Attached files
file | filename |
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EX-31.1 - EX-31.1 - STEWART ENTERPRISES INC | h70096exv31w1.htm |
EX-32.1 - EX-32.1 - STEWART ENTERPRISES INC | h70096exv32w1.htm |
EX-31.2 - EX-31.2 - STEWART ENTERPRISES INC | h70096exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended January 31, 2010
or
o | 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 (State or other jurisdiction of incorporation or organization) |
72-0693290 (I.R.S. Employer Identification No.) |
|
1333 South Clearview Parkway Jefferson, Louisiana (Address of principal executive offices) |
70121 (Zip Code) |
Registrants telephone number, including area code: (504) 729-1400
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
þ No o
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 o No o
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 o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act.) Yes
o No þ
The number of shares of the registrants Class A common stock, no par value per share, and
Class B common stock, no par value per share, outstanding as of February 28, 2010, was 89,566,742
and 3,555,020, respectively.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
INDEX
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
(As Adjusted) | ||||||||
Revenues: |
||||||||
Funeral |
$ | 72,108 | $ | 71,750 | ||||
Cemetery |
52,292 | 47,580 | ||||||
124,400 | 119,330 | |||||||
Costs and expenses: |
||||||||
Funeral |
52,911 | 53,495 | ||||||
Cemetery |
46,320 | 42,752 | ||||||
99,231 | 96,247 | |||||||
Gross profit |
25,169 | 23,083 | ||||||
Corporate general and administrative expenses |
(6,554 | ) | (7,506 | ) | ||||
Hurricane related charges, net |
| (315 | ) | |||||
Net impairment losses on dispositions |
| (63 | ) | |||||
Other operating income, net |
179 | 259 | ||||||
Operating earnings |
18,794 | 15,458 | ||||||
Interest expense |
(6,456 | ) | (7,395 | ) | ||||
Gain on early extinguishment of debt |
17 | | ||||||
Investment and other income, net |
24 | 41 | ||||||
Earnings before income taxes |
12,379 | 8,104 | ||||||
Income taxes |
4,892 | 3,338 | ||||||
Net earnings |
$ | 7,487 | $ | 4,766 | ||||
Net earnings per common share: |
||||||||
Basic |
$ | .08 | $ | .05 | ||||
Diluted |
$ | .08 | $ | .05 | ||||
Weighted average common shares outstanding (in thousands): |
||||||||
Basic |
92,053 | 91,824 | ||||||
Diluted |
92,234 | 91,843 | ||||||
Dividends declared per common share |
$ | .030 | $ | .025 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
January 31, 2010 | October 31, 2009 | |||||||
(As Adjusted) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 52,780 | $ | 62,808 | ||||
Certificates of deposit |
5,000 | | ||||||
Receivables, net of allowances |
59,331 | 59,439 | ||||||
Inventories |
35,947 | 36,156 | ||||||
Prepaid expenses |
11,574 | 6,748 | ||||||
Deferred income taxes, net |
21,645 | 21,715 | ||||||
Total current assets |
186,277 | 186,866 | ||||||
Receivables due beyond one year, net of allowances |
62,062 | 63,011 | ||||||
Preneed funeral receivables and trust investments |
397,454 | 389,512 | ||||||
Preneed cemetery receivables and trust investments |
196,797 | 193,417 | ||||||
Goodwill |
247,236 | 247,236 | ||||||
Cemetery property, at cost |
386,189 | 385,977 | ||||||
Property and equipment, at cost: |
||||||||
Land |
43,677 | 43,677 | ||||||
Buildings |
332,061 | 329,685 | ||||||
Equipment and other |
188,092 | 187,100 | ||||||
563,830 | 560,462 | |||||||
Less accumulated depreciation |
267,234 | 261,005 | ||||||
Net property and equipment |
296,596 | 299,457 | ||||||
Deferred income taxes, net |
109,866 | 113,398 | ||||||
Cemetery perpetual care trust investments |
214,460 | 205,476 | ||||||
Other assets |
14,139 | 14,654 | ||||||
Total assets |
$ | 2,111,076 | $ | 2,099,004 | ||||
(continued)
4
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
January 31, 2010 | October 31, 2009 | |||||||
(As Adjusted) | ||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 3 | $ | 5 | ||||
Accounts payable and accrued expenses |
21,260 | 25,604 | ||||||
Accrued payroll and other benefits |
11,938 | 15,200 | ||||||
Accrued insurance |
20,139 | 20,504 | ||||||
Accrued interest |
6,181 | 4,561 | ||||||
Estimated obligation to fund cemetery perpetual care trust |
13,642 | 14,010 | ||||||
Other current liabilities |
11,982 | 14,099 | ||||||
Income taxes payable |
3,143 | 2,028 | ||||||
Total current liabilities |
88,288 | 96,011 | ||||||
Long-term debt, less current maturities |
339,934 | 339,721 | ||||||
Deferred preneed funeral revenue |
245,584 | 247,825 | ||||||
Deferred preneed cemetery revenue |
263,388 | 266,964 | ||||||
Deferred preneed funeral and cemetery receipts held in trust |
526,424 | 514,787 | ||||||
Perpetual care trusts corpus |
212,076 | 204,168 | ||||||
Other long-term liabilities |
21,032 | 20,871 | ||||||
Total liabilities |
1,696,726 | 1,690,347 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Preferred stock, $1.00 par value, 5,000,000 shares
authorized; no shares issued |
| | ||||||
Common stock, $1.00 stated value: |
||||||||
Class A authorized 200,000,000 shares; issued and
outstanding 89,566,742 and 89,128,700 shares at
January 31, 2010 and October 31, 2009, respectively |
89,567 | 89,129 | ||||||
Class B authorized 5,000,000 shares; issued and
outstanding 3,555,020 shares at January 31, 2010 and
October 31, 2009; 10 votes per share convertible into
an equal number of Class A shares |
3,555 | 3,555 | ||||||
Additional paid-in capital |
558,832 | 561,063 | ||||||
Accumulated deficit |
(237,638 | ) | (245,125 | ) | ||||
Accumulated other comprehensive income: |
||||||||
Unrealized appreciation of investments |
34 | 35 | ||||||
Total accumulated other comprehensive income |
34 | 35 | ||||||
Total shareholders equity |
414,350 | 408,657 | ||||||
Total liabilities and shareholders equity |
$ | 2,111,076 | $ | 2,099,004 | ||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
Unrealized | ||||||||||||||||||||
Appreciation | ||||||||||||||||||||
Common | Additional Paid-In | (Depreciation) of | Total Shareholders | |||||||||||||||||
Stock(1) | Capital | Accumulated Deficit | Investments | Equity | ||||||||||||||||
Balance October 31, 2009, as
previously reported |
$ | 92,684 | $ | 526,062 | $ | (227,897 | ) | $ | 35 | $ | 390,884 | |||||||||
Adoption of convertible debt
standard (See Note 2) |
| 35,001 | (17,228 | ) | | 17,773 | ||||||||||||||
Balance October 31, 2009, as
adjusted |
$ | 92,684 | $ | 561,063 | $ | (245,125 | ) | $ | 35 | $ | 408,657 | |||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net earnings |
| | 7,487 | | 7,487 | |||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||
Unrealized depreciation of
investments, net of deferred
tax benefit of $1 |
| | | (1 | ) | (1 | ) | |||||||||||||
Total other comprehensive loss |
| | | (1 | ) | (1 | ) | |||||||||||||
Total comprehensive income
(loss) |
| | 7,487 | (1 | ) | 7,486 | ||||||||||||||
Restricted stock activity |
317 | (87 | ) | | | 230 | ||||||||||||||
Issuance of common stock |
109 | 388 | | | 497 | |||||||||||||||
Stock options exercised |
12 | 20 | | | 32 | |||||||||||||||
Stock option expense |
| 275 | | | 275 | |||||||||||||||
Tax benefit associated with
stock activity |
| 17 | | | 17 | |||||||||||||||
Retirement of call options,
net of tax expense of $37 |
| 70 | | | 70 | |||||||||||||||
Retirement of common stock
warrants |
| (107 | ) | | | (107 | ) | |||||||||||||
Repurchase of convertible
notes, net of tax benefit of
$7 |
| (13 | ) | | | (13 | ) | |||||||||||||
Dividends ($.030 per share) |
| (2,794 | ) | | | (2,794 | ) | |||||||||||||
Balance January 31, 2010 |
$ | 93,122 | $ | 558,832 | $ | (237,638 | ) | $ | 34 | $ | 414,350 | |||||||||
(1) | Amount includes 89,567 and 89,129 shares (in thousands) of Class A common stock with a stated value of $1 per share as of January 31, 2010 and October 31, 2009, respectively, and includes 3,555 shares (in thousands) of Class B common stock. |
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
(As Adjusted) | ||||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 7,487 | $ | 4,766 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Net impairment losses on dispositions |
| 63 | ||||||
Gain on early extinguishment of debt |
(17 | ) | | |||||
Depreciation and amortization |
6,587 | 6,971 | ||||||
Non-cash interest and amortization of discount on senior convertible notes |
1,521 | 1,907 | ||||||
Provision for doubtful accounts |
1,674 | 2,215 | ||||||
Share-based compensation |
962 | 802 | ||||||
Excess tax benefits from share-based payment arrangements |
(20 | ) | | |||||
Provision (benefit) for deferred income taxes |
3,569 | (749 | ) | |||||
Estimated obligation to fund cemetery perpetual care trust |
| 88 | ||||||
Other |
20 | 66 | ||||||
Changes in assets and liabilities: |
||||||||
(Increase) decrease in receivables |
(1,648 | ) | 2,993 | |||||
Increase in prepaid expenses |
(4,825 | ) | (5,050 | ) | ||||
Increase in inventories and cemetery property |
(3 | ) | (1,043 | ) | ||||
Decrease in accounts payable and accrued expenses |
(7,204 | ) | (7,629 | ) | ||||
Net effect of preneed funeral production and maturities: |
||||||||
Decrease in preneed funeral receivables and trust investments |
3,031 | 3,910 | ||||||
Decrease in deferred preneed funeral revenue |
(2,240 | ) | (2,054 | ) | ||||
Decrease in deferred preneed funeral receipts held in trust |
(3,324 | ) | (1,996 | ) | ||||
Net effect of preneed cemetery production and deliveries: |
||||||||
Decrease in preneed cemetery receivables and trust investments |
781 | 1,934 | ||||||
Decrease in deferred preneed cemetery revenue |
(3,575 | ) | (1,645 | ) | ||||
Increase (decrease) in deferred preneed cemetery receipts held in trust |
(173 | ) | 81 | |||||
Increase in other |
170 | 1,654 | ||||||
Net cash provided by operating activities |
2,773 | 7,284 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of certificates of deposit |
(5,000 | ) | | |||||
Proceeds from sale of assets |
| 292 | ||||||
Purchase of subsidiaries and other investments, net of cash acquired |
| (1,623 | ) | |||||
Additions to property and equipment |
(4,297 | ) | (4,789 | ) | ||||
Other |
39 | 1 | ||||||
Net cash used in investing activities |
(9,258 | ) | (6,119 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayments of long-term debt |
(846 | ) | (9 | ) | ||||
Retirement of common stock warrants |
(107 | ) | | |||||
Issuance of common stock |
115 | 83 | ||||||
Retirement of call options |
107 | | ||||||
Debt refinancing costs |
(38 | ) | | |||||
Dividends |
(2,794 | ) | (2,318 | ) | ||||
Excess tax benefits from share-based payment arrangements |
20 | | ||||||
Net cash used in financing activities |
(3,543 | ) | (2,244 | ) | ||||
Net decrease in cash |
(10,028 | ) | (1,079 | ) | ||||
Cash and cash equivalents, beginning of period |
62,808 | 72,574 | ||||||
Cash and cash equivalents, end of period |
$ | 52,780 | $ | 71,495 | ||||
Supplemental cash flow information: |
||||||||
Cash paid (received) during the period for: |
||||||||
Income taxes, net |
$ | (44 | ) | $ | 874 | |||
Interest |
$ | 3,191 | $ | 5,125 | ||||
Non-cash investing and financing activities: |
||||||||
Issuance of common stock to executive officers and directors |
$ | 414 | $ | 305 | ||||
Issuance of restricted stock, net of forfeitures |
$ | 1,024 | $ | 312 |
See accompanying notes to condensed consolidated financial statements.
7
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(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 and cremation merchandise and services, along with cemetery
property, merchandise and services, both at the time of need and on a preneed basis. As of January
31, 2010, the Company owned and operated 218 funeral homes and 140 cemeteries in 24 states within
the United States and Puerto Rico. The Company has three operating and reportable segments
consisting of a funeral segment, cemetery segment and corporate trust management segment.
(b) Principles of Consolidation
The accompanying condensed consolidated financial statements include the Company and its
subsidiaries. All significant intercompany balances and transactions have been eliminated.
(c) Interim Disclosures
The information as of January 31, 2010, and for the three months ended January 31, 2010 and
2009, 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 Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2009
(the 2009 Form 10-K).
The October 31, 2009 condensed consolidated balance sheet data was derived from audited
financial statements in the Companys 2009 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 Companys 2009 Form 10-K. Certain amounts reported in prior periods have been adjusted to
conform to the 2010 presentation as further discussed in Note 2.
The results of operations for the three months ended January 31, 2010 are not necessarily
indicative of the results to be expected for the fiscal year ending October 31, 2010.
(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
Companys significant estimates are disclosed in Note 2 in the Companys 2009 Form 10-K.
(e) Share-Based Compensation
The Company has share-based compensation plans, which are described in more detail in Note 19 to
the consolidated financial statements in the Companys 2009 Form 10-K. Net earnings for the three
months ended January 31, 2010 and 2009 include $275 and $324, respectively, of stock option
expenses, all of which are included in corporate general and administrative expenses in the
condensed consolidated statements of earnings. As of January 31, 2010, there was $2,297 of total
unrecognized compensation costs related to nonvested stock options that is expected to be
recognized over a weighted-average period of 3.02 years of which $1,014 of total stock option
expense is expected for fiscal year 2010. The expense related to restricted stock is reflected in
earnings and amounted to $273 and $173 for the three months ended January 31, 2010 and 2009,
respectively. As of January 31,
8
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(1) Basis of Presentation(Continued)
2010, there was $1,234 of future restricted stock expense to be recognized, of which $984 is
expected for fiscal year 2010.
In November 2009, the Company issued 90,000 shares of Class A common stock and paid
approximately $96 in cash to the independent directors of the Company. The expense related to this
stock grant amounted to $414 and was recorded in corporate general and administrative expenses
during the first quarter of 2010. Each independent director must hold all of the shares received
until completion of service as a member of the Board of Directors.
The table below presents all stock options and restricted stock granted to employees during
the three months ended January 31, 2010:
Number of Shares | Weighted Average | |||||||||
Grant Type | Granted | Price per Share | Vesting Period | Vesting Condition | ||||||
Stock options |
960,750 | $5.08 | Equal one-fourth | Service condition | ||||||
portions over 4 years | ||||||||||
Restricted stock |
324,500 | $5.09 | Equal one-third | Market condition | ||||||
portions over 3 years | ||||||||||
Restricted stock |
7,500 | $4.89 | Equal one-third | Service condition | ||||||
portions over 3 years |
The fair value of the Companys service based stock options is the estimated present
value at grant date using the Black-Scholes option pricing model with the following weighted
average assumptions for the three months ended January 31, 2010: expected dividend yield of 2.4
percent; expected volatility of 40.1 percent; risk-free interest rate of 2.2 percent; and an
expected term of 4.8 years. In the first quarter of 2010, the Company granted 324,500 shares of
restricted stock with market conditions based on achieving certain target stock prices in the years
2010, 2011 and 2012. The Company records the expense over the requisite service period.
(f) Reclassifications
Certain reclassifications have been made to the 2009 condensed consolidated statement of cash
flows in order for these periods to be comparable. These reclassifications had no effect on
operating cash flows.
(2) New Accounting Principles
In December 2007, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Codification 805-Business Combinations (ASC 805). This guidance states that all
business combinations, whether full, partial or step acquisitions, will result in all assets and
liabilities of an acquired business being recorded at their fair values at the acquisition date.
In subsequent periods, contingent liabilities will be measured at the higher of their acquisition
date fair value or the estimated amounts to be realized. ASC 805 applies to all transactions or
other events in which an entity obtains control of one or more businesses. This statement is
effective as of the beginning of an entitys first fiscal year beginning after December 15, 2008,
which corresponds to the Companys fiscal year beginning November 1, 2009. This guidance will
apply to any future business combinations as of that date.
In December 2007, the FASB amended guidance regarding noncontrolling interests in consolidated
financial statements. This guidance states that accounting and reporting for minority interests
will be recharacterized as noncontrolling interests and classified as a component of shareholders
equity. This guidance
9
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(2) New Accounting Principles(Continued)
applies to all entities that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding noncontrolling interest
in one or more subsidiaries or that deconsolidate a subsidiary. This guidance is effective as of
the beginning of an entitys first fiscal year beginning after December 15, 2008, which corresponds
to the Companys fiscal year beginning November 1, 2009. The adoption did not have a material
impact on the Companys consolidated results of operations, financial position or cash flows.
In May 2008, the FASB issued guidance regarding the accounting for convertible debt
instruments that may be settled in cash upon conversion. The guidance states that issuers of
convertible debt instruments that may be settled in cash upon conversion should account separately
for the liability and equity components of the instruments in a manner that will reflect the
entitys nonconvertible debt borrowing rate as the related interest cost is recognized in
subsequent periods. The entity must determine the carrying amount of the liability component of
any outstanding debt instrument by estimating the fair value of a similar liability without the
conversion option. The amount of the equity component is then calculated by deducting the fair
value of the liability component from the principal amount of the debt instrument. The value of
the debt instrument is adjusted through a discount to the face value of the debt, which is
amortized as non-cash interest expense over the expected life of the debt. This guidance applies
to the Companys 3.125 percent senior convertible notes due 2014 and 3.375 percent senior
convertible notes due 2016 which were originally issued in 2007, and is required to be applied
retrospectively to all periods presented. The Company adopted this guidance effective November 1,
2009. The tables below reflect the Companys retrospective adoption of this guidance as of November
1, 2009 and summarize the impact on the Companys balance sheet as of October 31, 2009 and
statements of earnings for the three months ended January 31, 2009 and the year ended October 31,
2009. See Note 13 for additional information.
In June 2008, the FASB issued guidance on determining whether instruments granted in
share-based payment transactions are participating securities. This guidance states whether
instruments granted in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in computing earnings per
share under the two-class method. Unvested share-based payment awards that contain nonforfeitable
rights to dividends are participating securities. Dividends are currently paid by the Company on
shares of restricted stock, whether vested or nonvested, at the same rate as dividends on normal
shares of the Companys stock. In addition, restricted stockholders are not required to return the
dividends to the Company if their shares of nonvested restricted stock do not vest. Therefore,
under this guidance, the Company must include nonvested restricted stock in the basic earnings per
share calculation and allocate earnings to common stock and the
participating securities according to
dividends declared and participation rights in undistributed earnings. This is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and must be applied
retrospectively to all periods presented (including interim financial statements, summaries of
earnings and selected financial data). The Company adopted this guidance effective November 1,
2009. The impact of adopting this guidance for the three months ended January 31, 2009 and the
year ended October 31, 2009 was immaterial and is presented in the statement of earnings tables
below, along with the impact of the adoption of the convertible debt guidance described above.
10
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(2) New Accounting Principles(Continued)
Effects of the | ||||||||||||
Adoption of | ||||||||||||
October 31, 2009 | Convertible Debt | October 31, 2009 | ||||||||||
Balance Sheet: | As Reported | Guidance | As Adjusted | |||||||||
Deferred tax assets |
$ | 145,110 | $ | (9,997 | ) | $ | 135,113 | |||||
Long-term debt |
367,496 | (27,770 | ) | 339,726 | ||||||||
Additional paid-in capital |
526,062 | 35,001 | 561,063 | |||||||||
Accumulated deficit |
(227,897 | ) | (17,228 | ) | (245,125 | ) |
Effects of the | Three Months | |||||||||||||||
Three Months Ended | Adoption of | Effects of Adoption | Ended | |||||||||||||
January 31, 2009 | Convertible Debt | of Participating | January 31, 2009 | |||||||||||||
Statement of earnings: | As Reported | Guidance | Share Guidance | As Adjusted | ||||||||||||
Interest expense |
$ | 5,910 | $ | 1,485 | $ | 7,395 | ||||||||||
Income taxes |
3,873 | (535 | ) | 3,338 | ||||||||||||
Net earnings |
5,716 | (950 | ) | 4,766 | ||||||||||||
Basic earnings per share |
$ | .06 | $ | (.01 | ) | $ | .05 | |||||||||
Diluted earnings per share |
$ | .06 | $ | (.01 | ) | $ | .05 | |||||||||
Weighted average basic
shares outstanding |
91,824 | | 91,824 | |||||||||||||
Weighted average diluted
shares outstanding |
91,896 | (53 | ) | 91,843 | ||||||||||||
Effects of the | ||||||||||||||||
Year Ended | Adoption of | Effects of Adoption | Year Ended October | |||||||||||||
October 31, 2009 | Convertible Debt | of Participating | 31, 2009 | |||||||||||||
Statement of earnings: | As Reported | Guidance | Share Guidance | As Adjusted | ||||||||||||
Interest expense |
$ | 22,353 | $ | 5,423 | $ | 27,776 | ||||||||||
Gain on early
extinguishment of debt |
20,078 | (13,932 | ) | 6,146 | ||||||||||||
Income taxes |
19,611 | (6,968 | ) | 12,643 | ||||||||||||
Net earnings |
35,653 | (12,387 | ) | 23,266 | ||||||||||||
Basic earnings per share |
$ | .39 | $ | (.14 | ) | $ | .25 | |||||||||
Diluted earnings per share |
$ | .39 | $ | (.14 | ) | $ | .25 | |||||||||
Weighted average basic
shares outstanding |
91,898 | | 91,898 | |||||||||||||
Weighted average diluted
shares outstanding |
91,995 | (17 | ) | 91,978 | ||||||||||||
In June 2009, the FASB issued guidance on the accounting for transfers of financial assets.
It will require more information about transfers of financial assets, including securitization
transactions, and enhanced disclosures when companies have continuing exposure to the risks related
to transferred financial assets. Additionally, it eliminates the concept of a qualifying
special-purpose entity. This guidance is effective as of the beginning of the first annual
reporting period that begins after November 15, 2009, which corresponds to the Companys fiscal
year beginning November 1, 2010. The Company is evaluating the impact the adoption will have on
its consolidated financial statements.
11
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(2) New Accounting Principles(Continued)
In June 2009, the FASB issued guidance which amends the consolidation guidance for variable
interest entities. It will require additional disclosures about involvement with variable interest
entities and any significant changes in risk exposure due to that involvement. This guidance is
effective as of the beginning of the first annual reporting period that begins after November 15,
2009, which corresponds to the Companys fiscal year beginning November 1, 2010. The Company is
evaluating the impact the adoption will have on its consolidated financial statements.
In January 2010, the 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.
This guidance is effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and settlements related to Level
3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and
for interim periods within those fiscal years. The guidance on transfers between Levels 1 and 2 is
effective for the Company as of its second fiscal quarter ended April 30, 2010. The guidance on
Level 3 activity is effective for the Companys fiscal year beginning November 1, 2011. The
Company is evaluating the impact the adoption will have on its consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events disclosure.
This guidance clarifies that an entity that is a Securities and Exchange Commission filer is not
required to disclose the date through which subsequent events have been evaluated. This guidance
was effective upon issuance, and the Company adopted the provisions effective with the preparation
of its condensed consolidated financial statements for the three months ended January 31, 2010.
(3) Preneed Funeral Activities
The Company maintains three types of trust and escrow accounts: (1) preneed funeral
merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual
care. The activity of these trust and escrow accounts is detailed below and in Notes 4 and 5.
Preneed Funeral Receivables and Trust Investments
Preneed funeral receivables and trust investments represent trust assets and customer
receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The
components of preneed funeral receivables and trust investments in the condensed consolidated
balance sheets as of January 31, 2010 and October 31, 2009 are as follows:
January 31, | October 31, | |||||||
2010 | 2009 | |||||||
Trust assets |
$ | 366,900 | $ | 358,430 | ||||
Receivables from customers |
42,448 | 43,225 | ||||||
409,348 | 401,655 | |||||||
Allowance for cancellations |
(11,894 | ) | (12,143 | ) | ||||
Preneed funeral receivables and trust investments |
$ | 397,454 | $ | 389,512 | ||||
12
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(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 January 31, 2010 are detailed below.
January 31, 2010 | ||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||
Cost Basis | Gains | Losses | Market | |||||||||||||||||
Cash, money market and other
short- term investments |
$ | 29,830 | $ | | $ | | $ | 29,830 | ||||||||||||
U.S. Government, agencies and
municipalities |
5,888 | 166 | (1 | ) | 6,053 | |||||||||||||||
Corporate bonds |
38,247 | 1,883 | (874 | ) | 39,256 | |||||||||||||||
Preferred stocks |
56,785 | 34 | (7,985 | ) | 48,834 | |||||||||||||||
Common stocks |
247,824 | 973 | (100,269 | ) | 148,528 | |||||||||||||||
Mutual funds: |
||||||||||||||||||||
Equity |
28,839 | 24 | (6,360 | ) | 22,503 | |||||||||||||||
Fixed income |
54,755 | 485 | (915 | ) | 54,325 | |||||||||||||||
Insurance contracts and other
long-term investments |
19,088 | 112 | (2,637 | ) | 16,563 | |||||||||||||||
Trust investments |
$ | 481,256 | $ | 3,677 | $ | (119,041 | ) | 365,892 | ||||||||||||
Market value as a percentage of cost |
76.0 | % | ||||||||||||||||||
Accrued investment income |
1,008 | |||||||||||||||||||
Trust assets |
$ | 366,900 | ||||||||||||||||||
The cost basis and market values associated with preneed funeral merchandise and services
trust assets as of October 31, 2009 are detailed below.
October 31, 2009 | ||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||
Cost Basis | Gains | Losses | Market | |||||||||||||||||
Cash, money market and other
short- term investments |
$ | 28,979 | $ | | $ | | $ | 28,979 | ||||||||||||
U.S. Government, agencies and
municipalities |
6,044 | 214 | (1 | ) | 6,257 | |||||||||||||||
Corporate bonds |
39,007 | 1,650 | (1,458 | ) | 39,199 | |||||||||||||||
Preferred stocks |
56,885 | 9 | (10,394 | ) | 46,500 | |||||||||||||||
Common stocks |
248,750 | 848 | (106,788 | ) | 142,810 | |||||||||||||||
Mutual funds: |
||||||||||||||||||||
Equity |
28,841 | 20 | (7,486 | ) | 21,375 | |||||||||||||||
Fixed income |
56,193 | 448 | (916 | ) | 55,725 | |||||||||||||||
Insurance contracts and other
long-term investments |
19,054 | 112 | (2,594 | ) | 16,572 | |||||||||||||||
Trust investments |
$ | 483,753 | $ | 3,301 | $ | (129,637 | ) | $ | 357,417 | |||||||||||
Market value as a percentage of cost |
73.9 | % | ||||||||||||||||||
Accrued investment income |
1,013 | |||||||||||||||||||
Trust assets |
$ | 358,430 | ||||||||||||||||||
13
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Preneed Funeral Activities(Continued)
The estimated maturities and market values of debt securities included above are as follows:
January 31, 2010 | ||||
Due in one year or less |
$ | 1,331 | ||
Due in one to five years |
31,699 | |||
Due in five to ten years |
12,255 | |||
Thereafter |
24 | |||
$ | 45,309 | |||
The Company is actively managing a covered call program on its equity securities within the
funeral merchandise and services trust. As of January 31, 2010, the Company has outstanding
covered calls with a market value of $48. These covered calls constitute a hedge on $4,769, or
approximately 3.2 percent, of the common stock portion of the Companys portfolio within the
funeral merchandise and services trust and also provide an opportunity for income. For the three
months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of
approximately ($235) and $253, respectively, related to the covered call program. Although the
Company realized losses associated with the covered call program in the first quarter of 2010, it
continues to hold the underlying securities against which these
covered calls were issued; these underlying securities
appreciated in value by $3,135 during the period that the covered calls were outstanding.
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 Companys
Level 1 investments include cash, money market and other short-term investments, common stock 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 and preferred stocks, all
of which are classified within Level 2 of the valuation hierarchy.
The Companys Level 3 investments include insurance contracts and partnership investments.
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 was obtained from the insurance
companies sites showing the current face value of the contracts 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 Companys preneed funeral merchandise and services trust
investments are categorized as follows:
Quoted Market | ||||||||||||||||
Prices in Active | Significant Other | Significant | ||||||||||||||
Markets | Observable Inputs | Unobservable Inputs | Fair Market | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Value | |||||||||||||
Trust investmentsJanuary 31, 2010 |
$ | 263,014 | $ | 94,143 | $ | 8,735 | $ | 365,892 | ||||||||
Trust investmentsOctober 31, 2009 |
$ | 256,799 | $ | 91,956 | $ | 8,662 | $ | 357,417 |
14
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Preneed Funeral Activities(Continued)
The change in the Companys preneed funeral merchandise and services trust investments with
significant unobservable inputs (Level 3) is as follows:
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
Fair market value, beginning balance |
$ | 8,662 | $ | 11,299 | ||||
Total unrealized losses included in other comprehensive income (1) |
| (1,714 | ) | |||||
Purchases, sales, contributions and distributions, net |
73 | (515 | ) | |||||
Fair market value, ending balance |
$ | 8,735 | $ | 9,070 | ||||
(1) | All gains (losses) recognized in other comprehensive income for funeral trust investments are attributable to the Companys 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 January 31, | ||||||||
2010 | 2009 | |||||||
Purchases |
$ | 849 | $ | 641 | ||||
Sales |
4,349 | 4,616 | ||||||
Realized gains from sales of investments |
628 | 508 | ||||||
Realized losses from sales of investments and other |
(516 | ) | (8,501 | )(1) | ||||
Interest income, dividends and other ordinary income |
2,346 | 3,153 | ||||||
Deposits |
8,015 | 6,359 | ||||||
Withdrawals |
11,977 | 11,052 |
(1) | Includes $195 in losses from the sale of investments and $8,306 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value. |
The following tables show the gross unrealized losses and fair value of the preneed funeral
merchandise and services trust investments with unrealized losses aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss position as
of January 31, 2010 and October 31, 2009.
January 31, 2010 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Market | Unrealized | Market | Unrealized | Market | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S.
Government,
agencies and
municipalities |
$ | | $ | | $ | 21 | $ | (1 | ) | $ | 21 | $ | (1 | ) | ||||||||||
Corporate bonds |
462 | (136 | ) | 8,920 | (738 | ) | 9,382 | (874 | ) | |||||||||||||||
Preferred stocks |
491 | (9 | ) | 44,518 | (7,976 | ) | 45,009 | (7,985 | ) | |||||||||||||||
Common stocks |
1,934 | (110 | ) | 136,357 | (100,159 | ) | 138,291 | (100,269 | ) | |||||||||||||||
Mutual funds: |
||||||||||||||||||||||||
Equity |
3 | | 22,357 | (6,360 | ) | 22,360 | (6,360 | ) | ||||||||||||||||
Fixed income |
7,712 | (30 | ) | 4,584 | (885 | ) | 12,296 | (915 | ) | |||||||||||||||
Insurance contracts
and other long-term
investments |
| | 3,219 | (2,637 | ) | 3,219 | (2,637 | ) | ||||||||||||||||
Total |
$ | 10,602 | $ | (285 | ) | $ | 219,976 | $ | (118,756 | ) | $ | 230,578 | $ | (119,041 | ) | |||||||||
15
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Preneed Funeral Activities(Continued)
October 31, 2009 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Market | Unrealized | Market | Unrealized | Market | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S.
Government,
agencies and
municipalities |
$ | | $ | | $ | 21 | $ | (1 | ) | $ | 21 | $ | (1 | ) | ||||||||||
Corporate bonds |
| | 10,154 | (1,458 | ) | 10,154 | (1,458 | ) | ||||||||||||||||
Preferred stocks |
493 | (7 | ) | 43,519 | (10,387 | ) | 44,012 | (10,394 | ) | |||||||||||||||
Common stocks |
1,000 | (276 | ) | 133,428 | (106,512 | ) | 134,428 | (106,788 | ) | |||||||||||||||
Mutual funds: |
||||||||||||||||||||||||
Equity |
| | 21,237 | (7,486 | ) | 21,237 | (7,486 | ) | ||||||||||||||||
Fixed income |
318 | (1 | ) | 4,539 | (915 | ) | 4,857 | (916 | ) | |||||||||||||||
Insurance contracts
and other long-term
investments |
1,203 | (1,060 | ) | 2,016 | (1,534 | ) | 3,219 | (2,594 | ) | |||||||||||||||
Total |
$ | 3,014 | $ | (1,344 | ) | $ | 214,914 | $ | (128,293 | ) | $ | 217,928 | $ | (129,637 | ) | |||||||||
The unrealized losses in the preneed funeral merchandise and services trust portfolio are
not considered to be other than temporary. For each of these securities, the Company evaluates
consensus analyst recommendations, ratings from established ratings agencies, any concerns specific
to the issuer of the securities and overall market performance. Of the total unrealized losses at
January 31, 2010, 91 percent, or $108,254, 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 A or better at the time of purchase. Because approximately 41 percent of
the Companys preneed funeral trust portfolio is currently invested in common stock, the Company
generally expects its portfolio performance to improve if the performance of the overall stock
market improves, but would also expect its performance to deteriorate if the overall stock market
declines. The preferred stocks are primarily in the financial services sector which experienced a
significant decline in market value during late 2008 and early 2009 due to the current economic
crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts
and from cash deposits of future preneed sales and cash received from ordinary income to fund
future services and allow the Company to hold these investments until they recover in value.
The Companys policy for recognizing trust income follows the allocation of trust earnings to
individual contracts as stipulated in the Companys respective trust agreements for distributable
income. In substantially all of the Companys trusts, dividends and interest earned and net
capital gains and losses realized by preneed funeral trust or escrow accounts net of fees are
allocated to individual contracts when earned or realized. In these trusts, unrealized gains and
losses are not allocated to 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 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
Companys 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 services are needed. The
receivables related to the sale of preneed property interment rights are included in the Companys
current and long-term receivables. The components of preneed cemetery receivables and trust
investments in the condensed consolidated balance sheets as of January 31, 2010 and October 31,
2009 are as follows:
16
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities(Continued)
January 31, | ||||||||
2010 | October 31, 2009 | |||||||
Trust assets |
$ | 169,260 | $ | 163,938 | ||||
Receivables from customers |
33,740 | 35,718 | ||||||
203,000 | 199,656 | |||||||
Allowance for cancellations |
(6,203 | ) | (6,239 | ) | ||||
Preneed cemetery receivables and trust investments |
$ | 196,797 | $ | 193,417 | ||||
The cost basis and market values associated with the preneed cemetery merchandise and services
trust assets as of January 31, 2010 are detailed below.
January 31, 2010 | ||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||
Cost Basis | Gains | Losses | Market | |||||||||||||||||
Cash, money market and other
short- term investments |
$ | 17,148 | $ | | $ | | $ | 17,148 | ||||||||||||
U.S. Government, agencies and
municipalities |
8,751 | 632 | | 9,383 | ||||||||||||||||
Corporate bonds |
7,491 | 619 | (74 | ) | 8,036 | |||||||||||||||
Preferred stocks |
20,831 | 64 | (3,498 | ) | 17,397 | |||||||||||||||
Common stocks |
127,715 | 846 | (51,495 | ) | 77,066 | |||||||||||||||
Mutual funds: |
||||||||||||||||||||
Equity |
30,291 | 16 | (9,554 | ) | 20,753 | |||||||||||||||
Fixed income |
18,530 | 143 | (17 | ) | 18,656 | |||||||||||||||
Other long-term investments |
495 | | (75 | ) | 420 | |||||||||||||||
Trust investments |
$ | 231,252 | $ | 2,320 | $ | (64,713 | ) | 168,859 | ||||||||||||
Market value as a percentage of cost |
73.0 | % | ||||||||||||||||||
Accrued investment income |
401 | |||||||||||||||||||
Trust assets |
$ | 169,260 | ||||||||||||||||||
17
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities(Continued)
The cost basis and market values associated with the preneed cemetery merchandise and services
trust assets as of October 31, 2009 are detailed below.
October 31, 2009 | ||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||
Cost Basis | Gains | Losses | Market | |||||||||||||||||
Cash, money market and other short-
term investments |
$ | 15,123 | $ | | $ | | $ | 15,123 | ||||||||||||
U.S. Government, agencies and municipalities |
9,259 | 678 | | 9,937 | ||||||||||||||||
Corporate bonds |
7,554 | 552 | (74 | ) | 8,032 | |||||||||||||||
Preferred stocks |
20,831 | 46 | (4,363 | ) | 16,514 | |||||||||||||||
Common stocks |
127,942 | 714 | (54,254 | ) | 74,402 | |||||||||||||||
Mutual funds: |
||||||||||||||||||||
Equity |
30,291 | 15 | (9,980 | ) | 20,326 | |||||||||||||||
Fixed income |
18,530 | 125 | (4 | ) | 18,651 | |||||||||||||||
Other long-term investments |
562 | | (8 | ) | 554 | |||||||||||||||
Trust investments |
$ | 230,092 | $ | 2,130 | $ | (68,683 | ) | $ | 163,539 | |||||||||||
Market value as a percentage of cost |
71.1 | % | ||||||||||||||||||
Accrued investment income |
399 | |||||||||||||||||||
Trust assets |
$ | 163,938 | ||||||||||||||||||
The estimated maturities and market values of debt securities included above are as follows:
January 31, 2010 | ||||
Due in one year or less |
$ | 2,974 | ||
Due in one to five years |
9,137 | |||
Due in five to ten years |
5,153 | |||
Thereafter |
155 | |||
$ | 17,419 | |||
The Company is actively managing a covered call program on its equity securities within the
cemetery merchandise and services trust. As of January 31, 2010, the Company has outstanding
covered calls with a market value of $41. These covered calls constitute a hedge on $3,744, or
approximately 4.9 percent, of the common stock portion of the Companys portfolio within the
cemetery merchandise and services trust and also provide an opportunity for income. For the three
months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of
approximately ($187) and $86 respectively, related to the covered call program. Although the
Company realized losses associated with the covered call program in the first quarter of fiscal
year 2010, it continues to hold the underlying securities against which these covered calls were
issued; these underlying securities appreciated in value by $2,409 during the period that the covered calls were
outstanding.
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 Companys
Level 1 investments include cash, money market and other short-term investments, common stock 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 and preferred stocks, all of which are classified within Level 2 of
the valuation hierarchy.
18
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities(Continued)
There are no Level 3 investments in the preneed cemetery merchandise and services trust
investment portfolio.
The inputs into the fair value of the Companys preneed cemetery merchandise and services
trust investments are categorized as follows:
Quoted | Significant | |||||||||||||||
Market | Other | Significant | ||||||||||||||
Prices in Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | Fair Market | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Value | |||||||||||||
Trust investmentsJanuary 31, 2010 |
$ | 134,140 | $ | 34,719 | $ | | $ | 168,859 | ||||||||
Trust investmentsOctober 31, 2009 |
$ | 129,032 | $ | 34,507 | $ | | $ | 163,539 |
Activity related to preneed cemetery merchandise and services trust investments is as follows:
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
Purchases |
$ | 2,046 | $ | 1,153 | ||||
Sales |
2,320 | 2,456 | ||||||
Realized gains from sales of investments |
423 | 104 | ||||||
Realized losses from sales of investments and other |
(881 | ) | (4,464 | ) (1) | ||||
Interest income, dividends and other ordinary income |
1,152 | 1,300 | ||||||
Deposits |
5,693 | 4,033 | ||||||
Withdrawals |
4,404 | 3,768 |
(1) | Includes $1,243 in losses from the sale of investments and $3,221 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value. |
19
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities(Continued)
The following tables show the gross unrealized losses and fair value of the preneed cemetery
merchandise and services trust investments aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position as of January 31,
2010 and October 31, 2009.
January 31, 2010 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Market | Unrealized | Market | Unrealized | Market | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S. Government,
agencies and
municipalities |
$ | 41 | $ | | $ | | $ | | $ | 41 | $ | | ||||||||||||
Corporate bonds |
220 | (44 | ) | 670 | (30 | ) | 890 | (74 | ) | |||||||||||||||
Preferred stocks |
| | 17,221 | (3,498 | ) | 17,221 | (3,498 | ) | ||||||||||||||||
Common stocks |
2,257 | (19 | ) | 68,299 | (51,476 | ) | 70,556 | (51,495 | ) | |||||||||||||||
Mutual funds: |
||||||||||||||||||||||||
Equity |
| | 20,612 | (9,554 | ) | 20,612 | (9,554 | ) | ||||||||||||||||
Fixed income |
2,979 | (14 | ) | 15 | (3 | ) | 2,994 | (17 | ) | |||||||||||||||
Other long-term investments |
| | | (75 | ) | | (75 | ) | ||||||||||||||||
Total |
$ | 5,497 | $ | (77 | ) | $ | 106,817 | $ | (64,636 | ) | $ | 112,314 | $ | (64,713 | ) | |||||||||
October 31, 2009 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Market | Unrealized | Market | Unrealized | Market | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Corporate bonds |
$ | | $ | | $ | 1,045 | $ | (74 | ) | $ | 1,045 | $ | (74 | ) | ||||||||||
Preferred stocks |
| | 16,356 | (4,363 | ) | 16,356 | (4,363 | ) | ||||||||||||||||
Common stocks |
1,755 | (464 | ) | 67,374 | (53,790 | ) | 69,129 | (54,254 | ) | |||||||||||||||
Mutual funds: |
||||||||||||||||||||||||
Equity |
| | 20,186 | (9,980 | ) | 20,186 | (9,980 | ) | ||||||||||||||||
Fixed income |
20 | | 15 | (4 | ) | 35 | (4 | ) | ||||||||||||||||
Other long-term investments |
| | | (8 | ) | | (8 | ) | ||||||||||||||||
Total |
$ | 1,775 | $ | (464 | ) | $ | 104,976 | $ | (68,219 | ) | $ | 106,751 | $ | (68,683 | ) | |||||||||
The unrealized losses in the preneed cemetery merchandise and services trust portfolio
are not considered to be other than temporary. For each of these securities, the Company evaluates
consensus analyst recommendations, ratings from established ratings agencies, any concerns specific
to the issuer of the securities and overall market performance. Of the total unrealized losses at
January 31, 2010, 85 percent, or $54,993, 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 A or better at the time of purchase. Because approximately 46 percent of
the Companys preneed cemetery merchandise and services trust portfolio is currently invested in
common stock, the Company generally expects its portfolio performance to improve if the performance
of the overall stock market improves, but would also expect its performance to deteriorate if the
overall stock market declines. The preferred stocks are primarily in the financial services sector
which experienced a significant decline in market value in late 2008 and early 2009 due to the
current economic crisis. The Company believes that it has sufficient cash and cash equivalents
within the trusts and from cash deposits of future preneed sales and cash
received from ordinary income to fund future services and allow the Company to hold these
investments until they recover in value.
The Companys policy for recognizing trust income follows the allocation of trust earnings to
individual contracts as stipulated in the Companys respective trust agreements for distributable
income. In substantially all of the Companys trusts, dividends and interest earned and net
capital gains and losses realized by preneed cemetery trust or escrow accounts net of fees are allocated to individual contracts when earned or
realized. In these trusts,
20
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities(Continued)
unrealized gains and losses are not allocated to contracts. The trust
earnings allocated to individual contracts are recognized as components of revenue along with the
original sales price when the underlying service or merchandise is delivered. Principal and
earnings are withdrawn only as the merchandise or servies are delivered or contracts are cancelled,
except in jurisdictions that permit trust earnings to be withdrawn currently.
Cash flows from preneed cemetery merchandise and services contracts are presented as operating
cash flows in the Companys 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 in current cemetery revenues and are used to defray cemetery maintenance
costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care
trust investments were $2,473 and $1,722 for the three months ended January 31, 2010 and 2009,
respectively.
The cost basis and market values of the trust investments held by the cemetery perpetual care
trusts as of January 31, 2010 are detailed below.
January 31, 2010 | ||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||
Cost Basis | Gains | Losses | Market | |||||||||||||||||
Cash, money market and other
short- term investments |
$ | 33,444 | $ | | $ | | $ | 33,444 | ||||||||||||
U.S. Government, agencies and
municipalities |
6,508 | 368 | (80 | ) | 6,796 | |||||||||||||||
Corporate bonds |
31,843 | 1,570 | (1,065 | ) | 32,348 | |||||||||||||||
Preferred stocks |
57,893 | 5 | (13,397 | ) | 44,501 | |||||||||||||||
Common stocks |
96,517 | 2,746 | (39,965 | ) | 59,298 | |||||||||||||||
Mutual funds: |
||||||||||||||||||||
Equity |
8,869 | 37 | (1,478 | ) | 7,428 | |||||||||||||||
Fixed income |
29,729 | 290 | (397 | ) | 29,622 | |||||||||||||||
Other long-term investments |
513 | 1 | (196 | ) | 318 | |||||||||||||||
Trust investments |
$ | 265,316 | $ | 5,017 | $ | (56,578 | ) | 213,755 | ||||||||||||
Market value as a percentage of cost |
80.6 | % | ||||||||||||||||||
Accrued investment income |
705 | |||||||||||||||||||
Trust assets |
$ | 214,460 | ||||||||||||||||||
21
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(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, 2009 are detailed below.
October 31, 2009 | ||||||||||||||||||||
Cost Basis | Unrealized Gains | Unrealized Losses | Market | |||||||||||||||||
Cash, money market and other
short- term investments |
$ | 17,784 | $ | | $ | | $ | 17,784 | ||||||||||||
U.S. Government, agencies and
municipalities |
5,416 | 394 | (82 | ) | 5,728 | |||||||||||||||
Corporate bonds |
42,735 | 2,088 | (1,085 | ) | 43,738 | |||||||||||||||
Preferred stocks |
58,421 | 2 | (17,137 | ) | 41,286 | |||||||||||||||
Common stocks |
96,831 | 2,663 | (42,792 | ) | 56,702 | |||||||||||||||
Mutual funds: |
||||||||||||||||||||
Equity |
6,838 | 25 | (1,560 | ) | 5,303 | |||||||||||||||
Fixed income |
32,561 | 1,340 | (342 | ) | 33,559 | |||||||||||||||
Other long-term investments |
766 | 4 | (177 | ) | 593 | |||||||||||||||
Trust investments |
$ | 261,352 | $ | 6,516 | $ | (63,175 | ) | $ | 204,693 | |||||||||||
Market value as a percentage of cost |
78.3 | % | ||||||||||||||||||
Accrued investment income |
783 | |||||||||||||||||||
Trust assets |
$ | 205,476 | ||||||||||||||||||
The estimated maturities and market values of debt securities included above are as follows:
January 31, 2010 | ||||
Due in one year or less |
$ | 10,259 | ||
Due in one to five years |
19,974 | |||
Due in five to ten years |
8,424 | |||
Thereafter |
487 | |||
$ | 39,144 | |||
The Company is actively managing a covered call program on its equity securities within the
cemetery perpetual care trust. As of January 31, 2010, the Company has outstanding covered calls
with a market value of $24. These covered calls constitute a hedge on $2,514, or approximately 4.2
percent, of the common stock portion of the Companys portfolio within the cemetery perpetual care
trust and also provide an opportunity for current income. For the three months ended January 31,
2010 and 2009, the Company realized trust earnings (losses) of approximately ($165) and $37,
respectively, related to the covered call program. Although the Company realized losses associated
with the covered call program in the first quarter of fiscal year 2010, it continues to hold the
underlying securities against which these covered calls were issued;
these underlying securities appreciated in value
by $1,599 during the period that the covered calls were outstanding.
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 Companys
Level 1 investments include cash, money market and other short-term investments, common stock 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,
22
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(5) Cemetery
Interment Rights and Perpetual Care Trusts(Continued)
agencies and municipalities, corporate bonds and preferred stocks, all of which are classified
within Level 2 of the valuation hierarchy.
The Companys Level 3 investments include an investment in a partnership. The valuation of
partnership investments requires significant management judgment due to the absence of quoted
prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value
of the partnership investment was determined by using its most recent audited financial statements
and assessing the market value of the underlying securities within the partnership.
The inputs into the fair value of the Companys cemetery perpetual care trust investments are
categorized as follows:
Quoted Market | ||||||||||||||||
Prices in Active | Significant Other | Significant | ||||||||||||||
Markets | Observable Inputs | Unobservable Inputs | Fair Market | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Value | |||||||||||||
Trust investmentsJanuary 31, 2010 |
$ | 129,942 | $ | 83,645 | $ | 168 | $ | 213,755 | ||||||||
Trust investmentsOctober 31, 2009 |
$ | 113,715 | $ | 90,752 | $ | 226 | $ | 204,693 |
The change in the Companys cemetery perpetual care trust investments with significant
unobservable inputs (Level 3) is as follows:
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
Fair market value, beginning balance |
$ | 226 | $ | 611 | ||||
Total unrealized losses included in other comprehensive income (1) |
| (118 | ) | |||||
Transfers out of Level 3 category and other |
(58 | ) | (250 | ) | ||||
Fair market value, ending balance |
$ | 168 | $ | 243 | ||||
(1) | All gains (losses) recognized in other comprehensive income for cemetery perpetual care trust investments are attributable to the Companys 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 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
net realized losses. As of October 31, 2009, the Company had a liability recorded for the
estimated probable funding obligation to restore the net realized losses as a result of fiscal year
2008 and 2009 losses of $14,010, which was recognized as realized losses in the consolidated
statement of earnings in fiscal years 2008 and 2009 in cemetery costs. The Company recorded no
additional estimated probable funding obligation during the three months ended January 31, 2010.
The Company had earnings of $368 for the three months ended January 31, 2010, within the trusts
that it did not withdraw from the trusts in order to satisfy a portion of its estimated probable
funding obligation. As of January 31, 2010, the Companys estimated probable funding obligation
was $13,642. In those states where realized net capital gains have not been withdrawn, the Company
believes it is reasonably possible that additional funding obligations may exist with an estimated
amount of approximately $3,100.
23
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(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 January 31, | ||||||||
2010 | 2009 | |||||||
Purchases |
$ | 16,172 | $ | 329 | ||||
Sales |
28,885 | 1,806 | ||||||
Realized gains from sales of investments |
2,025 | 359 | ||||||
Realized losses from sales of investments and other |
(550 | ) | (96 | ) (1) | ||||
Interest income, dividends and other ordinary income |
2,161 | 2,284 | ||||||
Deposits |
1,838 | 2,454 | (2) | |||||
Withdrawals |
888 | 1,587 |
(1) | Includes $84 in losses related to certain investments that were rendered worthless or practically worthless. | |
(2) | Includes $734 that the Company contributed to the cemetery perpetual care trusts as part of its funding obligation during the three months ended January 31, 2009. |
During the three months ended January 31, 2010 and 2009, cemetery revenues were $52,292 and
$47,580, respectively, of which $2,334 and $1,613, respectively, were required to be placed into
perpetual care trusts and were recorded as revenues and expenses.
The following tables show the gross unrealized losses and fair value of the cemetery perpetual
care trust investments with unrealized losses aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position as of January 31,
2010 and October 31, 2009.
January 31, 2010 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Market | Unrealized | Market | Unrealized | Market | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S. Government,
agencies and
municipalities |
$ | | $ | | $ | 270 | $ | (80 | ) | $ | 270 | $ | (80 | ) | ||||||||||
Corporate bonds |
514 | (92 | ) | 2,178 | (973 | ) | 2,692 | (1,065 | ) | |||||||||||||||
Preferred stocks |
| | 42,898 | (13,397 | ) | 42,898 | (13,397 | ) | ||||||||||||||||
Common stocks |
1,716 | (16 | ) | 51,118 | (39,949 | ) | 52,834 | (39,965 | ) | |||||||||||||||
Mutual funds: |
||||||||||||||||||||||||
Equity |
1,949 | (53 | ) | 5,188 | (1,425 | ) | 7,137 | (1,478 | ) | |||||||||||||||
Fixed income |
5,416 | (51 | ) | 1,074 | (346 | ) | 6,490 | (397 | ) | |||||||||||||||
Other long-term investments |
| | 201 | (196 | ) | 201 | (196 | ) | ||||||||||||||||
Total |
$ | 9,595 | $ | (212 | ) | $ | 102,927 | $ | (56,366 | ) | $ | 112,522 | $ | (56,578 | ) | |||||||||
24
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(5) Cemetery Interment Rights and Perpetual Care Trusts(Continued)
October 31, 2009 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Market | Unrealized | Market | Unrealized | Market | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
U.S. Government,
agencies and
municipalities |
$ | 270 | $ | (81 | ) | $ | 6 | $ | (1 | ) | $ | 276 | $ | (82 | ) | |||||||||
Corporate bonds |
600 | (124 | ) | 1,732 | (961 | ) | 2,332 | (1,085 | ) | |||||||||||||||
Preferred stocks |
| | 40,784 | (17,137 | ) | 40,784 | (17,137 | ) | ||||||||||||||||
Common stocks |
(38 | ) | (473 | ) | 50,445 | (42,319 | ) | 50,407 | (42,792 | ) | ||||||||||||||
Mutual funds: |
||||||||||||||||||||||||
Equity |
43 | (11 | ) | 5,034 | (1,549 | ) | 5,077 | (1,560 | ) | |||||||||||||||
Fixed income |
118 | | 1,096 | (342 | ) | 1,214 | (342 | ) | ||||||||||||||||
Other long-term investments |
201 | (177 | ) | | | 201 | (177 | ) | ||||||||||||||||
Total |
$ | 1,194 | $ | (866 | ) | $ | 99,097 | $ | (62,309 | ) | $ | 100,291 | $ | (63,175 | ) | |||||||||
The unrealized losses in the cemetery perpetual care trust portfolio are not considered
to be other than temporary. For each of these securities, the Company evaluates consensus analyst
recommendations, ratings from established ratings agencies, any concerns specific to the issuer of
the securities and overall market performance. Of the total unrealized losses at January 31, 2010,
94 percent, or $53,362, 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 A or better at the time of purchase. Because approximately 28 percent of the Companys
cemetery perpetual care trusts portfolio is currently invested in common stock, the Company
generally expects its portfolio performance to improve if the performance of the overall stock
market improves, but would also expect its performance to deteriorate if the overall stock market
declines. The preferred stocks are primarily in the financial services sector which experienced a
significant decline in market value in late 2008 and early 2009 due to the current economic crisis.
The Company believes that it has sufficient cash and cash equivalents within the trusts and from
cash deposits of future preneed sales and cash received from ordinary income to fund future
services and allow the Company to hold these investments until they recover in value.
Cash flows from cemetery perpetual care contracts are presented as operating cash flows in the
Companys condensed consolidated statements of cash flows.
(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care
Trusts Corpus
The components of deferred preneed funeral and cemetery receipts held in trust in the
condensed consolidated balance sheet at January 31, 2010 are as follows:
Deferred Receipts Held in Trust | ||||||||||||
Preneed | Preneed | |||||||||||
Funeral | Cemetery | Total | ||||||||||
Trust assets at market value |
$ | 366,900 | $ | 169,260 | $ | 536,160 | ||||||
Less: |
||||||||||||
Pending withdrawals |
(7,387 | ) | (5,015 | ) | (12,402 | ) | ||||||
Pending deposits |
1,627 | 1,039 | 2,666 | |||||||||
Deferred receipts held in trust |
$ | 361,140 | $ | 165,284 | $ | 526,424 | ||||||
25
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts Corpus-(Continued)
The components of perpetual care trusts corpus in the condensed consolidated balance sheet at
January 31, 2010 are as follows:
Perpetual Care | ||||
Trusts Corpus | ||||
Trust assets at market value |
$ | 214,460 | ||
Less: |
||||
Pending withdrawals |
(3,164 | ) | ||
Pending deposits |
780 | |||
Perpetual care trusts corpus |
$ | 212,076 | ||
Investment and other income, net
The components of investment and other income, net in the condensed consolidated statements of
earnings for the three months ended January 31, 2010 and 2009 are detailed below.
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
Realized gains from sales of investments |
$ | 3,076 | $ | 971 | ||||
Realized losses from sales of investments and other |
(1,947 | ) | (13,061 | ) | ||||
Interest income, dividends and other ordinary income |
5,659 | 6,737 | ||||||
Trust expenses and income taxes |
(2,538 | ) | (2,134 | ) | ||||
Net trust investment income (loss) |
4,250 | (7,487 | ) | |||||
Reclassification to deferred preneed funeral and
cemetery receipts held in trust |
(1,350 | ) | 9,273 | |||||
Reclassification to perpetual care trusts corpus |
(2,900 | ) | (1,786 | ) | ||||
Total deferred preneed funeral and cemetery receipts
held in trust and perpetual care trusts corpus |
| | ||||||
Investment and other income, net (1) |
24 | 41 | ||||||
Total investment and other income, net |
$ | 24 | $ | 41 | ||||
(1) | Investment and other income, net consists of interest income primarily on the Companys cash, cash equivalents and marketable securities not held in trust. |
(7) Commitments and Contingencies
Litigation
Funeral Consumers Alliance, Inc., et al. v. Service Corporation International, Alderwoods
Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co., on
the docket of the United States District Court for the Southern District of Texas. This purported
class action was originally filed on May 2, 2005, in the United States District Court for the
Northern District of California, on behalf of a nationwide class defined to include all consumers
who purchased a Batesville casket from the funeral home defendants at any time. The court
consolidated it with five subsequently filed, substantially similar cases (the Consolidated
Consumer Cases).
The Consolidated Consumer Cases allege that the defendants acted jointly to reduce competition
from independent casket discounters and fix and maintain prices on caskets in violation of the
federal antitrust laws and
26
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(7) Commitments and Contingencies-(Continued)
Californias Business and Professions Code. The plaintiffs seek treble
damages, restitution, injunctive relief, interest, costs and attorneys fees.
At the defendants request, in late September 2005, the court transferred the Consolidated
Consumer Cases to the United States District Court for the Southern District of Texas. The
transferred Consolidated Consumer Cases have been consolidated before a single judge in the
Southern District of Texas.
On November 10, 2006, after the court denied defendants motions to dismiss, the Company
answered the first amended consolidated class action complaint, denying liability and asserting
various affirmative defenses. Fact discovery has been completed, and expert discovery is complete
with the exception of the deposition of one expert witness.
In April 2007, the plaintiffs filed an expert report indicating that the amounts sought from
all defendants as damages to the proposed class would be in the range of approximately $950 million
to approximately $1.5 billion, before trebling. Accordingly, any judgment in favor of the proposed
class could have a material adverse effect on the Companys financial condition and results of
operations.
On March 26, 2009, the court denied plaintiffs motion for class certification. The United
States Court of Appeals for the Fifth Circuit denied plaintiffs petition for permission to appeal
on June 19, 2009, and denied plaintiffs motion for reconsideration on July 29, 2009.
The named plaintiffs (FCA and thirteen individuals) are proceeding with a jury trial scheduled
for August 2, 2010 on their individual claims for alleged damages arising out of the purchase of
ten caskets. The named plaintiffs also have indicated an intent to seek injunctive relief and
attorneys fees.
The Company believes it has meritorious defenses to the substantive allegations asserted, to
class certification, and to the plaintiffs damage theories and calculations, and the Company
intends to aggressively defend itself in these proceedings. The Company has not recorded a
liability related to this litigation given that it does not believe that a loss is probable and
estimable.
Other Litigation
The Company has been unable to finalize its negotiations with its insurance carriers related
to property damage and extra expenses, and business interruption damages, related to Hurricane
Katrina, and filed suit against the carriers in August 2007. In 2007, the carriers advanced an
additional $1,100, which the Company has not recorded as income but as a liability pending the
outcome of the litigation. The suit involves numerous significant policy interpretation disputes,
among other issues, and no assurance can be given as to how much additional proceeds the Company
may recover from its insurers, if any, or the timing of the receipt of any additional proceeds.
The Company is a defendant in a variety of other 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 the realized net capital
losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals
of future earnings until they cover the loss. As of January 31, 2010, the Company had $13,642
recorded as a liability for an estimated probable funding obligation. As of January 31, 2010, the
Company had unrealized losses of approximately $44,774 in the cemetery perpetual care
27
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(7) Commitments and Contingencies-(Continued)
trusts in
these states. Because all 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, unidentified contracts are presented to the Company relating to contracts
sold prior to the time the Company acquired certain businesses. In addition, from time to time,
the Company has identified in its backlog, certain contracts in which services or merchandise have
already been delivered. Using historical trends and statistical analysis, the Company has recorded
an estimated net liability for these items of approximately $2.0 million and $3.0 million as of
January 31, 2010 and October 31, 2009, respectively.
The Company is required to maintain a bond ($24,815 as of January 31, 2010) 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 to extinguish the bond obligation
by returning to the trusts the amounts it previously withdrew that relate to the remaining
undelivered preneed contracts.
(8) Reconciliation of Basic and Diluted Per Share Data
Earnings | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Data | ||||||||||
Three Months Ended January 31, 2010 |
||||||||||||
Net earnings |
$ | 7,487 | ||||||||||
Allocation of earnings to nonvested restricted stock |
(83 | ) | ||||||||||
Basic earnings per common share: |
||||||||||||
Net earnings available to common shareholders |
$ | 7,404 | 92,053 | $ | .08 | |||||||
Effect of dilutive securities: |
||||||||||||
Stock options assumed exercised |
181 | |||||||||||
Diluted earnings per common share: |
||||||||||||
Net earnings available to common shareholders
plus stock options assumed exercised |
$ | 7,404 | 92,234 | $ | .08 | |||||||
Earnings | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Data | ||||||||||
Three Months Ended January 31, 2009 |
||||||||||||
Net earnings |
$ | 4,766 | ||||||||||
Allocation of earnings to nonvested restricted stock |
(44 | ) | ||||||||||
Basic earnings per common share: |
||||||||||||
Net earnings available to common shareholders |
$ | 4,722 | 91,824 | $ | .05 | |||||||
Effect of dilutive securities: |
||||||||||||
Stock options assumed exercised |
19 | |||||||||||
Diluted earnings per common share: |
||||||||||||
Net earnings available to common shareholders
plus stock options assumed exercised |
$ | 4,722 | 91,843 | $ | .05 | |||||||
As discussed in Note 2, the Company adopted guidance on determining whether instruments
granted in share-based payment transactions are participating securities, effective November 1,
2009. Since this guidance requires retrospective treatment, the information presented above for
the three months ended January 31, 2009 has been adjusted to reflect the adoption of this guidance.
28
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(8) Reconciliation of Basic and Diluted Per Share Data-(Continued)
During the three months ended January 31, 2010, options to purchase 2,074,986 shares of common
stock at prices ranging from $5.04 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 those periods. These options expire between
November 29, 2012 and January 18, 2017.
Options to purchase 1,653,796 shares of common stock at prices ranging from $5.06 to $8.47 per
share for the three months ended January 31, 2009 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 the period. Additionally, weighted-average
shares outstanding for the three months ended January 31, 2009 exclude the effect of approximately
110,217 options, because such options were not dilutive.
For the three months ended January 31, 2010 and 2009, 438,000 and 468,000 market based stock
options, respectively, were not dilutive. The market based stock options were not dilutive because
the market conditions required for vesting for the respective grants were not achieved during any
of periods presented.
For the three months ended January 31, 2010, a maximum of 16,640,100 shares of the Companys
Class A common stock related to the senior convertible notes and a maximum of 13,312,080 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 price of the Companys stock for the
three months ended January 31, 2010 was less than the conversion price of the senior convertible
notes and strike price of the warrants. For the three months ended January 31, 2009, a maximum of
25,000,000 shares of the Companys Class A common stock related to the senior convertible notes and
a maximum of 20,000,000 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 January 31, 2010, the Companys Chairman, Frank B. Stewart, Jr., was the record holder of all of
the Companys shares of Class B common stock. The Companys 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 managements 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. Prior period data has been
retrospectively adjusted to conform to the new segment presentation.
Total Revenue | ||||||||
Three Months | ||||||||
Ended | Three Months Ended | |||||||
January 31, 2010 | January 31, 2009 | |||||||
Funeral |
$ | 68,029 | $ | 68,146 | ||||
Cemetery(1) |
50,508 | 45,690 | ||||||
Corporate Trust Management(2) |
5,863 | 5,494 | ||||||
Total |
$ | 124,400 | $ | 119,330 | ||||
29
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(9) Segment Data-(Continued)
Total Gross Profit | ||||||||
Three Months Ended | Three Months Ended | |||||||
January 31, 2010 | January 31, 2009 | |||||||
Funeral |
$ | 15,347 | $ | 14,842 | ||||
Cemetery(1) |
4,411 | 3,187 | ||||||
Corporate Trust Management(2) |
5,411 | 5,054 | ||||||
Total |
$ | 25,169 | $ | 23,083 | ||||
Net Total Preneed Merchandise and | ||||||||
Service Sales(3) | ||||||||
Three Months Ended | Three Months Ended | |||||||
January 31, 2010 | January 31, 2009 | |||||||
Funeral |
$ | 18,111 | $ | 18,732 | ||||
Cemetery(1) |
10,204 | 10,779 | ||||||
Total |
$ | 28,315 | $ | 29,511 | ||||
(1) | Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $2,473 and $1,722 for the three months ended January 31, 2010 and 2009, respectively. | |
(2) | Corporate trust management consists of trust management fees and funeral 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 the assets managed and are paid by the trusts to the Companys subsidiary, Investors Trust, Inc. The trust earnings represent earnings generated over the life of the preneed contracts delivered during the relevant periods and distributable to the Company based upon the Companys respective trust agreements. Trust management fees included in funeral revenue for the three months ended January 31, 2010 and 2009 were $1,115 and $937, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended January 31, 2010 and 2009 were $2,963 and $2,667, respectively. Trust management fees included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $1,189 and $952, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $596 and $938, respectively. | |
(3) | 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. |
30
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(9) Segment Data-(Continued)
A reconciliation of total segment gross profit to total earnings before income taxes for the
three months ended January 31, 2010 and 2009 is as follows:
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
Gross profit for reportable segments |
$ | 25,169 | $ | 23,083 | ||||
Corporate general and administrative expenses |
(6,554 | ) | (7,506 | ) | ||||
Hurricane related charges, net |
| (315 | ) | |||||
Net impairment losses on dispositions |
| (63 | ) | |||||
Other operating income, net |
179 | 259 | ||||||
Interest expense |
(6,456 | ) | (7,395 | ) | ||||
Gain on early extinguishment of debt |
17 | | ||||||
Investment and other income, net |
24 | 41 | ||||||
Earnings before income taxes |
$ | 12,379 | $ | 8,104 | ||||
31
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(10) Supplementary Information
The detail of certain income statement accounts is as follows for the three months ended
January 31, 2010 and 2009.
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
Service revenue |
||||||||
Funeral |
$ | 45,327 | $ | 45,306 | ||||
Cemetery |
15,571 | 15,101 | ||||||
60,898 | 60,407 | |||||||
Merchandise revenue |
||||||||
Funeral |
25,142 | 24,917 | ||||||
Cemetery |
33,141 | 29,027 | ||||||
58,283 | 53,944 | |||||||
Other revenue |
||||||||
Funeral |
1,639 | 1,527 | ||||||
Cemetery |
3,580 | 3,452 | ||||||
5,219 | 4,979 | |||||||
Total revenue |
$ | 124,400 | $ | 119,330 | ||||
Service costs |
||||||||
Funeral |
$ | 14,705 | $ | 14,668 | ||||
Cemetery |
9,802 | 9,755 | ||||||
24,507 | 24,423 | |||||||
Merchandise costs |
||||||||
Funeral |
14,585 | 15,006 | ||||||
Cemetery |
22,204 | 19,250 | ||||||
36,789 | 34,256 | |||||||
Facility expenses |
||||||||
Funeral |
23,621 | 23,821 | ||||||
Cemetery |
14,314 | 13,747 | ||||||
37,935 | 37,568 | |||||||
Total costs |
$ | 99,231 | $ | 96,247 | ||||
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, preneed
selling costs associated with preneed merchandise sales and the Companys estimated obligation to
fund the cemetery perpetual care trusts.
32
Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(11) | Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes |
The following tables present the condensed consolidating historical financial statements as of
January 31, 2010 and October 31, 2009 and for the three months ended January 31, 2010 and 2009, for
the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the
Companys 6.25 percent senior notes and its 3.125 percent and 3.375 percent senior convertible
notes, and the financial results of the Companys subsidiaries that do not serve as guarantors.
Non-guarantor subsidiaries of the 6.25 percent senior notes include the Puerto Rican subsidiaries,
Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law
from guaranteeing the senior notes. The guarantor subsidiaries of the 6.25 percent senior notes are
wholly-owned directly or indirectly by the Company, except for three immaterial guarantor
subsidiaries of which the Company is the majority owner. The non-guarantor subsidiaries of the
senior convertible notes are identical to those of the 6.25 percent senior notes but also include
three immaterial non-wholly owned subsidiaries and any future non-wholly owned subsidiaries. The
guarantees are full and unconditional and joint and several. In the statements presented within
this footnote, Tier 2 guarantor subsidiaries represent the three immaterial non-wholly owned
subsidiaries that do not guaranty the senior convertible notes but do guaranty the 6.25 percent
senior notes. Non-guarantor subsidiaries represent the identical non-guarantor subsidiaries of the
6.25 percent senior notes and senior convertible notes. In the condensed consolidating statements
of earnings and other comprehensive income, corporate general and administrative expenses and
interest expense of the parent are presented net of amounts charged to the guarantor and
non-guarantor subsidiaries.
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
Three Months Ended January 31, 2010 | ||||||||||||||||||||||||
Guarantor | Guarantor | Non- | ||||||||||||||||||||||
Subsidiaries- | Subsidiaries- | Guarantor | ||||||||||||||||||||||
Parent | Tier 1 | Tier 2 | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Funeral |
$ | | $ | 67,232 | $ | 485 | $ | 4,391 | $ | | $ | 72,108 | ||||||||||||
Cemetery |
| 46,676 | 572 | 5,044 | | 52,292 | ||||||||||||||||||
| 113,908 | 1,057 | 9,435 | | 124,400 | |||||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Funeral |
| 49,441 | 263 | 3,207 | | 52,911 | ||||||||||||||||||
Cemetery |
| 41,573 | 620 | 4,127 | | 46,320 | ||||||||||||||||||
| 91,014 | 883 | 7,334 | | 99,231 | |||||||||||||||||||
Gross profit |
| 22,894 | 174 | 2,101 | | 25,169 | ||||||||||||||||||
Corporate general and administrative
expenses |
(6,554 | ) | | | | | (6,554 | ) | ||||||||||||||||
Hurricane related recoveries (charges), net |
(54 | ) | | 54 | | | | |||||||||||||||||
Other operating income, net |
16 | 143 | | 20 | | 179 | ||||||||||||||||||
Operating earnings (loss) |
(6,592 | ) | 23,037 | 228 | 2,121 | | 18,794 | |||||||||||||||||
Interest expense |
(487 | ) | (5,478 | ) | (8 | ) | (483 | ) | | (6,456 | ) | |||||||||||||
Gain on early extinguishment of debt |
17 | | | | | 17 | ||||||||||||||||||
Investment and other income, net |
24 | | | | | 24 | ||||||||||||||||||
Equity in subsidiaries |
11,821 | 80 | | | (11,901 | ) | | |||||||||||||||||
Earnings before income taxes |
4,783 | 17,639 | 220 | 1,638 | (11,901 | ) | 12,379 | |||||||||||||||||
Income tax expense (benefit) |
(2,704 | ) | 7,043 | 54 | 499 | | 4,892 | |||||||||||||||||
Net earnings |
7,487 | 10,596 | 166 | 1,139 | (11,901 | ) | 7,487 | |||||||||||||||||
Other comprehensive loss, net |
(1 | ) | | | (1 | ) | 1 | (1 | ) | |||||||||||||||
Comprehensive income |
$ | 7,486 | $ | 10,596 | $ | 166 | $ | 1,138 | $ | (11,900 | ) | $ | 7,486 | |||||||||||
33
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(11) | Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes(Continued) |
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
Three Months Ended January 31, 2009 | ||||||||||||||||||||||||
Guarantor | Guarantor | Non- | ||||||||||||||||||||||
Subsidiaries- | Subsidiaries- | Guarantor | ||||||||||||||||||||||
Parent | Tier 1 | Tier 2 | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Funeral |
$ | | $ | 66,871 | $ | 399 | $ | 4,480 | $ | | $ | 71,750 | ||||||||||||
Cemetery |
| 43,025 | 661 | 3,894 | | 47,580 | ||||||||||||||||||
| 109,896 | 1,060 | 8,374 | | 119,330 | |||||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Funeral |
| 50,000 | 291 | 3,204 | | 53,495 | ||||||||||||||||||
Cemetery |
| 38,811 | 636 | 3,305 | | 42,752 | ||||||||||||||||||
| 88,811 | 927 | 6,509 | | 96,247 | |||||||||||||||||||
Gross profit |
| 21,085 | 133 | 1,865 | | 23,083 | ||||||||||||||||||
Corporate general and administrative
expenses |
(7,506 | ) | | | | | (7,506 | ) | ||||||||||||||||
Hurricane related charges, net |
(276 | ) | (39 | ) | | | | (315 | ) | |||||||||||||||
Net impairment losses on dispositions |
(8 | ) | (55 | ) | | | | (63 | ) | |||||||||||||||
Other operating income (expense), net |
(2 | ) | 244 | 1 | 16 | | 259 | |||||||||||||||||
Operating earnings (loss) |
(7,792 | ) | 21,235 | 134 | 1,881 | | 15,458 | |||||||||||||||||
Interest expense |
(666 | ) | (6,165 | ) | (36 | ) | (528 | ) | | (7,395 | ) | |||||||||||||
Investment and other income, net |
41 | | | | | 41 | ||||||||||||||||||
Equity in subsidiaries |
11,171 | 135 | | | (11,306 | ) | | |||||||||||||||||
Earnings before income taxes |
2,754 | 15,205 | 98 | 1,353 | (11,306 | ) | 8,104 | |||||||||||||||||
Income tax expense (benefit) |
(2,012 | ) | 4,836 | 19 | 495 | | 3,338 | |||||||||||||||||
Net earnings |
4,766 | 10,369 | 79 | 858 | (11,306 | ) | 4,766 | |||||||||||||||||
Other comprehensive income, net |
3 | | | 3 | (3 | ) | 3 | |||||||||||||||||
Comprehensive income |
$ | 4,769 | $ | 10,369 | $ | 79 | $ | 861 | $ | (11,309 | ) | $ | 4,769 | |||||||||||
34
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(11) | Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes(Continued) |
Condensed Consolidating Balance Sheets
January 31, 2010 | ||||||||||||||||||||||||
Guarantor | Guarantor | Non- | ||||||||||||||||||||||
Subsidiaries- | Subsidiaries- | Guarantor | ||||||||||||||||||||||
Parent | Tier 1 | Tier 2 | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 44,418 | $ | 6,023 | $ | 36 | $ | 2,303 | $ | | $ | 52,780 | ||||||||||||
Certificates of deposit |
5,000 | | | | | 5,000 | ||||||||||||||||||
Receivables, net of allowances |
6,968 | 47,689 | 447 | 4,227 | | 59,331 | ||||||||||||||||||
Inventories |
263 | 33,440 | 336 | 1,908 | | 35,947 | ||||||||||||||||||
Prepaid expenses |
1,516 | 8,068 | 61 | 1,929 | | 11,574 | ||||||||||||||||||
Deferred income taxes, net |
9,932 | 10,296 | 43 | 1,374 | | 21,645 | ||||||||||||||||||
Total current assets |
68,097 | 105,516 | 923 | 11,741 | | 186,277 | ||||||||||||||||||
Receivables due beyond one year, net of
allowances |
| 48,113 | 397 | 13,552 | | 62,062 | ||||||||||||||||||
Preneed funeral receivables and trust
investments |
| 387,954 | | 9,500 | | 397,454 | ||||||||||||||||||
Preneed cemetery receivables and trust
investments |
| 189,112 | 1,085 | 6,600 | | 196,797 | ||||||||||||||||||
Goodwill |
| 227,401 | 48 | 19,787 | | 247,236 | ||||||||||||||||||
Cemetery property, at cost |
| 348,668 | 11,286 | 26,235 | | 386,189 | ||||||||||||||||||
Property and equipment, at cost |
54,268 | 469,159 | 2,208 | 38,195 | | 563,830 | ||||||||||||||||||
Less accumulated depreciation |
37,134 | 213,539 | 1,039 | 15,522 | | 267,234 | ||||||||||||||||||
Net property and equipment |
17,134 | 255,620 | 1,169 | 22,673 | | 296,596 | ||||||||||||||||||
Deferred income taxes, net |
| 105,844 | | 10,994 | (6,972 | ) | 109,866 | |||||||||||||||||
Cemetery perpetual care trust investments |
| 202,202 | 8,462 | 3,796 | | 214,460 | ||||||||||||||||||
Other assets |
7,975 | 5,113 | 6 | 1,045 | | 14,139 | ||||||||||||||||||
Intercompany receivables |
774,766 | | | | (774,766 | ) | | |||||||||||||||||
Equity in subsidiaries |
16,289 | 8,201 | | | (24,490 | ) | | |||||||||||||||||
Total assets |
$ | 884,261 | $ | 1,883,744 | $ | 23,376 | $ | 125,923 | $ | (806,228 | ) | $ | 2,111,076 | |||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current maturities of long-term debt |
$ | 3 | $ | | $ | | $ | | $ | | $ | 3 | ||||||||||||
Accounts payable, accrued expenses and
other current liabilities |
14,528 | 68,931 | 220 | 4,606 | | 88,285 | ||||||||||||||||||
Total current liabilities |
14,531 | 68,931 | 220 | 4,606 | | 88,288 | ||||||||||||||||||
Long-term debt, less current maturities |
339,934 | | | | | 339,934 | ||||||||||||||||||
Deferred income taxes |
3,996 | | 2,976 | | (6,972 | ) | | |||||||||||||||||
Intercompany payables |
| 751,049 | 3,082 | 20,635 | (774,766 | ) | | |||||||||||||||||
Deferred preneed funeral revenue |
| 198,957 | | 46,627 | | 245,584 | ||||||||||||||||||
Deferred preneed cemetery revenue |
| 236,145 | 278 | 26,965 | | 263,388 | ||||||||||||||||||
Deferred preneed funeral and cemetery
receipts held in trust |
| 519,327 | 1,049 | 6,048 | | 526,424 | ||||||||||||||||||
Perpetual care trusts corpus |
| 199,846 | 8,455 | 3,775 | | 212,076 | ||||||||||||||||||
Other long-term liabilities |
17,163 | 3,776 | | 93 | | 21,032 | ||||||||||||||||||
Negative equity in subsidiaries |
94,287 | | | | (94,287 | ) | | |||||||||||||||||
Total liabilities |
469,911 | 1,978,031 | 16,060 | 108,749 | (876,025 | ) | 1,696,726 | |||||||||||||||||
Common stock |
93,122 | 102 | 324 | 52 | (478 | ) | 93,122 | |||||||||||||||||
Other |
321,194 | (94,389 | ) | 6,992 | 17,088 | 70,309 | 321,194 | |||||||||||||||||
Accumulated other comprehensive income |
34 | | | 34 | (34 | ) | 34 | |||||||||||||||||
Total shareholders equity |
414,350 | (94,287 | ) | 7,316 | 17,174 | 69,797 | 414,350 | |||||||||||||||||
Total liabilities and shareholders equity |
$ | 884,261 | $ | 1,883,744 | $ | 23,376 | $ | 125,923 | $ | (806,228 | ) | $ | 2,111,076 | |||||||||||
35
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(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, 2009 | ||||||||||||||||||||||||
Guarantor | Guarantor | Non- | ||||||||||||||||||||||
Subsidiaries- | Subsidiaries- | Guarantor | ||||||||||||||||||||||
Parent | Tier 1 | Tier 2 | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 56,734 | $ | 5,096 | $ | 52 | $ | 926 | $ | | $ | 62,808 | ||||||||||||
Receivables, net of allowances |
7,062 | 47,388 | 504 | 4,485 | | 59,439 | ||||||||||||||||||
Inventories |
269 | 33,440 | 312 | 2,135 | | 36,156 | ||||||||||||||||||
Prepaid expenses |
1,218 | 3,804 | 38 | 1,688 | | 6,748 | ||||||||||||||||||
Deferred income taxes, net |
9,006 | 11,168 | 47 | 1,494 | | 21,715 | ||||||||||||||||||
Total current assets |
74,289 | 100,896 | 953 | 10,728 | | 186,866 | ||||||||||||||||||
Receivables due beyond one year, net of allowances |
| 48,783 | 420 | 13,808 | | 63,011 | ||||||||||||||||||
Preneed funeral receivables and trust investments |
| 379,899 | | 9,613 | | 389,512 | ||||||||||||||||||
Preneed cemetery receivables and trust investments |
| 185,447 | 1,124 | 6,846 | | 193,417 | ||||||||||||||||||
Goodwill |
| 227,401 | 48 | 19,787 | | 247,236 | ||||||||||||||||||
Cemetery property, at cost |
| 348,627 | 11,315 | 26,035 | | 385,977 | ||||||||||||||||||
Property and equipment, at cost |
53,956 | 466,187 | 2,183 | 38,136 | | 560,462 | ||||||||||||||||||
Less accumulated depreciation |
36,015 | 208,806 | 994 | 15,190 | | 261,005 | ||||||||||||||||||
Net property and equipment |
17,941 | 257,381 | 1,189 | 22,946 | | 299,457 | ||||||||||||||||||
Deferred income taxes, net |
| 107,636 | | 10,415 | (4,653 | ) | 113,398 | |||||||||||||||||
Cemetery perpetual care trust investments |
| 193,616 | 8,207 | 3,653 | | 205,476 | ||||||||||||||||||
Other assets |
8,402 | 5,196 | 6 | 1,050 | | 14,654 | ||||||||||||||||||
Intercompany receivables |
771,490 | | | | (771,490 | ) | | |||||||||||||||||
Equity in subsidiaries |
15,065 | 8,121 | | | (23,186 | ) | | |||||||||||||||||
Total assets |
$ | 887,187 | $ | 1,863,003 | $ | 23,262 | $ | 124,881 | $ | (799,329 | ) | $ | 2,099,004 | |||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current maturities of long-term debt |
$ | 5 | $ | | $ | | $ | | $ | | $ | 5 | ||||||||||||
Accounts payable, accrued expenses and other current liabilities |
15,209 | 75,920 | 199 | 4,678 | | 96,006 | ||||||||||||||||||
Total current liabilities |
15,214 | 75,920 | 199 | 4,678 | | 96,011 | ||||||||||||||||||
Long-term debt, less current maturities |
339,721 | | | | | 339,721 | ||||||||||||||||||
Deferred income taxes |
1,672 | | 2,981 | | (4,653 | ) | | |||||||||||||||||
Intercompany payables |
| 747,847 | 3,402 | 20,241 | (771,490 | ) | | |||||||||||||||||
Deferred preneed funeral revenue |
| 200,990 | | 46,835 | | 247,825 | ||||||||||||||||||
Deferred preneed cemetery revenue |
| 239,177 | 277 | 27,510 | | 266,964 | ||||||||||||||||||
Deferred preneed funeral and cemetery receipts held in trust |
| 507,912 | 1,045 | 5,830 | | 514,787 | ||||||||||||||||||
Perpetual care trusts corpus |
| 192,324 | 8,208 | 3,636 | | 204,168 | ||||||||||||||||||
Other long-term liabilities |
17,040 | 3,716 | | 115 | | 20,871 | ||||||||||||||||||
Negative equity in subsidiaries |
104,883 | | | | (104,883 | ) | | |||||||||||||||||
Total liabilities |
478,530 | 1,967,886 | 16,112 | 108,845 | (881,026 | ) | 1,690,347 | |||||||||||||||||
Common stock |
92,684 | 102 | 324 | 52 | (478 | ) | 92,684 | |||||||||||||||||
Other |
315,938 | (104,985 | ) | 6,826 | 15,949 | 82,210 | 315,938 | |||||||||||||||||
Accumulated other comprehensive income |
35 | | | 35 | (35 | ) | 35 | |||||||||||||||||
Total shareholders equity |
408,657 | (104,883 | ) | 7,150 | 16,036 | 81,697 | 408,657 | |||||||||||||||||
Total liabilities and shareholders equity |
$ | 887,187 | $ | 1,863,003 | $ | 23,262 | $ | 124,881 | $ | (799,329 | ) | $ | 2,099,004 | |||||||||||
36
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(11) | Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes(Continued) |
Condensed Consolidating Statements of Cash Flows
Three Months Ended January 31, 2010 | ||||||||||||||||||||||||
Guarantor | Guarantor | Non- | ||||||||||||||||||||||
Subsidiaries- | Subsidiaries- | Guarantor | ||||||||||||||||||||||
Parent | Tier 1 | Tier 2 | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | (131 | ) | $ | 1,411 | $ | 380 | $ | 1,113 | $ | | $ | 2,773 | |||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Purchases of certificates of deposit |
(5,000 | ) | | | | | (5,000 | ) | ||||||||||||||||
Additions to property and equipment |
(366 | ) | (3,725 | ) | (76 | ) | (130 | ) | | (4,297 | ) | |||||||||||||
Other |
| 39 | | | | 39 | ||||||||||||||||||
Net cash used in investing activities |
(5,366 | ) | (3,686 | ) | (76 | ) | (130 | ) | | (9,258 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Repayments of long-term debt |
(846 | ) | | | | | (846 | ) | ||||||||||||||||
Intercompany receivables (payables) |
(3,276 | ) | 3,202 | (320 | ) | 394 | | | ||||||||||||||||
Retirement of common stock warrants |
(107 | ) | | | | | (107 | ) | ||||||||||||||||
Issuance of common stock |
115 | | | | | 115 | ||||||||||||||||||
Retirement of call options |
107 | | | | | 107 | ||||||||||||||||||
Debt refinancing costs |
(38 | ) | | | | | (38 | ) | ||||||||||||||||
Dividends |
(2,794 | ) | | | | | (2,794 | ) | ||||||||||||||||
Excess tax benefits from share-based payment arrangements |
20 | | | | | 20 | ||||||||||||||||||
Net cash provided by (used in) financing activities |
(6,819 | ) | 3,202 | (320 | ) | 394 | | (3,543 | ) | |||||||||||||||
Net increase (decrease) in cash |
(12,316 | ) | 927 | (16 | ) | 1,377 | | (10,028 | ) | |||||||||||||||
Cash and cash equivalents, beginning of period |
56,734 | 5,096 | 52 | 926 | | 62,808 | ||||||||||||||||||
Cash and cash equivalents, end of period |
$ | 44,418 | $ | 6,023 | $ | 36 | $ | 2,303 | $ | | $ | 52,780 | ||||||||||||
37
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(11) | Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes(Continued) |
Condensed Consolidating Statements of Cash Flows
Three Months Ended January 31, 2009 | ||||||||||||||||||||||||
Guarantor | Guarantor | Non- | ||||||||||||||||||||||
Subsidiaries- | Subsidiaries- | Guarantor | ||||||||||||||||||||||
Parent | Tier 1 | Tier 2 | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | (2,134 | ) | $ | 7,005 | $ | 103 | $ | 2,310 | $ | | $ | 7,284 | |||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Proceeds from sale of assets |
292 | | | | | 292 | ||||||||||||||||||
Purchase of subsidiaries and other investments, net of cash acquired |
| (1,623 | ) | | | | (1,623 | ) | ||||||||||||||||
Additions to property and equipment |
(1,908 | ) | (2,587 | ) | (5 | ) | (289 | ) | | (4,789 | ) | |||||||||||||
Other |
| 1 | | | | 1 | ||||||||||||||||||
Net cash used in investing activities |
(1,616 | ) | (4,209 | ) | (5 | ) | (289 | ) | | (6,119 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Repayments of long-term debt |
(9 | ) | | | | | (9 | ) | ||||||||||||||||
Intercompany receivables (payables) |
3,690 | (744 | ) | (86 | ) | (2,860 | ) | | | |||||||||||||||
Issuance of common stock |
83 | | | | | 83 | ||||||||||||||||||
Dividends |
(2,318 | ) | | | | | (2,318 | ) | ||||||||||||||||
Net cash provided by (used in) financing activities |
1,446 | (744 | ) | (86 | ) | (2,860 | ) | | (2,244 | ) | ||||||||||||||
Net increase (decrease) in cash |
(2,304 | ) | 2,052 | 12 | (839 | ) | | (1,079 | ) | |||||||||||||||
Cash and cash equivalents, beginning of period |
65,593 | 4,332 | 22 | 2,627 | | 72,574 | ||||||||||||||||||
Cash and cash equivalents, end of period |
$ | 63,289 | $ | 6,384 | $ | 34 | $ | 1,788 | $ | | $ | 71,495 | ||||||||||||
38
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(12) | Consolidated Comprehensive Income |
Consolidated comprehensive income for the three months ended January 31, 2010 and 2009 is as
follows:
Three Months Ended January 31, | ||||||||
2010 | 2009 | |||||||
Net earnings |
$ | 7,487 | $ | 4,766 | ||||
Other comprehensive income (loss): |
||||||||
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of $1 and
($2), respectively |
(1 | ) | 3 | |||||
(Increase) reduction in net unrealized losses associated with available-for-sale securities of the trusts |
20,230 | (35,915 | ) | |||||
Reclassification of the net unrealized (increases) losses activity attributable to the deferred preneed
funeral and cemetery receipts held in trust and perpetual care trusts corpus |
(20,230 | ) | 35,915 | |||||
Total other comprehensive income (loss) |
(1 | ) | 3 | |||||
Total comprehensive income |
$ | 7,486 | $ | 4,769 | ||||
(13) | Long-term Debt |
January 31, 2010 | October 31, 2009 | |||||||
Long-term debt: |
||||||||
3.125% senior convertible notes due
2014, net of unamortized discount of
$12,156 and $12,912 as of January 31,
2010 and October 31, 2009, respectively |
$ | 74,260 | $ | 74,504 | ||||
3.375% senior convertible notes due
2016, net of unamortized discount of
$14,400 and $14,858 as of January 31,
2010 and October 31, 2009, respectively |
65,584 | 65,127 | ||||||
Senior secured revolving credit facility |
| | ||||||
6.25% senior notes due 2013 |
200,000 | 200,000 | ||||||
Other, principally seller financing of
acquired operations or assumption upon
acquisition, weighted average interest
rate of 8.0% as of January 31, 2010 and
October 31, 2009, partially secured by
assets of subsidiaries, with maturities
through 2022 |
93 | 95 | ||||||
Total long-term debt |
339,937 | 339,726 | ||||||
Less current maturities |
3 | 5 | ||||||
$ | 339,934 | $ | 339,721 | |||||
Fair Value
As of January 31, 2010, the carrying values of the Companys 3.125 percent senior convertible
notes due 2014 and 3.375 percent senior convertible notes due 2016, including accrued interest,
were $74,380 and $65,704, respectively, compared to fair values of $72,871 and $65,708,
respectively. As of January 31, 2010, the carrying
value of the Companys 6.25 percent senior notes, including accrued interest, was $205,729 compared
to a fair value of $200,713.
Senior Convertible Notes
During the three months ended January 31, 2010, the Company purchased $1,000 aggregate
principal amount of its 3.125 percent senior convertible notes due 2014 in the open market. In
connection with these debt purchases, corresponding call options and common stock warrants were
also terminated. As a result of the debt
39
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(13) | Long-term Debt(Continued) |
purchases at discounts, the Company recorded $17 in pre-tax gains on early extinguishment of
debt during the three months ended January 31, 2010.
Adoption of Convertible Debt Guidance
In May 2008, the FASB issued guidance regarding the accounting for convertible debt
instruments that may be settled in cash upon conversion. The guidance states that issuers of
convertible debt instruments that may be settled in cash upon conversion should account separately
for the liability and equity components of the instruments in a manner that will reflect the
entitys nonconvertible debt borrowing rate as the related interest cost is recognized in
subsequent periods. The entity must determine the carrying amount of the liability component of
any outstanding debt instrument by estimating the fair value of a similar liability without the
conversion option. The amount of the equity component is then calculated by deducting the fair
value of the liability component from the principal amount of the debt instrument. The value of
the debt instrument is adjusted through a discount to the face value of the debt, which is
amortized as non-cash interest expense over the expected life of the debt.
This guidance applies to the Companys 3.125 percent senior convertible notes due 2014 (2014
Notes) and 3.375 percent senior convertible notes due 2016 (2016 Notes and together with the
2014 Notes, the senior convertible notes), which were originally issued in 2007, and must be
applied retrospectively to all periods since inception. The Company adopted this guidance
effective November 1, 2009. The impact of adopting this guidance on the Companys October 31, 2009
balance sheet was a $9,997 decrease to deferred tax assets, a $27,770 decrease in long-term debt, a
$35,001 increase to additional paid-in capital and an increase of $17,228 to accumulated deficit.
See Note 2 for additional information on the effects of the adoption of this guidance.
The remaining periods over which the discount on the 2014 Notes and 2016 Notes will be
amortized is approximately 4.25 years and approximately 6.25 years, respectively. The carrying
value of the equity component of the 2014 Notes as of January 31, 2010 and October 31, 2009 was
$16,191 and $16,204, respectively. The
carrying value of the equity component of the 2016 Notes was $18,797 as of January 31, 2010
and October 31, 2009. The amount of interest expense recorded for the senior convertible notes for
the three months ended January 31, 2010 and 2009 related both to the contractual interest coupon
and amortization of the discount on the liability component is $2,426 and $3,516, respectively.
For the three months ended January 31, 2010 and 2009, the coupon and amortization of the discount
yielded an effective interest rate of approximately 6.96 percent on the 2014 Notes and the 2016
Notes.
Holders may convert their senior convertible notes based on a conversion rate of 90.4936
shares of the Companys Class A common stock per $1,000 principal amount of senior convertible
notes (which is equal to an initial conversion price of approximately $11.05 per share), subject to
adjustment: (1) during any fiscal quarter beginning after October 31, 2007, if the closing price
of the Companys Class A common stock for a specified period in the prior quarter is more than 130
percent of the conversion price per share, (2) for a specified period after five trading days in
which the trading price of the notes for each trading day was less than 95 percent of the product
of the closing price of the Companys Class A common stock and the then applicable conversion rate,
(3) if specified distributions to holders of the Companys Class A common stock occur, (4) if a
fundamental change occurs or (5) during the last month prior to the maturity date of the notes.
None of these conditions had been met during the three months ended January 31, 2010, fiscal year
2009 or fiscal year 2008.
Upon conversion, in lieu of shares of the Companys Class A common stock, for each $1,000
principal amount of senior convertible notes converted, a holder will receive an amount in cash
equal to the lesser of (1) $1,000 or (2) the conversion value, determined in the manner set forth
in the indentures, of the number of shares of the Companys Class A common stock equal to the
conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at the
Companys election, cash or Class A common stock or a combination of cash and Class A common stock
with respect to such excess amount, subject to the limitations in the indentures. If a holder
40
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(13) | Long-term Debt(Continued) |
elects to convert its senior convertible notes in connection with certain fundamental change
transactions, the Company will pay, to the extent described in the indentures, a make whole premium
by increasing the conversion rate applicable to such senior convertible notes.
Upon specified fundamental change events, holders will have the option to require the Company
to purchase for cash all or any portion of their senior convertible notes at a price equal to 100
percent of the principal amount of the senior convertible notes plus accrued and unpaid interest,
if any, to, but excluding, the fundamental change purchase date.
Also, in connection with the sale of the senior convertible notes, the Company purchased call
options with respect to its Class A common stock from Bank of America/Merrill Lynch International.
The call options cover,
subject to anti-dilution adjustments, 11,311,700 shares of Class A common stock for each
series of senior convertible notes, at strike prices that correspond to the initial conversion
price of the notes. The call options are expected to offset the Companys exposure to dilution
from conversion of the senior convertible notes because any shares the Company would be obligated
to deliver to holders upon conversion of the senior convertible notes would be delivered to the
Company by the counterparty to the call options. The Company paid approximately $60,000 for the
call options.
The Company also entered into warrant transactions whereby it sold to Bank of America/Merrill
Lynch Financial Markets warrants expiring in 2014 and 2016 to acquire, subject to customary
anti-dilution adjustments, 11,311,700 and 11,311,700 shares of Class A common stock, respectively.
The strike prices of the sold warrants expiring in 2014 and 2016 are $12.93 per share of Class A
common stock and $13.76 per share of Class A common stock, respectively. The warrants expiring in
2014 and 2016 may not be exercised prior to the maturity of the 2014 Notes and 2016 Notes,
respectively. The Company can elect to settle the warrants in cash or Class A common stock,
subject to certain conditions. The Company received approximately $43,850 for the warrants. In
connection with the purchases of the Companys senior convertible notes during fiscal year 2009 and
the three months ended January 31, 2010, the number of shares subject to the warrants was reduced
to 6,913,280 related to the 2014 Notes and 6,398,800 related to the 2016 Notes.
The price of the call options is treated for tax purposes as interest expense, which amortizes
over the lives of the notes. Accordingly, the Company will have a tax benefit of approximately
$21,000 over the lives of the senior convertible notes. The sale of the warrants is not expected
to have any tax consequences to the Company.
By selling the warrants, the Company used the proceeds to offset much of the cost of the call
options. By simultaneously purchasing the call options and selling the warrants, the Company has
effectively increased the conversion premium on the senior convertible notes to 55-65 percent above
the market price of the Class A common stock at the time of the offering.
(14) | Income Taxes |
The Company continues to pursue several tax planning strategies. The Company received
IRS approval in fiscal year 2010 on two pending requests for changes in tax accounting methods,
which will result in the deferral of approximately $70.0 million of taxable income. The
combination of these two changes will significantly reduce federal income tax cash payments
(approximately $25.0 million) for the next two to three years.
(15) | Subsequent Events |
During February 2010, several of the Companys facilities in Texas and one facility in
Maryland experienced property damage from winter storms but were able to restore operations
quickly. The Company is in the process of assessing the damages.
41
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(15) | Subsequent Events(Continued) |
As of February 28, 2010, the fair market value of the Companys preneed funeral and cemetery
merchandise and services trusts and cemetery perpetual care trusts increased 1.6 percent, or
approximately $12,000, from January 31, 2010.
42
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements 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, 2009 (the 2009 Form 10-K), and in conjunction
with our consolidated financial statements included in this report and in our 2009 Form 10-K.
This report contains forward-looking statements that are generally identifiable through the
use of words such as believe, expect, intend, plan, estimate, anticipate, project,
will and similar expressions. These forward-looking statements rely on assumptions, estimates
and predictions that could be inaccurate and that are subject to risks and uncertainties that could
cause actual results to differ materially. Important factors that may cause our actual results to
differ materially from expectations reflected in our forward-looking statements include those
described in Risk Factors in our 2009 Form 10-K. 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. As of January 31, 2010, we owned and operated 218 funeral
homes and 140 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 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 2009 Form 10-K.
As of November 1, 2009, the Company adopted guidance regarding the accounting for our 2014 and
2016 senior convertible notes and applied the change retrospectively for all periods presented.
See Note 2 and Note 13 to the condensed consolidated financial statements for further information
on the impact of the accounting change in the Companys statements of earnings and balance sheets.
Financial Summary
For the first quarter of fiscal year 2010, net earnings increased $2.7 million to $7.5 million
from $4.8 million for the first quarter of fiscal year 2009. Revenue increased $5.1 million to
$124.4 million for the quarter ended January 31, 2010. Funeral revenue increased $0.4 million to
$72.1 million in the first quarter of 2010, primarily due to a $0.5 million increase in funeral
trust related activities. The increase in trust earnings was partially offset by a 1.3 percent, or
185 event, decrease in same-store funeral services performed and a 0.6 percent decrease in
same-store average revenue per funeral service, including trust earnings. Cemetery revenue
increased $4.7 million to $52.3 million for the quarter ended January 31, 2010. This increase is
due primarily to a $1.8 million, or 9.8 percent, increase in cemetery property sales, net of
discounts, a $1.4 million increase in merchandise delivered and a $0.6 million increase in cemetery
trust related activities. Consolidated gross profit increased $2.1 million to $25.2 million
primarily due to a $1.2 million increase in cemetery gross profit and a $0.9 million increase in
funeral gross profit.
Corporate general and administrative expenses decreased $1.0 million to $6.5 million for the
quarter ended January 31, 2010 largely due to a decrease in information technology costs and a
decrease in training costs related to our implementation of a new business system in the prior
year. Interest expense decreased $0.9 million to $6.5 million during the first quarter of 2010
primarily due to the significant fiscal year 2009 repurchases of our senior convertible notes in
the open market that occurred during the last nine months of fiscal year 2009. The effective tax
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rate for the three months ended January 31, 2010 was 39.5 percent compared to 41.2 percent for
the same period in 2009. We recorded a tax valuation allowance of $0.2 million for the three
months ended January 31, 2010, compared to a $0.3 million tax valuation allowance for the same
period in 2009. The tax valuation allowance increased income tax expense for both periods by the
respective amounts. The tax rate for both the current and prior quarter would have been
approximately 37 percent without the tax valuation allowance.
For the first quarter of 2010, preneed cemetery property sales, net of discounts, increased
9.8 percent compared to the same period of last year, which increased our cemetery revenue as
described above. Our net preneed funeral sales decreased 3.3 percent during the first quarter of
2010 compared to the first quarter of 2009. Preneed funeral sales are deferred until a future
period and have no impact on current revenue.
During the first quarter of fiscal 2010, we experienced positive trends in the overall
financial markets and in our preneed and perpetual care trusts. Specifically, our preneed funeral
and cemetery merchandise and services trusts experienced a total return, including both realized
and unrealized losses, of 4.1 percent, and our cemetery perpetual care trusts experienced a total
return, including both realized and unrealized losses, of 5.0 percent.
As of January 31, 2010 and October 31, 2009, the fair market value of the investments in our
funeral and cemetery merchandise and services trusts were $177.8 million and $192.9 million,
respectively, lower than our cost basis. The preneed contracts we manage are long-term in nature,
and we believe that the trust investments will appreciate in value over the long-term. We continue
to monitor our investment portfolio closely. As of January 31, 2010 and October 31, 2009, we had
$218.5 million and $220.7 million, respectively, in distributable earnings that have been realized
and allocated to contracts that will be recognized in the future as the underlying contracts are
performed.
In our cemetery perpetual care trusts, as of January 31, 2010 and October 31, 2009, the fair
market value of our investments were $51.6 million and $56.7 million, respectively, lower than our
cost basis. See Note 5 to the condensed consolidated financial statements for further information
on the estimated probable funding obligation.
The sectors in which our trust investment portfolio is invested have not materially changed
from that disclosed in our 2009 Form 10-K.
Each quarter we perform an analysis to determine whether our preneed contracts are in a loss
position, which would necessitate a charge to earnings. When we review our backlog for potential
loss contracts, we consider the impact of the market value of our trust assets. We look at
unrealized gains and losses based on current market prices quoted for the investments, but we do
not include anticipated future returns on the investments in our analysis. If a deficiency were to
exist, we would record a charge to earnings and a corresponding liability for the expected loss on
the delivery of those contracts in our backlog. Due to the positive margins of our preneed
contracts and the trust portfolio returns we have experienced in prior years and deferred on our
consolidated balance sheet until delivery, currently there is capacity for additional market
depreciation before a contract loss would result.
For additional information regarding our preneed funeral and cemetery merchandise and services
trusts and our cemetery perpetual care trusts, see Notes 3, 4 and 5 to the condensed consolidated
financial statements included in this report.
The following table presents our trust portfolio returns including realized and unrealized
gains and losses.
Funeral and Cemetery | ||||||||
Merchandise and | Cemetery Perpetual | |||||||
Services Trusts | Care Trusts | |||||||
For the quarter ended January 31, 2010 |
4.1 | % | 5.0 | % | ||||
For the last twelve months ended January 31, 2010 |
28.8 | % | 32.8 | % | ||||
For the last five years ended January 31, 2010 |
(1.3 | )% | 2.1 | % | ||||
For the last ten years ended January 31, 2010 |
1.9 | % | 2.7 | % |
Our operations provided cash of $2.8 million for the three months ended January 31, 2010,
compared to $7.3 million for the corresponding period in 2009. The decrease in the current
quarters operating cash flow is
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largely due to an increase in working capital, partly driven by a $4.6 million increase in
receivables due in part to the improved cemetery property sales during the quarter, which are
typically financed. Due to the timing of our insurance, property tax and other annual payments
made on or around calendar year end, we have historically had negative to slightly positive cash
flow in the first quarter while generating greater amounts of cash in later quarters.
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 managements most difficult, subjective and complex judgment.
These critical accounting policies are discussed in MD&A in our 2009 Form 10-K. There have been
no significant changes to our critical accounting policies since the filing of our 2009 Form 10-K.
Results of Operations
Effective as of the second quarter of fiscal year 2009, we have three operating and reportable
segments consisting of a funeral segment, cemetery segment and a corporate trust management
segment. For a discussion of our segments, see Note 9 to the condensed consolidated financial
statements included herein. Prior period data has been retrospectively adjusted to conform to the
new segment presentation. As there have been no material acquisitions or construction of new
locations in fiscal years 2010 and 2009, results essentially reflect those of same-store locations.
Three Months Ended January 31, 2010 Compared to Three Months Ended January 31, 2009
Funeral Operations
Three Months Ended January 31, | ||||||||||||
Increase | ||||||||||||
2010 | 2009 | (Decrease) | ||||||||||
(In millions) | ||||||||||||
Funeral Revenue: |
||||||||||||
Funeral Home Locations |
$ | 68.0 | $ | 68.1 | $ | (.1 | ) | |||||
Corporate Trust Management (1) |
4.1 | 3.6 | .5 | |||||||||
Total Funeral Revenue |
$ | 72.1 | $ | 71.7 | $ | .4 | ||||||
Funeral Costs: |
||||||||||||
Funeral Home Locations |
$ | 52.6 | $ | 53.2 | $ | (.6 | ) | |||||
Corporate Trust Management (1) |
.3 | .2 | .1 | |||||||||
Total Funeral Costs |
$ | 52.9 | $ | 53.4 | $ | (.5 | ) | |||||
Funeral Gross Profit: |
||||||||||||
Funeral Home Locations |
$ | 15.4 | $ | 14.9 | $ | .5 | ||||||
Corporate Trust Management (1) |
3.8 | 3.4 | .4 | |||||||||
Total Funeral Gross Profit |
$ | 19.2 | $ | 18.3 | $ | .9 | ||||||
Same-Store Analysis for the Three Months Ended January 31, 2010 and 2009
Change in Average Revenue | Change in Same-Store | |||||||||||
Per Funeral Service | Funeral Services | Same-Store Cremation Rate | ||||||||||
2010 | 2009 | |||||||||||
(.6)% (1)
|
(1.3 | )% | 41.4 | % | 40.3 | % |
(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 |
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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 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended January 31, 2010 and 2009 were $1.1 million and $0.9 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended January 31, 2010 and 2009 were $3.0 million and $2.7 million, respectively. |
Funeral revenue increased $0.4 million, or 0.6 percent, from $71.7 million in the first
quarter of 2009 to $72.1 million in the first quarter of 2010. The increase in funeral revenue is
primarily due to a $0.5 million increase in funeral trust related activities. During the first
quarter of 2010, our same-store funeral operations experienced a decrease in average revenue per
traditional funeral service of 0.8 percent, partially offset by an increase in average revenue per
cremation service of 1.3 percent. These averages were affected by a shift in mix to lower priced
funeral services during the quarter. These averages were also impacted by a quarter-over-quarter increase in funeral trust earnings resulting in an overall
decrease in the same-store average revenue per funeral service of 0.6 percent. Same-store funeral
services decreased 1.3 percent, or 185 events, or less than one event per funeral home. The
cremation rate for our same-store operations was 41.4 percent for the first quarter of 2010
compared to 40.3 percent for the first quarter of 2009.
Funeral gross profit increased $0.9 million, or 4.9 percent, to $19.2 million for the first
quarter of 2010 compared to $18.3 million for the same period of 2009, primarily due to the
increase in revenue, as noted above, coupled with a reduction in expenses due to effective cost
management.
Cemetery Operations
Three Months Ended January 31, | ||||||||||||
Increase | ||||||||||||
2010 | 2009 | (Decrease) | ||||||||||
(In millions) | ||||||||||||
Cemetery Revenue: |
||||||||||||
Cemetery Locations |
$ | 50.5 | $ | 45.7 | $ | 4.8 | ||||||
Corporate Trust Management (1) |
1.8 | 1.9 | (.1 | ) | ||||||||
Total Cemetery Revenue |
$ | 52.3 | $ | 47.6 | $ | 4.7 | ||||||
Cemetery Costs: |
||||||||||||
Cemetery Locations |
$ | 46.1 | $ | 42.5 | $ | 3.6 | ||||||
Corporate Trust Management (1) |
.2 | .3 | (.1 | ) | ||||||||
Total Cemetery Costs |
$ | 46.3 | $ | 42.8 | $ | 3.5 | ||||||
Cemetery Gross Profit: |
||||||||||||
Cemetery Locations |
$ | 4.4 | $ | 3.2 | $ | 1.2 | ||||||
Corporate Trust Management (1) |
1.6 | 1.6 | | |||||||||
Total Cemetery Gross Profit |
$ | 6.0 | $ | 4.8 | $ | 1.2 | ||||||
(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 |
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regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $1.2 million and $1.0 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $0.6 million and $0.9 million, respectively. Perpetual care trust earnings of $2.4 million and $1.7 million, respectively, 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 $4.7 million, or 9.9 percent, from $47.6 million for the quarter
ended January 31, 2009 to $52.3 million for the quarter ended January 31, 2010. This increase is
due primarily to a $1.8 million, or 9.8 percent, increase in cemetery property sales, net of
discounts, a $1.4 million increase in merchandise delivered and a $0.6 million increase in revenue
related to trust activities, of which $0.7 million of the increase relates to cemetery perpetual
care trust earnings.
Cemetery gross profit increased $1.2 million, or 25.0 percent, to $6.0 million for the first
quarter of 2010 compared to $4.8 million for the same period of 2009. The increase in cemetery
gross profit is primarily due to the increase in cemetery revenue, as discussed above, partially
offset by an increase in property costs and selling costs resulting from the increase in cemetery
property sales.
Other
Corporate general and administrative expenses decreased $1.0 million to $6.5 million for the
quarter ended January 31, 2010 largely due to a decrease in information technology costs and a
decrease in training costs related to our implementation of a new business system in the prior
year.
Interest expense decreased $0.9 million to $6.5 million during the first quarter of fiscal
year 2010 primarily due to the significant fiscal year 2009 repurchases of a portion of our senior
convertible notes in the open market that occurred during the last nine months of fiscal year 2009.
The effective tax rate for the three months ended January 31, 2010 was 39.5 percent compared
to 41.2 percent for the same period in 2009. We recorded a tax valuation allowance of $0.2 million
for the three months ended January 31, 2010, compared to a $0.3 million tax valuation allowance for
the same period of 2009. The tax valuation allowance increased income tax expense for both periods
by the respective amounts. The tax rate for both the current and prior quarter would have been
approximately 37 percent without the tax valuation allowance.
Since January 31, 2009, we have repurchased $83.6 million aggregate principal amount of our
senior convertible notes in the open market, including repurchases of $1.0 million aggregate
principal amount during the first quarter of fiscal year 2010.
Cash and cash equivalents decreased $10.0 million from October 31, 2009 to January 31, 2010
primarily due to the purchase of $5.0 million in certificates of deposit and $4.3 million in
capital expenditure projects. Prepaid expenses increased $4.8 million from October 31, 2009 to
January 31, 2010 primarily due to annual premiums paid in the first quarter of fiscal year 2010 for
property, general liability and other insurance. Deferred income taxes decreased $3.5 million
primarily due to the utilization of net operating losses in the first quarter of 2010 and other
timing differences. Preneed funeral receivables and trust investments, preneed cemetery
receivables and trust investments, cemetery perpetual care trust investments, deferred preneed
funeral and cemetery receipts held in trust and perpetual care trusts corpus were all positively
impacted by the recent improvement in the market value of our trust assets. For additional
information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included
herein.
Accounts payable decreased $4.3 million from October 31, 2009 to January 31, 2010 primarily
due to the timing of payables related to professional fees and vendor payments. Accrued payroll
decreased $3.3 million from October 31, 2009 to January 31, 2010 due to fiscal year 2009 annual
bonuses paid in the first quarter of 2010 and due to the timing of the payroll period at quarter
end. Other current liabilities decreased $2.1 million from October
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31, 2009 to January 31, 2010 primarily due to a $2.5 million decline in accrued property
taxes, as 80 percent of our property taxes are paid in the months of December and January each
year.
Preneed Sales into the Backlog
Net preneed funeral sales decreased 3.3 percent during the first three months of fiscal year
2010 compared to the corresponding period in 2009.
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 $28.3
million in net preneed funeral and cemetery merchandise and service sales (including $16.3 million
related to insurance-funded preneed funeral contracts) during the three months ended January 31,
2010 to be recognized in the future as these prepaid products and services are delivered, compared
to net sales of $29.5 million (including $16.3 million related to insurance-funded preneed funeral
contracts) for the corresponding period in 2009. 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 trusted and cemetery
perpetual care trust earnings. Over the last five years, we have generated more than $50.0 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 $95.0 million senior secured
revolving credit facility will be sufficient to meet our cash requirements for the foreseeable
future, although we will need to refinance the senior secured revolving credit facility in 2012 and
long-term debt becoming due in 2013 through 2016, as described below.
As of January 31, 2010, we had no amounts drawn on the $95.0 million senior secured revolving
credit facility, and our availability under the senior secured revolving credit facility, after
giving consideration to $8.8 million outstanding letters of credit and the $24.8 million Florida
bond, was $61.4 million. We also have the ability to request the addition of a new tranche of term
loans, an increase in the commitments to the senior secured revolving credit facility or a
combination thereof not to exceed $30.0 million. Our $200.0 million senior notes mature on
February 15, 2013 and are currently redeemable at the redemption prices set forth in the indenture.
We also have $166.4 million in senior convertible notes as of January 31, 2010 of which $86.4
million mature in 2014 and $80.0 million mature in 2016. See the table below under Contractual
Obligations and Commercial Commitments for further information on our long-term debt obligations.
Beginning in the fourth quarter of fiscal year 2009, we increased our quarterly cash dividend
from two and one-half cents per share to three cents per share on our Class A and B common stock,
which amounted to $2.8 million for the three months ended January 31, 2010. 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. We also have a $75.0 million
stock repurchase program, of which $26.5 million remains available as of January 31, 2010.
Repurchases under the program are limited to our Class A common stock, and are made in the open
market or in privately negotiated transactions at such times and in such amounts as management
deems appropriate, depending upon market conditions and other factors. We have not made
open-market stock repurchases under the program since July 2008. During fiscal year 2009, we
repurchased $82.6 million aggregate principal amount of our senior convertible notes in the open
market at substantial discounts and repurchased an additional $1.0 million aggregate principal
amount during the first quarter of fiscal year 2010.
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 pay dividends, construct funeral homes on cemeteries
of unaffiliated third parties or in
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strategic locations, make acquisitions of or investments in death care or related businesses
and repurchase debt and stock are attractive options. We believe that growing our organization
through acquisitions and investments is a good business strategy, as it will enable us to enjoy the
important synergies and economies of scale from our existing infrastructure. We have also
redesigned our websites to support e-commerce initiatives that will provide new revenue
opportunities in the future and are continuing to invest in improving our business processes. 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 pursued several tax planning strategies in fiscal year 2009. We received IRS approval in
fiscal year 2010 on two pending requests for changes in tax accounting methods, which will result
in the deferral of approximately $70 million of taxable income. The combination of these two
changes will significantly reduce federal income tax cash payments (approximately $25 million) for
the next two to three years. We are continuing to review all of our tax accounting policies to
determine opportunities to improve our current tax position. Several possible changes are being
considered that could result in potential reductions in future tax payments. At this time, we
cannot predict with certainty what, if any, reductions in future tax payments we will obtain.
However, we currently do not expect that these potential reductions in future tax payments, if
obtained, will be as substantial as those obtained in fiscal year 2009 or to date in fiscal year
2010.
Cash Flow
Our operations provided cash of $2.8 million for the three months ended January 31, 2010,
compared to $7.3 million for the corresponding period in 2009. The decrease in the current
quarters operating cash flow is largely due to an increase in working capital, partly driven by a
$4.6 million increase in receivables due in part to the improved cemetery property sales during the
quarter, which are typically financed. Due to the timing of our insurance, property tax and other
annual payments made on or around calendar year end, we have historically had negative to slightly
positive cash flow in the first quarter while generating greater amounts of cash in later quarters.
Our investing activities resulted in a net cash outflow of $9.3 million for the three months
ended January 31, 2010, compared to a net cash outflow of $6.1 million for the comparable period in
2009. The change is primarily due to $5.0 million in purchases of certificates of deposit in the
first quarter of fiscal year 2010. For the three months ended January 31, 2010, capital
expenditures amounted to $4.3 million, which included $3.0 million for maintenance capital
expenditures, $1.2 million for growth initiatives and $0.1 million related to the implementation of
new business systems. For the three months ended January 31, 2009, capital expenditures were $4.8
million, which included $3.1 million for maintenance capital expenditures, $0.4 million for growth
initiatives, and $1.3 million related to the implementation of new business systems. We also
purchased a cemetery business in the first quarter of fiscal year 2009 resulting in a net cash
outflow of $1.6 million.
Our financing activities resulted in a net cash outflow of $3.5 million for the three months
ended January 31, 2010, compared to a net cash outflow of $2.2 million for the comparable period in
2009. The change is primarily due to $0.8 million in repayments of long-term debt during the first
quarter of 2010. Also, dividends in the first quarter of 2010 reflect the increased quarterly
dividend rate of $0.030 per share, from $0.025 per share, which went into effect in the fourth
quarter of fiscal year 2009.
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Contractual Obligations and Commercial Commitments
We have contractual obligations requiring future cash payments under existing contractual
arrangements. The following table details our known future cash payments (in millions) related to
various contractual obligations as of January 31, 2010.
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Contractual Obligations | Total | 1 year | 1 3 years | 3 5 years | 5 years | |||||||||||||||
Long-term debt obligations (1) |
$ | 366.5 | $ | | $ | | $ | 286.4 | $ | 80.1 | ||||||||||
Interest on long-term debt (2) |
73.5 | 17.9 | 35.8 | 15.7 | 4.1 | |||||||||||||||
Operating and capital lease obligations (3) |
29.9 | 3.4 | 6.0 | 3.8 | 16.7 | |||||||||||||||
Purchase obligations (4) |
2.7 | 2.7 | | | | |||||||||||||||
Non-competition and other agreements (5) |
1.4 | .3 | .5 | .2 | .4 | |||||||||||||||
$ | 474.0 | $ | 24.3 | $ | 42.3 | $ | 306.1 | $ | 101.3 | |||||||||||
(1) | See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of January 31, 2010. | |
(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 14 years, except for eight leases that expire between 2032 and 2039. Our future minimum lease payments for all operating leases as of January 31, 2010 are $3.4 million, $3.3 million, $2.7 million, $2.1 million, $1.7 million and $16.7 million for the years ending October 31, 2010, 2011, 2012, 2013, 2014 and later years, respectively. | |
(4) | Represents a construction contract for a funeral home. | |
(5) | This category includes payments pursuant to non-competition agreements with prior owners and key employees of acquired businesses and separation pay related to former executive officers. |
The following table details our known potential or possible future cash payments related to
the contingent obligations specified below (in millions) as of January 31, 2010.
Expiration by Period | ||||||||||||||||||||
Less than 1 | More than 5 | |||||||||||||||||||
Contingent Obligations | Total | year | 1 3 years | 3 5 years | years | |||||||||||||||
Cemetery perpetual
care trust funding
obligations
(1) |
$ | 13.6 | $ | 13.6 | $ | | $ | | $ | | ||||||||||
Long-term obligations
related to uncertain
tax positions
(2) |
3.6 | | | | 3.6 | |||||||||||||||
$ | 17.2 | $ | 13.6 | $ | | $ | | $ | 3.6 | |||||||||||
(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 realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. The estimated probable funding obligation in the cemetery perpetual care trusts in these states was $13.6 million as of January 31, 2010. As of January 31, 2010, we had unrealized losses of $44.8 million in the trusts in these states. 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 that additional funding obligations may exist with an estimated amount of approximately $3.1 million. | |
(2) | In accordance with the required accounting guidance on uncertain tax positions, as of January 31, 2010, we have recorded $3.6 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 |
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the range of increase and decrease and the timing thereof of any potential cash payments. |
As of January 31, 2010, our outstanding long-term debt balance was $366.5 million, consisting
of $86.4 million in 3.125 percent senior convertible notes due 2014, $80.0 million in 3.375 percent
senior convertible notes due 2016, $200.0 million of 6.25 percent senior notes and $0.1 million of
other debt. There were no amounts drawn on the senior secured revolving credit facility. The
following table reflects future scheduled principal payments and maturities of our long-term debt
(in millions) as of January 31, 2010.
Other, | |||||||||||||||||||
Senior | Principally | ||||||||||||||||||
Secured | Seller | ||||||||||||||||||
Revolving | Senior | Financing | |||||||||||||||||
Credit | Convertible | Senior | of Acquired | ||||||||||||||||
Fiscal Years Ending October 31, | Facility | Notes | Notes | Operations | Total | ||||||||||||||
2010
|
$ | | $ | | $ | | $ | | $ | | |||||||||
2011
|
| | | | | ||||||||||||||
2012
|
| | | | | ||||||||||||||
2013
|
| | 200.0 | | 200.0 | ||||||||||||||
2014
|
| 86.4 | | | 86.4 | ||||||||||||||
Thereafter
|
| 80.0 | | .1 | 80.1 | ||||||||||||||
Total long-term debt
|
$ | | $ | 166.4 | $ | 200.0 | $ | .1 | $ | 366.5 | |||||||||
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of January 31, 2010 consist of the following items:
(1) | the $24.8 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 20 to the consolidated financial statements in our 2009 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 2009 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
Annual Report on Form 10-K for the fiscal year ended October 31, 2009, filed with the Securities
and Exchange Commission (SEC) on December 17, 2009. There have been no material changes in the
Companys market risk from that disclosed in our Form 10-K for the fiscal year ended October 31,
2009. For a discussion of fair market value as of January 31, 2010 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 Companys management, including its Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure.
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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 Companys Disclosure Committee and
management, including the CEO and CFO, of the effectiveness of the Companys disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon this evaluation, the CEO and
CFO concluded that the Companys disclosure controls and procedures were effective as of the end of
the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Companys internal control over financial reporting during
the quarter ended January 31, 2010 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of our current litigation, see Note 7 to the condensed consolidated financial
statements included herein.
In addition to the matters in Note 7, we and certain of our subsidiaries are parties to a
number of other 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 2009
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
Total number of | Maximum | |||||||||||||||
shares | approximate dollar | |||||||||||||||
purchased as | value of shares that | |||||||||||||||
Total number | Average | part of publicly- | may yet be | |||||||||||||
of shares | price paid | announced plans | purchased under the | |||||||||||||
Period | purchased | per share | or programs | plans or programs(1) | ||||||||||||
November 1,
2009 through
November 30, 2009 |
| $ | | | $ | 26,495,706 | ||||||||||
December 1, 2009
through December
31, 2009 |
| $ | | | $ | 26,495,706 | ||||||||||
January 1, 2010
through January 31,
2010 |
| $ | | | $ | 26,495,706 | ||||||||||
Total |
| $ | | | $ | 26,495,706 | ||||||||||
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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 and June 2008, resulting in a $75.0 million 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 Companys Quarterly Report on Form 10-Q for the quarter ended April 30, 2008) | |
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 Companys 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 Companys 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 Companys Registration Statement on Form 8-A/A filed with the Commission on June 21, 2007) | |
4.3
|
Second Amended and Restated Credit Agreement dated June 2, 2009 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 Companys Current Report on Form 8-K filed June 3, 2009) | |
4.4
|
Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25 percent Senior Notes due 2013 (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed February 14, 2005) | |
4.5
|
Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed February 14, 2005) | |
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 Companys 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 Companys Current Report on Form 8-K filed June 27, 2007) | |
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer | |
32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer |
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
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 10, 2010 | /s/ THOMAS M. KITCHEN | |||
Thomas M. Kitchen | ||||
Senior Executive Vice President and Chief Financial Officer | ||||
March 10, 2010 | /s/ ANGELA M. LACOUR | |||
Angela M. Lacour | ||||
Vice President Corporate Controller Chief Accounting Officer |
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Exhibit Index
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer | |
32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer |
55