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STEI > SEC Filings for STEI > Form 10-Q on 11-Mar-2013All Recent SEC Filings

Show all filings for STEWART ENTERPRISES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for STEWART ENTERPRISES INC


11-Mar-2013

Quarterly Report


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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our MD&A and Risk Factors contained in our Form 10-K for the fiscal year ended October 31, 2012 (the "2012 Form 10-K") and in conjunction with our consolidated financial statements included in this report and in our 2012 Form 10-K.

This report contains forward-looking statements that are generally identifiable through the use of words such as "believe," "expect," "intend," "plan," "estimate," "anticipate," "project," "will" and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Risk Factors included in Item 1A. in our 2012 Form 10-K and in this report. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

Overview

General

We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. As of January 31, 2013, we owned and operated 216 funeral homes and 141 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral, cremation and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings, finance charges on installment sales contracts and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see MD&A included in Item 7 in our 2012 Form 10-K.

Financial Summary

During the three months ended January 31, 2013, we generated the highest quarterly net earnings and earnings per share in more than 10 years. We reported net earnings and earnings from continuing operations of $15.5 million, or $.18 per share, for the first quarter of 2013. We reported net earnings of $8.5 million and earnings from continuing operations of $8.8 million, or $.10 per share, for the first quarter of 2012.

We believe these strong results demonstrate the power of leverage in our business and the importance of effectively managing our costs. For the first quarter of 2013, we achieved an 8.7 percent increase in revenue, a 27.2 percent increase in gross profit and an 80 percent increase in earnings per share. Total revenue increased 8.7 percent to $135.7 million for the first quarter of 2013, compared to $124.8 million for the same period of the prior year. Total gross profit increased 27.2 percent to $32.3 million for the first quarter of 2013, compared to $25.4 million for the prior year period.

We generated $78.1 million in funeral revenue during the first quarter of 2013, a $6.1 million, or 8.5 percent, increase from the first quarter of 2012. This increase is primarily attributable to an 8.4 percent increase in same-store funeral services performed. While we believe deaths in our markets increased period-over-period, our increase in funeral services is particularly strong compared to industry-wide data and is the third consecutive quarter of increased funeral services. Our same-store funeral operations generated a 1.2 percent increase in average revenue per traditional funeral service and a 1.4 percent increase in average revenue per cremation service. Overall same-store average revenue per funeral service was consistent with the first quarter of 2012, primarily as a result of a decrease in funeral trust earnings.


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Cemetery revenue improved $4.8 million, or 9.1 percent, to $57.6 million for the quarter ended January 31, 2013. The improvement is primarily a result of a $4.3 million increase in revenue recognized for cemetery property sales for which the down payment required for revenue recognition was received in the first quarter of 2013. In addition, merchandise delivered and services performed improved by $1.8 million, revenue related to trust activities increased by $1.4 million and revenue recognized for cemetery property sales for which construction was completed increased $1.3 million. These improvements were partially offset by a $3.2 million, or 13.6 percent, decrease in cemetery property sales compared to the first quarter of 2012 and a $0.5 million decline in finance charges as a result of reduced interest rates in this low interest rate environment.

Our net preneed funeral sales decreased 7.3 percent during the first quarter of 2013 compared to the first quarter of 2012. Preneed funeral sales are deferred until the underlying contracts are performed and have no impact on current revenue. For the first quarter of 2013, preneed cemetery property sales declined 13.6 percent compared to the same period of last year. As part of the integration of our operations and sales teams, we revised our structure and compensation packages, which affected cemetery property sales, as well as preneed funeral sales during the quarter. In addition, during the quarter we tightened our sales terms for cemetery property sales. We knew these changes would create challenges, particularly during the first quarter in light of declining consumer confidence, increases in payroll taxes and economic uncertainty. The decline in preneed production is isolated to six funeral homes and ten cemeteries. We firmly believe the current organization provides the foundation to improve our customer service and enhance sales production over time.

Cemetery gross profit increased $4.2 million, or 62.7 percent, to $10.9 million, and cemetery gross profit margin improved 620 basis points compared to the first quarter of 2012. Funeral gross profit increased $2.7 million, or 14.4 percent, to $21.4 million, and funeral gross profit margin improved 140 basis points compared to the first quarter of 2012. The increase in both cemetery and funeral gross profit is primarily due to the improvement in revenue, as previously noted.

During the first quarter of 2013, we repurchased 0.2 million shares of our Class A common stock for $1.8 million under our stock repurchase program. As of January 31, 2013, we had $14.6 million remaining under the $125.0 million program authorized by the Board of Directors.

The first quarter dividend historically declared in December and paid in January (both our first quarter) was declared in October 2012 (our fourth quarter) and paid in December 2012. We paid dividends of $.04 per share in the first quarter of 2013 compared to $.035 per share in the first quarter of 2012. The acceleration of the declaration and payment of the first quarter 2013 dividend resulted in no dividends being declared in the first quarter of 2013, although the dividend was paid in the first quarter of 2013.

Cash flow provided by operating activities for the first three months of 2013 was $11.9 million compared to $7.8 million for the same period of last year. The improvement in operating cash flow is primarily driven by the improvement in net earnings. In addition, we received $2.3 million in proceeds from the sale of undeveloped cemetery property during the first quarter of 2013. These increases were partially offset by a change in working capital during the first three months of 2013 partly driven by the timing of trust withdrawals and deposits.

We are planning to develop cremation gardens and other cremation projects in our cemeteries over the next few years. We have successfully completed 33 cremation projects, and we currently have 6 projects either under construction or expected to begin construction this fiscal year and approximately 24 additional projects currently under feasibility review. For the three months ended January 31, 2013, we have spent approximately $1.5 million in our cremation inventory development projects, compared to spending approximately $3 million during the first three months of fiscal year 2012. We are working to complete a number of these projects in fiscal year 2013 and expect to spend approximately $10 million to $15 million.

Supplemental Trust Portfolio Information

During the first quarter of fiscal year 2013, positive trends in the overall financial markets continued to benefit our preneed and perpetual care trusts. Specifically, our preneed funeral and cemetery merchandise and services trusts ("preneed trusts") experienced a three month total return, including both realized and unrealized gains and losses, of 4.5 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized gains and losses, of 3.8 percent. As of January 31, 2013, the fair market value of our preneed trusts and our cemetery perpetual care trusts was $881.8 million, an improvement of 3.0 percent, or $25.6 million, from October 31, 2012.


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As of January 31, 2013 and October 31, 2012, the fair market value of the investments in our preneed trusts were $53.1 million and $68.5 million, respectively, lower than our cost basis. In our cemetery perpetual care trusts, as of January 31, 2013 and October 31, 2012, the fair market value of the investments were $5.4 million and $14.6 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, 2013 and October 31, 2012, we had $191.4 million and $187.1 million, respectively, in trust earnings, net of losses that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.

As of February 28, 2013, the fair market value of our preneed trusts and our cemetery perpetual care trusts improved 0.4 percent, or approximately $3.9 million from January 31, 2013, which is consistent with the overall financial markets.

The sectors in which our trust investment portfolio is invested have not materially changed from that disclosed in our 2012 Form 10-K. The following table presents the material sectors in which our trust portfolio is invested and the percentage of each sector to the total trust portfolio as of January 31, 2013 (in millions):

                                            Preneed Trusts                        Cemetery Perpetual Care Trusts
                                   Fair Market          Percentage              Fair Market               Percentage
Sector                                Value            of Portfolio                Value                 of Portfolio
Cash and mutual funds             $       265.0                   43 %       $            133.4                     49 %
Financial Services                $        69.8                   11 %       $             41.1                     15 %
Information Technology            $        59.2                   10 %       $             14.5                      5 %
Healthcare Services               $        46.9                    8 %       $             17.9                      7 %

Issuer specific investments in the financial services sector represent $69.8 million of the fair market value of our preneed trust portfolio as of January 31, 2013, of which 57 percent related to investments in preferred stock, 33 percent related to common stock and 10 percent related to fixed-income securities. Issuer specific investments in the financial services sector represented $41.1 million of the fair market value of our cemetery perpetual care trust portfolio as of January 31, 2013, of which 64 percent related to investments in preferred stock, 21 percent related to fixed-income securities and 15 percent related to common stock.

Issuer specific investments in the information technology sector represent $59.2 million of the fair market value of our preneed trust portfolio as of January 31, 2013, of which 98 percent related to investments in common stock and 2 percent related to fixed-income securities. Issuer specific investments in the information technology sector represent $14.5 million of the fair market value of our cemetery perpetual care trust portfolio as of January 31, 2013, of which 92 percent related to investments in common stock and 8 percent related to fixed-income securities.

Issuer specific investments in the healthcare services sector represented $46.9 million of the fair market value of our preneed trust portfolio as of January 31, 2013, of which 98 percent related to investments in common stock and 2 percent related to fixed-income securities. Issuer specific investments in the healthcare services sector represented $17.9 million of the fair market value of our cemetery perpetual care trust portfolio as of January 31, 2013, of which 90 percent related to investments in common stock and 10 percent related to fixed-income securities.


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The following table presents the material sectors in which our trust portfolio currently has unrealized losses and the percentage of each sector to the total unrealized losses as of January 31, 2013 (in millions):

                                            Preneed Trusts                         Cemetery Perpetual Care Trusts
                                                       Percentage of                                     Percentage of
                                                           Total                                             Total
                                  Unrealized            Unrealized              Unrealized                Unrealized
Sector                              Losses                Losses                  Losses                    Losses
Information Technology           $       25.0                      34 %       $           6.4                        36 %
Healthcare Services              $        4.0                       5 %       $           1.2                         6 %

Each quarter we perform a separate analysis to determine whether our preneed contracts are in a loss position and whether a charge to earnings to record a liability for any expected loss is required. No charge has ever been required. For additional information, see Note 2(m) to the consolidated financial statements included in Item 8. and "Overview of Critical Accounting Policies" in the 2012 Form 10-K.

In states where we withdraw and recognize capital gains in our cemetery perpetual care trusts, if we realize subsequent net capital losses (i.e., losses in excess of capital gains in the trust) and the fair market value of the trust assets are less than the aggregate amounts required to be contributed to the trust, some states may require us to make cash deposits to the trusts or may require us to stop withdrawing earnings until future earnings restore the initial corpus. As of January 31, 2013 and October 31, 2012, we had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $12.0 million. During the first quarter of 2012, we increased the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust by $0.6 million. The additional funding in fiscal year 2012 was primarily related to the bankruptcy of Eastman Kodak.

For additional information regarding our preneed trusts and our cemetery perpetual care trusts, including further information on the estimated probable funding obligation, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in Item 1. herein.

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

                                                  Funeral and Cemetery
                                                     Merchandise and         Cemetery Perpetual
                                                   Services Trusts (1)         Care Trusts(1)
For the three months ended January 31, 2013                         4.5 %                    3.8 %
For the last three years ended January 31, 2013                    10.1 %                   10.6 %
For the last five years ended January 31, 2013                      4.1 %                    5.7 %

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

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2012 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2012 Form 10-K.

Results of Operations

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


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Three Months Ended January 31, 2013 Compared to Three Months Ended January 31, 2012

Funeral Operations



                                              Three Months Ended January 31,
                                        2013               2012             Increase
                                                       (In millions)
    Funeral Revenue:
    Funeral Home Locations           $     74.0       $          67.9       $     6.1
    Corporate Trust Management (1)          4.1                   4.1              -

    Total Funeral Revenue            $     78.1       $          72.0       $     6.1
    Funeral Costs:
    Funeral Home Locations           $     56.5       $          53.1       $     3.4
    Corporate Trust Management (1)           .2                    .2              -

    Total Funeral Costs              $     56.7       $          53.3       $     3.4

    Funeral Gross Profit:
    Funeral Home Locations           $     17.5       $          14.8       $     2.7
    Corporate Trust Management (1)          3.9                   3.9              -

    Total Funeral Gross Profit       $     21.4       $          18.7       $     2.7

Same-Store Analysis for the Three Months Ended January 31, 2013 and 2012

Change in Average Revenue Change in Same-Store Per Funeral Service Funeral Services Same-Store Cremation Rate 2013 2012 -% (1) 8.4% 42.2% 43.3%

(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 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, 2013 and 2012 were $1.5 million and $1.3 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended January 31, 2013 and 2012 were $2.6 million and $2.8 million, respectively.

We generated $78.1 million in funeral revenue during the first quarter of 2013, a $6.1 million, or 8.5 percent, increase from the first quarter of 2012. This increase is primarily attributable to an 8.4 percent increase, or 1,176 events, in same-store funeral services performed. While we believe deaths in our markets increased period-over-period, our increase in funeral services is particularly strong compared to industry-wide data and is the third consecutive quarter of increased funeral services. Our same-store funeral operations generated a 1.2 percent increase in average revenue per traditional funeral service and a 1.4 percent increase in average revenue per cremation service. Overall same-store average revenue per funeral service was consistent with the first quarter of 2012, primarily due to a decrease in funeral trust earnings.

Funeral gross profit increased $2.7 million, or 14.4 percent, to $21.4 million for the first quarter of 2013 compared to $18.7 million for the same period of 2012. Funeral gross profit margin improved 140 basis points to 27.4 percent for the first quarter of 2013 from 26.0 percent for the first quarter of 2012. The increase is primarily due to the $6.1 million improvement in revenue, as previously noted.


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Cemetery Operations



                                              Three Months Ended January 31,
                                        2013               2012             Increase
                                                       (In millions)
    Cemetery Revenue:
    Cemetery Locations               $     55.1       $          50.5       $     4.6
    Corporate Trust Management (1)          2.5                   2.3              .2

    Total Cemetery Revenue           $     57.6       $          52.8       $     4.8

    Cemetery Costs:
    Cemetery Locations               $     46.4       $          45.9       $      .5
    Corporate Trust Management (1)           .3                    .2              .1

    Total Cemetery Costs             $     46.7       $          46.1       $      .6

    Cemetery Gross Profit:
    Cemetery Locations               $      8.7       $           4.6       $     4.1
    Corporate Trust Management (1)          2.2                   2.1              .1

    Total Cemetery Gross Profit      $     10.9       $           6.7       $     4.2

(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 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, 2013 and 2012 were $1.7 million and $1.5 million, respectively, and cemetery trust earnings included in cemetery revenue for both the three months ended January 31, 2013 and 2012 were $0.8 million. Perpetual care trust earnings were $4.2 million and $3.0 million for the three months ended January 31, 2013 and 2012, respectively, and are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.

Cemetery revenue increased $4.8 million, or 9.1 percent, to $57.6 million for the first quarter of 2013. The improvement is primarily a result of a $4.3 million increase in revenue recognized for cemetery property sales for which the down payment required for revenue recognition was received in the first quarter of 2013. In addition, merchandise delivered and services performed improved by $1.8 million, revenue related to trust activities increased by $1.4 million and revenue recognized for cemetery property sales for which construction was completed increased by $1.3 million. These improvements were partially offset by a $0.5 million decline in finance charges as a result of reduced interest rates in this low interest rate environment. Our cemetery property sales declined $3.2 million, or 13.6 percent, compared to the first quarter of 2012. As part of the integration of our operations and sales teams, we revised our structure and compensation packages, which affected cemetery property sales. In addition, during the quarter we tightened our sales terms for cemetery property sales. We knew these changes would create challenges, particularly during the first quarter in light of declining consumer confidence, increases in payroll taxes and economic uncertainty. The decline in preneed production is isolated to ten cemeteries. We firmly believe the current organization provides the foundation to improve our customer service and enhance sales production over time.

Cemetery gross profit increased $4.2 million, or 62.7 percent, to $10.9 million for the first quarter of 2013. Cemetery gross profit margin improved 620 basis points to 18.9 percent for the first quarter of 2013 from 12.7 percent for the same period of 2012. The improvement is primarily due to the increase in cemetery revenue, as previously noted.


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Other

Corporate general and administrative expenses increased $0.7 million to $7.4 million for the first quarter of 2013, compared to $6.7 million for the same period of 2012. Due to the strong operating results for the first quarter of 2013, we increased our accrual for annual incentive compensation during the period.

Other operating income, net increased $0.7 million to $0.9 million, primarily due to the sale of undeveloped cemetery property during the first quarter of 2013.

The effective tax rate for continuing operations for the quarter ended January 31, 2013 was 24.9 percent compared to 34.0 percent for the same period . . .

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