result in the future.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) ACQUISITION OF SUBSIDIARIES--(CONTINUED)
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
-------------- ------------
(UNAUDITED)
Revenues.................................... $ 151,372 $ 137,239
============== ============
Earnings before cumulative effect of
change in accounting principles.......... $ 21,785 $ 14,088
============== ============
Net earnings................................ $ 21,785 $ 11,764
============== ============
Basic earnings per share:
Earnings before cumulative effect of
change in accounting principles......... $ .45 $ .34
============== ============
Net earnings............................. $ .45 $ .28
============== ============
Diluted earnings per share:
Earnings before cumulative effect
of change in accounting principles...... $ .44 $ .33
============== ============
Net earnings............................. $ .44 $ .28
============== ============
Weighted average shares outstanding
(in thousands):
Basic.................................... 48,704 41,858
============== ============
Diluted.................................. 49,071 42,408
============== ============
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
-------------- ------------
(UNAUDITED)
Current assets............................... $ 1,776 $ 959
Receivables due beyond one year.............. -- 123
Cemetery property............................ 8,141 450
Property and equipment, net.................. 3,935 8,328
Deferred charges and other assets............ 128 226
Intangible assets, net....................... 25,633 9,675
Current liabilities.......................... (1,962) (981)
Long-term debt............................... (11,402) (81)
Other long-term liabilities.................. (8) (89)
-------------- ------------
26,241 18,610
Common stock used for acquisitions........... 200 1,342
-------------- ------------
Cash used for acquisitions................... $ 26,041 $ 17,268
============== ============
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) CONTINGENCIES
The Company was notified in September 1994 that a suit was brought by a
competitor regarding the Company's acquisition of certain corporations in
Mexico. The suit alleges that this acquisition violated the competitor's
previous option to acquire the same corporations. The suit seeks unspecified
damages. The Company believes that the suit is without merit and intends to
defend it vigorously. The Company believes it is entitled to indemnification
from the previous owners of these corporations should an unfavorable outcome
result. Management does not believe this matter will have a material adverse
effect on the financial position, net earnings or cash flows of the Company.
(5) RECENT ACCOUNTING STANDARDS
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," No. 131, "Disclosure about Segments of an Enterprise
and Related Information," and No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits," are required to be implemented during the
Company's fiscal year ending October 31, 1999. The effect of these
pronouncements on the Company's consolidated financial condition and results
of operations is not expected to be material.
(6) RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA
EARNINGS SHARES PER SHARE
THREE MONTHS ENDED JANUARY 31, 1998 (NUMERATOR) (DENOMINATOR) DATA
------------------------------------- ----------- ------------- ----------
Net earnings........................... $ 21,946
===========
Basic earnings per share:
Net earnings available to common
shareholders....................... $ 21,946 48,701 $ .45
==========
Effect of dilutive securities:
Stock options assumed exercised..... - 367
----------- -------------
Diluted earnings per share:
Net earnings available to common
shareholders plus stock options
assumed exercised................ $ 21,946 49,068 $ .45
=========== ============= ==========
THREE MONTHS ENDED JANUARY 31, 1997
-----------------------------------
Earnings before cumulative effect of
change in accounting principles..... $ 15,007
===========
Basic earnings per share:
Earnings available to common
shareholders....................... $ 15,007 41,853 $ .36
==========
Effect of dilutive securities:
Stock options assumed exercised..... - 550
----------- -------------
Diluted earnings per share:
Earnings available to common
shareholders plus stock options
assumed exercised................ $ 15,007 42,403 $ .35
=========== ============= ==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SUBSEQUENT EVENTS
As of March 13, 1998, the Company had outstanding commitments to acquire 53
funeral homes and three cemeteries for approximately $69,977.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Effective November 1, 1996, the Company changed certain of its accounting
methods for prearranged funeral and cemetery sales in order to provide a better
matching of revenues and costs. For further details, refer to the Company's
Annual Report on Form 10-K for the year ended October 31, 1997.
For purposes of the following discussion, funeral homes and cemeteries owned
and operated for the entirety of each period being compared are referred to as
"Existing Operations." Correspondingly, funeral homes and cemeteries acquired
or opened during either period being compared are referred to as "Acquired
Operations."
RESULTS OF OPERATIONS
Three Months Ended January 31, 1998 Compared to Three Months Ended January 31,
1997
Funeral Segment
THREE MONTHS ENDED
JANUARY 31,
--------------------- INCREASE
1998 1997 (DECREASE)
----------- -------- ----------
(IN MILLIONS)
FUNERAL REVENUE
---------------
Existing Operations..................... $ 64.5 $ 61.1 $ 3.4
Acquired Operations..................... 17.3 .6 16.7
Revenue from prearranged funeral trust
funds and escrow accounts.............. 5.1 4.9 .2
----------- -------- ----------
$ 86.9 $ 66.6 $ 20.3
=========== ======== ==========
FUNERAL COSTS
-------------
Existing Operations..................... $ 44.9 $ 45.9 $ (1.0)
Acquired Operations..................... 14.0 .5 13.5
----------- -------- ----------
$ 58.9 $ 46.4 $ 12.5
=========== ======== ==========
Funeral Segment Profit.................. $ 28.0 $ 20.2 $ 7.8
=========== ======== ==========
Funeral revenue increased $20.3 million, or 30%, for the three months ended
January 31, 1998, compared to the corresponding period in 1997. The Company
experienced a $3.4 million increase in revenue from Existing Operations as a
result of a 5.5% increase in the average revenue per domestic funeral service
performed by Existing Operations (6.9% increase in total), primarily due to
price increases and improved merchandising. Slightly offsetting this increase
in revenue was a .3% decrease in the number of domestic funeral services
performed by Existing Operations (1.5% decrease in total).
The $1.0 million, or 2%, decrease in funeral costs from Existing Operations
resulted principally from the implementation of certain cost control measures,
including contract negotiations with certain vendors and the Company's
centralization and standardization of certain financial and administrative
functions through its Shared Services Center. Existing Operations achieved
improved profit margins resulting primarily from these increased cost control
measures and the increased average revenue per funeral service mentioned
above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of funeral homes from
February 1997 through January 1998 which are not reflected in the 1997 period
presented above.
Cemetery Segment
THREE MONTHS ENDED
JANUARY 31,
--------------------- INCREASE
1998 1997 (DECREASE)
----------- -------- ----------
(IN MILLIONS)
CEMETERY REVENUE
----------------
Existing Operations.................... $ 57.8 $ 51.9 $ 5.9
Acquired Operations.................... 1.8 - 1.8
Revenue from merchandise trust funds and
escrow accounts....................... 2.8 4.2 (1.4)
----------- -------- ----------
$ 62.4 $ 56.1 $ 6.3
=========== ======== ==========
CEMETERY COSTS
--------------
Existing Operations..................... $ 42.6 $ 41.0 $ 1.6
Acquired Operations..................... 1.7 - 1.7
----------- -------- ----------
$ 44.3 $ 41.0 $ 3.3
=========== ======== ==========
Cemetery Segment Profit................. $ 18.1 $ 15.1 $ 3.0
=========== ======== ==========
Cemetery revenue increased $6.3 million, or 11%, for the three months ended
January 31, 1998, compared to the corresponding period in 1997, due principally
to a $5.9 million increase in revenue from Existing Operations. The increase in
revenue from Existing Operations resulted primarily from an increase in
cemetery sales, including burial site openings and closings.
The improved profit margin achieved by Existing Operations was attributable
principally to the increase in cemetery sales discussed above and the
implementation of certain cost control measures, including contract negotiations
with certain vendors and the Company's centralization and standardization of
certain financial and administrative functions through its Shared Services
Center.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of cemeteries from
February 1997 through January 1998 which are not reflected in the 1997 period
presented above.
The $1.4 million decrease in revenue from merchandise trust funds and escrow
accounts was attributable to a decline in the yield on the merchandise funds,
which was partially offset by a 22% growth in the average balance in the
merchandise trust funds and escrow accounts, resulting from current year
customer payments deposited into the funds, along with funds added through
acquisitions.
Other Segments and Activities
Interest expense increased $1.0 million during the first quarter of fiscal
year 1998 compared to the same period in 1997, resulting principally from an
increase in average borrowings. Approximately $369.5 million of the $606.5
million outstanding borrowings at January 31, 1998 was subject to short-term
variable interest rates averaging approximately 6.0%.
The Company experienced a decline in its effective tax rate from 35.5% for
the first quarter of fiscal year 1997 to 34.5% for the comparable period in
fiscal year 1998, principally as a result of the implementation of strategic
tax-planning strategies and the elimination of the Puerto Rican interest
withholding tax. The Company's effective tax rate is dependent upon a number
of factors, including the relative proportions of domestic and international
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $27.1 million at January
31, 1998, a decrease of approximately $9.2 million from October 31, 1997. The
Company used cash of $10.0 million in its operations for the three months ended
January 31, 1998, compared to $8.5 million for the corresponding period in
1997, due principally to a decrease in deferred revenue, offset by an increase
in net earnings and other working capital changes.
Long-term debt at January 31, 1998 amounted to $606.5 million, compared to
$558.3 million at October 31, 1997. The Company's long-term debt consisted of
$369.5 million under the Company's revolving credit facilities, $217.9 million
of long-term notes and $19.1 million of term notes incurred principally in
connection with the acquisition of funeral home and cemetery properties. All
of the Company's debt is uncollateralized, except for approximately $4.5
million of term notes incurred principally in connection with acquisitions.
The most restrictive of the Company's credit agreements requires it to
maintain a debt-to-equity ratio no higher than 1.25 to 1.0. The Company has
managed its capitalization within that limit, with a ratio of total debt to
equity of .7 to 1.0 as of January 31, 1998 and October 31, 1997. As of January
31, 1998, the Company had $432.1 million of additional borrowing capacity
within this parameter, of which $238.3 million was available under its
revolving credit facilities.
The Company's ratio of earnings to fixed charges was 4.18 for the three
months ended January 31, 1998, and 3.65 (which excludes the cumulative effect
of change in accounting principles), 3.98, 2.72 (which includes the $17.3
million non-recurring, non-cash performance-based stock option charge), 5.30
and 5.15 for the fiscal years ended October 31, 1997, 1996, 1995, 1994 and
1993, respectively. Excluding the stock option charge, the Company's ratio of
earnings to fixed charges for fiscal year 1995 would have been 3.43. For
purposes of computing the ratio of earnings to fixed charges, earnings consist
of pretax earnings plus fixed charges (excluding interest capitalized during
the period). Fixed charges consist of interest expense, capitalized interest,
amortization of debt expense and discount or premium relating to any
indebtedness and the portion of rental expense that management believes to be
representative of the interest component of rental expense. Fiscal year 1996
and prior amounts reflect the Company's previous accounting methods which were
in effect at that time.
During the three months ended January 31, 1998, the Company completed
acquisitions of 18 funeral homes and two cemeteries for purchase prices
aggregating approximately $40.7 million, including the issuance of
approximately 5,000 shares of Class A Common Stock and $7.1 million of seller-
financed acquisition indebtedness. The cash portion of the purchase price of
these acquisitions was funded primarily with advances under the Company's
revolving credit facilities.
As of March 13, 1998, the Company had outstanding commitments to acquire 53
funeral homes and three cemeteries for purchase prices aggregating
approximately $70.0 million. If these purchases are consummated, the amounts
to be paid will be satisfied by borrowings under the Company's revolving credit
facilities.
Although the Company has no material commitments for capital expenditures,
the Company contemplates capital expenditures, excluding acquisitions, of
approximately $40.0 million for the fiscal year ending October 31, 1998,
including construction of new funeral homes and refurbishing of funeral homes
recently acquired.
Management expects that future capital requirements will be satisfied
through a combination of internally generated cash flow and amounts available
under its revolving credit facilities. Additional debt and equity financing
may be required in connection with future acquisitions. In addition, the
Company monitors its mix of fixed and floating rate debt obligations in light
of changing market conditions and may from time to time decide to alter that
mix by, for example, refinancing balances outstanding under its floating rate
revolving credit facility with public or private fixed rate debt, or by
entering into interest rate swaps or similar interest rate hedging
transactions.
INFLATION
Inflation has not had a significant impact on the Company's United States
operations over the past three years, nor is it expected to have a significant
impact in the foreseeable future. The Mexican economy, however, currently is
experiencing inflation rates substantially in excess of those in the United
States.
During the first quarter of fiscal year 1997, the Company changed its method
of reporting foreign currency translation adjustments for its Mexican
operations to the method prescribed for highly inflationary economies. Under
that method, foreign currency translation adjustments are reflected in results
of operations, instead of in shareholders' equity. This change did not have a
material effect on the Company's results of operations for fiscal year 1997 or
the first quarter of fiscal year 1998, and management does not expect this
change to have a material effect on the Company's results of operations for
fiscal year 1998.
OTHER
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," No. 131, "Disclosure about Segments of an Enterprise and
Related Information," and No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," are required to be implemented during the
Company's fiscal year ending October 31, 1999. The effect of these
pronouncements on the Company's consolidated financial condition and results
of operations is not expected to be material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no change in the status of the Company's material legal
proceedings during the quarter ended January 31, 1998.
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
Certain statements made herein or elsewhere by, or on behalf of, the Company
that are not historical facts are intended to be forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
The Company's goals for fiscal year 1998 include: (i) revenue growth of at
least 20%; and (ii) earnings per share growth of 20%. The Company also
projects approximately $200-$225 million in acquisitions, which represents a
slight increase over the $185 million, $179 million, and $154 million achieved
in fiscal years 1997, 1996 and 1995, respectively. For fiscal year 1998, the
Company projects gross margin improvement of approximately 50 to 60 basis
points over its fiscal year 1997 gross margin.
The Company's strategic plan for the future includes the following goals:
(i) achievement of $1 billion in revenue by fiscal year 2001; and (ii) earnings
per share growth of 20% annually.
Forward-looking statements are based on assumptions about future events and
are therefore inherently uncertain; actual results may differ materially from
those projected. See "Cautionary Statements," below.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the projections
made in the forward-looking statements above and in any other forward-looking
statements made by, or on behalf of, the Company.
(1) Achieving projected revenue growth depends upon sustaining the level of
acquisition activity experienced by the Company in the last three fiscal years.
Higher levels of acquisition activity will increase anticipated revenues, and
lower levels of acquisition activity will decrease anticipated revenues. The
level of acquisition activity depends not only on the number of properties
acquired, but also on the size of the acquisitions; for example, one large
acquisition could increase substantially the level of acquisition activity and,
consequently, revenues. Several important factors, among others, affect the
Company's ability to consummate acquisitions:
(a)The Company may be unable to find a sufficient number of businesses
for sale at prices the Company is willing to pay.
(b)In most of its existing markets and in many new markets, including
foreign markets, that the Company desires to enter, the Company
competes for acquisitions with the other publicly-traded death care
firms. These competitors, and others, may be willing to pay higher
prices for businesses than the Company or may cause the Company to pay
more to acquire a business than the Company would otherwise have to
pay in the absence of such competition. Thus, the aggressiveness of
the Company's competitors in pricing acquisitions affects the
Company's ability to complete acquisitions at prices it finds
attractive.
(c)Achieving the Company's projected acquisition activity depends on the
Company's ability to enter new markets, including foreign markets.
Due in part to the Company's lack of experience operating in new areas
and to the presence of competitors who have been in certain markets
longer than the Company, such entry may be more difficult or expensive
than anticipated by the Company.
(2) The level of revenues also is affected by the volume and prices of the
properties, products and services sold. The annual sales targets set by the
Company are very aggressive, and the inability of the Company to achieve
planned increases in volume or prices could cause the Company not to meet
anticipated levels of revenue. The ability of the Company to achieve volume or
price increases at any location depends on numerous factors, including the
local economy, the local death rate and competition.
(3) Another important component of revenue is earnings from the Company's
trust funds and escrow accounts, which are determined by the size of, and
returns (which include dividends, interest and realized capital gains) on, the
funds. The performance of the funds is related primarily to market conditions
that are not within the Company's control. The size of the funds depends on
the level of sales, funds added through acquisitions and the amount of returns
that may be reinvested.
(4) Future revenue also is affected by the level of prearranged sales in
prior periods. The level of prearranged sales may be adversely affected by
numerous factors, including deterioration in the economy, which causes
individuals to have less discretionary income.
(5) The Company cannot predict whether or when a non-cash charge to earnings
of approximately $68 million may be required in connection with its
performance-based stock options. See "1995 Incentive Compensation Plan" in Note
13 to the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended October 31, 1997.
(6) The Company first entered foreign markets in the fourth quarter of
fiscal year 1994, and no assurance can be given that the Company will continue
to be successful in expanding in foreign markets, or that any expansion in
foreign markets will yield results comparable to those realized as a result of
the Company's expansion in the United States.
(7) In addition to the factors discussed above, earnings per share may be
affected by other important factors, including the following:
(a)The ability of the Company to achieve projected economies of scale in
markets where it has "clusters" or combined facilities.
(b)Whether acquired businesses perform at pro forma levels used by
management in the valuation process and whether, and the rate at
which, management is able to increase the profitability of acquired
businesses.
(c)The ability of the Company to manage its growth in terms of
implementing internal controls and information gathering systems, and
retaining or attracting key personnel, among other things.
(d)The amount and rate of growth in the Company's corporate general and
administrative expenses.
(e)Changes in interest rates, which can increase or decrease the amount
the Company pays on borrowings with variable rates of interest.
(f)The Company's debt-to-equity ratio, the number of shares of common
stock outstanding and the portion of the Company's debt that has fixed
or variable interest rates.
(g)The impact on the Company's financial statements of nonrecurring
accounting charges that may result from the Company's ongoing
evaluation of its business strategies, asset valuations and
organizational structures.
(h)Changes in government regulation, including tax rates and structures.
(i)Unanticipated outcomes of legal proceedings.
(j)Changes in accounting policies and practices adopted voluntarily or
required to be adopted by generally accepted accounting principles.
The Company also cautions readers that it assumes no obligation to update or
publicly release any revisions to forward-looking statements made herein or any
other forward-looking statements made by, or on behalf of, the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company, as amended,
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996)
3.2 By-laws of the Company, as amended (incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1997)
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 4.2 to Amendment No. 3 to the Company's Registration Statement on
Form S-1 (Registration No. 33-42336) filed with the Commission on October
7, 1991)
----------------------------------
Management Contracts and Compensatory Plans or Arrangements
10.1 Amendment No. 2 dated November 1, 1997 to Employment Agreement dated
January 1, 1997 between the Company and Brent F. Heffron
10.2 Stock Option Agreement dated December 23, 1997 (time-vest) and dated
December 23, 1997 (performance-based) between the Company and Brent F.
Heffron
10.3 Amendment No. 2 dated November 1, 1997 to Employment Agreement dated
January 1, 1997 between the Company and Raymond C. Knopke, Jr.
10.4 Stock Option Agreement dated December 23, 1997 (time-vest) and dated
December 23, 1997 (performance-based) between the Company and Raymond C.
Knopke, Jr.
----------------------------------
12 Calculation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on December 18, 1997 reporting, under "Item 5.
Other Events," the earnings release for the year ended October 31, 1997.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEWART ENTERPRISES, INC.
March 16, 1998 /s/ RONALD H. PATRON
----------------------------
Ronald H. Patron
Chief Financial Officer
President-Corporate Division
March 16, 1998 /s/ KENNETH C. BUDDE
-----------------------------
Kenneth C. Budde
Senior Vice President-Finance
Secretary and Treasurer
(Principal Accounting Officer)