Preneed Funeral Activities

9 Months Ended

Jul. 31, 2011

Preneed Funeral Activities [Abstract]

(3) Preneed Funeral Activities

The Company maintains three types of trust and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. The activity of these trust and escrow accounts is detailed below and in Notes 4 and 5.

Preneed Funeral Receivables and Trust Investments

Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of July 31, 2011 and October 31, 2010 are as follows:


	July 31,			October 31,
	2011			2010
Trust assets	$	386,039		$	383,792
Receivables from customers		42,951			42,879

		428,990			426,671
Allowance for cancellations		(11,576	)		(11,753	)

Preneed funeral receivables and trust investments	$	417,414		$	414,918

The cost basis and market values associated with preneed funeral merchandise and services trust assets as of July 31, 2011 are detailed below.


	July 31, 2011
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	18,650	$	—	$	—		$	18,650
U.S. Government, agencies and municipalities		1,718		58		—			1,776
Corporate bonds		25,396		1,590		—			26,986
Preferred stocks		37,232		195		(2,234	)		35,193
Common stocks		226,684		2,404		(85,637	)		143,451
Mutual funds:
Equity		19,148		1,179		(1,294	)		19,033
Fixed income		100,439		1,485		(793	)		101,131
Commodity		9,484		1		(379	)		9,106
Real estate investment trusts		15,076		505		(26	)		15,555
Master limited partnerships		136		1		—			137
Insurance contracts and other long-term investments		13,822		55		—			13,877

Trust investments	$	467,785	$	7,473	$	(90,363	)	$	384,895

Market value as a percentage of cost										82.3	%

Accrued investment income									1,144

Trust assets								$	386,039

The cost basis and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2010 are detailed below.


	October 31, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	26,118	$	—	$	—		$	26,118
U.S. Government, agencies and municipalities		2,224		84		(1	)		2,307
Corporate bonds		44,077		2,887		(1	)		46,963
Preferred stocks		56,297		356		(2,220	)		54,433
Common stocks		234,946		925		(91,593	)		144,278
Mutual funds:
Equity		27,154		185		(2,936	)		24,403
Fixed income		53,444		1,718		(767	)		54,395
Commodity		13,572		1,968		—			15,540
Insurance contracts and other long-term investments		14,171		146		(98	)		14,219

Trust investments	$	472,003	$	8,269	$	(97,616	)	$	382,656

Market value as a percentage of cost										81.1	%

Accrued investment income									1,136

Trust assets								$	383,792

The estimated maturities and market values of debt securities included above are as follows:


	July 31, 2011
Due in one year or less	$	2,088
Due in one to five years		19,886
Due in five to ten years		6,771
Thereafter		17

	$	28,762

The Company is actively managing a covered call program on its equity securities within the preneed funeral merchandise and services trusts in order to provide an opportunity for additional income. As of July 31, 2011 and October 31, 2010, the Company had outstanding covered calls with a market value of $63 and $311, respectively. These covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended July 31, 2011 and 2010, the Company realized trust earnings of approximately $75 and $46, respectively, related to the covered call program. For the nine months ended July 31, 2011 and 2010, the Company realized trust losses of $152 and $207, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as other funeral merchandise and services trust earnings and losses and flow through funeral revenue in the condensed consolidated statements of earnings as the underlying contracts are delivered. Although the Company realized losses associated with the covered call program for the nine months ended July 31, 2011 and 2010, it continues to hold the underlying securities against which these covered calls were issued. These underlying securities appreciated in value by $1,983 and $3,739 for the nine months ended July 31, 2011 and 2010, respectively.

Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stocks and mutual funds.

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

The Company’s Level 3 investments include insurance contracts and partnership investments purchased within the trusts. The valuation of insurance contracts and partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the insurance contracts is based upon the current face value of the contracts according to the respective insurance companies which is deemed to approximate fair market value. The fair market value of the partnership investments was determined by using their most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

The inputs into the fair value of the Company’s preneed funeral merchandise and services trust investments are categorized as follows:


			Significant
	Quoted Market		Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—July 31, 2011	$	314,664	$	63,955	$	6,276	$	384,895
Trust investments—October 31, 2010	$	272,173	$	103,703	$	6,780	$	382,656

In connection with its revised investment policy, during the nine months ended July 31, 2011, the Company sold several Level 2 investments including corporate bonds and preferred stocks and increased its holdings in several Level 1 investments such as highly diversified mutual funds invested in fixed income securities and real estate investment trusts.

The change in the Company’s preneed funeral merchandise and services trust investments with significant unobservable inputs (Level 3) is as follows:


	Three Months Ended July 31,						Nine Months Ended July 31,
	2011			2010			2011			2010
Fair market value, beginning balance	$	6,129		$	7,878		$	6,780		$	8,662
Total unrealized losses included in other comprehensive income ⁽¹⁾		(590	)		(130	)		(590	)		(1,060	)
Distributions and other, net		737			55			86			201

Fair market value, ending balance	$	6,276		$	7,803		$	6,276		$	7,803


⁽¹⁾		All gains (losses) recognized in other comprehensive income for funeral trust investments are attributable to the Company’s preneed customers and are offset by a corresponding increase (decrease) in deferred preneed funeral receipts held in trust.

Activity related to preneed funeral trust investments is as follows:


	Three Months Ended July 31,						Nine Months Ended July 31,
	2011			2010			2011			2010
Purchases	$	45,026		$	12,117		$	117,074		$	27,675
Sales		48,397			8,609			119,026			31,037
Realized gains from sales of investments		3,058			260			7,467			1,697
Realized losses from sales of investments and other		(1,335	)		(3,729	)		(2,015	)		(4,783	)
Interest income, dividends and other ordinary income		3,107			2,851			9,920			7,738
Deposits ⁽¹⁾		5,770			6,404			15,800			20,009
Withdrawals ⁽¹⁾		10,017			10,187			32,332			32,234


⁽¹⁾		The Company historically sold a significant portion of its preneed funeral sales through trust. Over time, the mix has shifted to a more significant portion being sold through insurance, particularly in states where the trusting requirements are high.

The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2011 and October 31, 2010.


	July 31, 2011
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Preferred stocks	$	—	$	—		$	22,785	$	(2,234	)	$	22,785	$	(2,234	)
Common stocks		665		(54	)		128,155		(85,583	)		128,820		(85,637	)
Mutual funds:
Equity		—		—			8,208		(1,294	)		8,208		(1,294	)
Fixed income		19,874		(60	)		13,688		(733	)		33,562		(793	)
Commodity		9,072		(379	)		—		—			9,072		(379	)
Real estate investment trusts		2,279		(26	)		—		—			2,279		(26	)

Total	$	31,890	$	(519	)	$	172,836	$	(89,844	)	$	204,726	$	(90,363	)


	October 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		896			(1	)		—		—			896		(1	)
Preferred stocks		49			(1	)		35,205		(2,219	)		35,254		(2,220	)
Common stocks		(17	)		(136	)		136,483		(91,457	)		136,466		(91,593	)
Mutual funds:
Equity		—			—			20,298		(2,936	)		20,298		(2,936	)
Fixed income		3,575			(3	)		4,550		(764	)		8,125		(767	)
Insurance contracts and other long-term investments		—			—			—		(98	)		—		(98	)

Total	$	4,503		$	(141	)	$	196,557	$	(97,475	)	$	201,060	$	(97,616	)

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, concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at July 31, 2011, 95 percent, or $85,637, were generated by investments in common stock. Most of the common stock investments are part of the S&P 500 Index. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes these investments will recover in value and that it has sufficient liquidity from cash and cash equivalents within the trusts, 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 Company’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements for distributable income. In substantially all of the Company’s trusts, trust earnings, which include 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 individual contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original contract sales price when the underlying service or merchandise is actually performed or delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

Cash flows from preneed funeral contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.