STEWART ENTERPRISES INC - 10-Q Quarterly Report

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 April 30, 2004

( ) 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.)

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 ( )

Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. 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 June 2, 2004, was 103,248,466 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)


	Three Months Ended April 30,
	2004			2003
Revenues:
Funeral	$	71,002		$	70,080
Cemetery		59,077			57,228

		130,079			127,308

Costs and expenses:
Funeral		49,452			51,817
Cemetery		43,768			42,913

		93,220			94,730

Gross profit		36,859			32,578
Corporate general and administrative expenses		4,621			4,182
Severance charge (Note 13)		138			—
Impairment and other charges, net (Note 11)		91			—

Operating earnings		32,009			28,396
Interest expense		(11,953	)		(13,579	)
Investment income		56			84
Other income, net		107			802

Earnings from continuing operations before income taxes		20,219			15,703
Income taxes		7,503			5,967

Earnings from continuing operations		12,716			9,736

Discontinued operations (Note 12):
Earnings (loss) from discontinued operations before income taxes (including net gain (loss) on disposals of $1,502 and ($712) in 2004 and 2003, respectively)		1,706			(394	)
Income tax benefit		(335	)		(149	)

Earnings (loss) from discontinued operations		2,041			(245	)

Net earnings	$	14,757		$	9,491

Basic earnings per common share:
Earnings from continuing operations	$	.12		$	.09
Earnings from discontinued operations		.02			—

Net earnings	$	.14		$	.09

Diluted earnings per common share:
Earnings from continuing operations	$	.12		$	.09
Earnings from discontinued operations		.02			—

Net earnings	$	.14		$	.09

Weighted average common shares outstanding (in thousands):
Basic		107,438			108,299

Diluted		108,400			108,302

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)


	Six Months Ended April 30,
	2004			2003
Revenues:
Funeral	$	144,854		$	140,787
Cemetery		114,718			111,298

		259,572			252,085

Costs and expenses:
Funeral		100,544			103,623
Cemetery		85,339			84,792

		185,883			188,415

Gross profit		73,689			63,670
Corporate general and administrative expenses		8,534			8,482
Severance charge (Note 13)		2,131			—
Impairment and other charges, net (Note 11)		91			—

Operating earnings		62,933			55,188
Interest expense		(24,474	)		(27,156	)
Investment income		125			171
Other income (expense), net		(47	)		1,684

Earnings from continuing operations before income taxes		38,537			29,887
Income taxes		14,463			11,357

Earnings from continuing operations		24,074			18,530

Discontinued operations (Note 12):
Earnings from discontinued operations before income taxes (including net gain on disposals of $1,502 and $91 in 2004 and 2003, respectively)		2,303			700
Income tax expense (benefit)		(108	)		266

Earnings from discontinued operations		2,411			434

Net earnings	$	26,485		$	18,964

Basic earnings per common share:
Earnings from continuing operations	$	.22		$	.17
Earnings from discontinued operations		.03			.01

Net earnings	$	.25		$	.18

Diluted earnings per common share:
Earnings from continuing operations	$	.22		$	.17
Earnings from discontinued operations		.02			.01

Net earnings	$	.24		$	.18

Weighted average common shares outstanding (in thousands):
Basic		107,660			108,169

Diluted		108,177			108,196

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)


	April 30,		October 31,
	2004		2003
ASSETS
Current assets:
Cash and cash equivalent investments	$	26,996	$	18,585
Marketable securities		1,402		2,346
Receivables, net of allowances		57,933		97,203
Inventories		39,535		40,154
Prepaid expenses		2,290		2,887
Deferred income taxes, net		1,589		2,990
Assets held for sale (Note 12)		38,958		52,117

Total current assets		168,703		216,282
Receivables due beyond one year, net of allowances		77,578		76,374
Preneed funeral receivables and trust investments		514,282		—
Preneed cemetery receivables and trust investments		255,906		—
Prearranged receivables, net		—		891,028
Goodwill		403,722		403,790
Deferred charges		247,070		247,067
Cemetery property, at cost		377,679		377,118
Property and equipment, at cost:
Land		37,350		37,350
Buildings		290,570		289,082
Equipment and other		158,828		155,429

		486,748		481,861
Less accumulated depreciation		190,770		181,801

Net property and equipment		295,978		300,060
Deferred income taxes, net		54,632		60,565
Cemetery perpetual care trust investments		205,114		—
Other assets		1,417		1,238

Total assets	$	2,602,081	$	2,573,522

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)


	April 30,			October 31,
	2004			2003
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5,639		$	13,935
Accounts payable		6,507			7,274
Accrued payroll		10,214			8,596
Accrued insurance		17,727			19,243
Accrued interest		11,199			11,428
Other current liabilities		11,720			17,273
Income taxes payable		2,667			769
Liabilities associated with assets held for sale (Note 12)		23,752			30,071

Total current liabilities		89,425			108,589
Long-term debt, less current maturities		448,318			488,180
Deferred preneed funeral revenue		160,696			—
Deferred preneed cemetery revenue		290,404			—
Non-controlling interest in funeral and cemetery trusts		635,638			—
Prearranged deferred revenue, net		—			1,222,785
Other long-term liabilities		13,581			15,109

Total liabilities		1,638,062			1,834,663

Commitments and contingencies
Non-controlling interest in perpetual care trusts		202,682			—

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 150,000,000 shares; issued and outstanding 103,779,966 and 104,172,151 shares at April 30, 2004 and October 31, 2003, respectively		103,780			104,172
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at April 30, 2004 and October 31, 2003; 10 votes per share; convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		672,324			676,439
Accumulated deficit		(16,379	)		(42,864	)
Unearned restricted stock compensation		(1,101	)		—
Accumulated other comprehensive loss:
Unrealized depreciation of investments		—			(797	)
Derivative financial instrument losses		(842	)		(1,646	)

Total accumulated other comprehensive loss		(842	)		(2,443	)

Total shareholders’ equity		761,337			738,859

Total liabilities and shareholders’ equity	$	2,602,081		$	2,573,522

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)


													Unrealized
							Retained			Unearned			Appreciation			Derivative
				Additional			Earnings			Restricted			(Depreciation)			Financial			Total
	Common			Paid-In			(Accumulated			Stock			of			Instrument			Shareholders’
	Stock ⁽¹⁾			Capital			Deficit)			Compensation			Investments			Gains (Losses)			Equity
Balance October 31, 2003	$	107,727		$	676,439		$	(42,864	)	$	—		$	(797	)	$	(1,646	)	$	738,859
Comprehensive income:
Net earnings								26,485												26,485
Other comprehensive income:
Reclassification adjustment for realized loss on investments, net of deferred tax benefit of $454														740						740
Unrealized appreciation of investments, net of deferred tax expense of ($14)														57						57
Termination of derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($119)																	194			194
Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($332)																	610			610

Total other comprehensive income		—			—			—			—			797			804			1,601

Total comprehensive income		—			—			26,485			—			797			804			28,086
Issuance of restricted stock awards		271			1,203						(1,474	)								—
Amortization of unearned restricted stock compensation											373									373
Issuance of common stock		44			173															217
Stock options exercised		913			3,581															4,494
Purchase and retirement of common stock		(1,620	)		(9,072	)														(10,692	)

Balance April 30, 2004	$	107,335		$	672,324		$	(16,379	)	$	(1,101	)	$	—		$	(842	)	$	761,337

⁽¹⁾ Amount includes 103,780 and 104,172 shares (in thousands) of Class A common stock with a stated value of $1 per share as of April 30, 2004 and October 31, 2003, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)


	Six Months Ended April 30,
	2004			2003
Cash flows from operating activities:
Net earnings	$	26,485		$	18,964
Adjustments to reconcile net earnings to net cash provided by operating activities:
Impairment and other charges, net		(1,411	)		—
Depreciation and amortization		26,010			27,112
Provision for doubtful accounts		4,197			3,515
Net loss realized on marketable securities		1,194			—
Provision for deferred income taxes		6,057			7,842
Other		(11	)		(887	)
Changes in assets and liabilities:
(Increase) decrease in other receivables		28,548			(2,448	)
Decrease in deferred charges		3,606			2,472
Increase in inventories and cemetery property		(77	)		(525	)
Increase (decrease) in accounts payable and accrued expenses		1,096			(4,871	)
Change in prearranged activity		(15,914	)		(17,746	)
Prearranged acquisition costs		(17,713	)		(17,437	)
Increase (decrease) in other		(1,188	)		2,119

Net cash provided by operating activities		60,879			18,110

Cash flows from investing activities:
Proceeds from sales of marketable securities		1,019			550
Proceeds from sale of assets, net		8,938			1,714
Additions to property and equipment		(8,333	)		(7,473	)
Other		47			173

Net cash provided by (used in) investing activities		1,671			(5,036	)

Cash flows from financing activities:
Proceeds from long-term debt		—			50,000
Repayments of long-term debt		(48,158	)		(7,338	)
Issuance of common stock		4,711			313
Purchase and retirement of common stock		(10,692	)		—

Net cash provided by (used in) financing activities		(54,139	)		42,975

Net increase in cash		8,411			56,049
Cash and cash equivalents, beginning of period		18,585			28,190

Cash and cash equivalents, end of period	$	26,996		$	84,239

Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes	$	(29,800	)	$	3,800
Interest	$	21,500		$	24,500
Noncash investing and financing activities:
Issuance of common stock to fund employee benefit plan	$	—		$	1,280

See accompanying notes to condensed consolidated financial statements.

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. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of April 30, 2004, the Company owned and operated 275 funeral homes and 148 cemeteries in 29 states within the United States and Puerto Rico.

(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. See Note 12 for a discussion of discontinued operations, assets held for sale and liabilities associated with assets held for sale.

The information as of April 30, 2004, and for the three and six months ended April 30, 2004 and 2003, 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 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, 2003.

The year-end condensed consolidating balance sheet data was derived from audited financial statements 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 annual report on Form 10-K for the fiscal year ended October 31, 2003.

The results of operations for the three and six months ended April 30, 2004 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2004.

(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.

(e) Fair Value of Financial Instruments

Estimated fair value amounts have been determined using available market information and the valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts the Company

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(1) Basis of Presentation—(Continued)

could realize in a current market. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

The carrying amounts of cash and cash equivalents and current receivables approximate fair value due to the short-term nature of these instruments. The carrying amount of receivables due beyond one year approximates fair value because they bear interest at rates currently offered by the Company for receivables with similar terms and maturities. The carrying amounts of marketable securities and marketable securities included in preneed funeral trust investments, preneed cemetery trust investments and cemetery perpetual care trust investments are stated at fair value as they are classified as available for sale under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The fair value of the Company’s long-term variable- and fixed-rate debt is estimated using quoted market prices, where applicable, or future cash flows discounted at rates for similar types of borrowing arrangements.

(f) Prearranged Trust Receivable and Prearranged Deferred Revenue

The Company adopted FIN 46R effective April 30, 2004, as described in Note 2(a). The following discussion describes the Company’s accounting prior to the adoption of FIN 46R. The Company evaluated the collectibility of the prearranged trust receivable for impairment when the fair market value of the trust assets was below the recorded prearranged trust receivable balance. A prearranged trust receivable was deemed to be impaired when, based on current information and events, it was probable that the Company would be unable to collect all amounts from the trust at the time the receivables are due. In those instances that a receivable was deemed to be impaired, a valuation allowance was provided on the trust receivable to reduce it to the currently estimated recoverable amount with a corresponding reduction to the associated deferred revenue balance. There was no income statement impact as long as the deferred revenue was not below the estimated costs to deliver the underlying products or services. If the deferred revenue were below the estimated costs to deliver the underlying products or services, the Company would record a charge to earnings. The valuation allowance as of October 31, 2003 was $4,500.

(g) Inventories

Inventories are stated at the lower of cost (specific identification and first-in, first-out methods) or net realizable value. The portion of developed cemetery property that management estimates will be used in the next twelve months is included in inventories. Such estimates are based on the Company’s historical experience or results.

(h) Depreciation and Amortization

Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 10 to 40 years and from 3 to 10 years, respectively, primarily using the straight-line method.

SFAS No. 142, “Goodwill and Other Intangibles,” provides that goodwill is no longer amortized, but must be tested for impairment using a fair value approach rather than an undiscounted cash flow approach. The Company’s evaluation of goodwill is performed at the funeral and cemetery segments, which constitute the Company’s reporting <


	Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings — Three Months Ended April 30, 2004 and 2003		3
Condensed Consolidated Statements of Earnings — Six Months Ended April 30, 2004 and 2003		4
Condensed Consolidated Balance Sheets — April 30, 2004 and October 31, 2003		5
Condensed Consolidated Statement of Shareholders’ Equity — Six Months Ended April 30, 2004		7
Condensed Consolidated Statements of Cash Flows — Six Months Ended April 30, 2004 and 2003		8
Notes to Condensed Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
Item 4. Controls and Procedures		50
Part II. Other Information
Item 1. Legal Proceedings		51
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		51
Item 4. Submission of Matters to a Vote of Security Holders		51
Item 5. Other Information		52
Item 6. Exhibits and Reports on Form 8-K		59
Signatures		61
Separation Agreement
Calculation of Ratio of Earnings to Fixed Charges
Certificaiton of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 906

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