Carriage Services, Inc. — Q2 2023 Form 10-Q
Business context and period. Quarterly report for the three and six months ended June 30, 2023; financial amounts below are in millions unless noted. Carriage operates funeral homes and cemeteries, with 172 funeral homes in 26 states and 32 cemeteries in 11 states at quarter-end. Funeral homes represent about 70% of revenue and cemeteries about 30%.
Financial results
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $97.7 | $90.6 | $193.2 | $188.8 |
| Gross profit | $31.2 | $27.7 | $62.3 | $62.2 |
| Operating income | $20.7 | $19.7 | $41.4 | $44.9 |
| Net income | $8.3 | $10.9 | $17.1 | $27.3 |
| Diluted EPS | $0.53 | $0.69 | $1.10 | $1.70 |
| Operating cash flow | — | — | $39.2 | $30.2 |
- Revenue increased 7.8% in Q2 and 2.3% in H1. Q2 gross margin was approximately 31.9% versus 30.6%; H1 gross margin was 32.2% versus 32.9%. Operating margin was approximately 21.2% in Q2 versus 21.8%, and 21.4% in H1 versus 23.8%.
- Q2 earnings declined despite higher revenue and gross profit, principally because interest expense rose $3.4 million, corporate G&A increased, and divestiture, disposal and insurance-related items were less favorable. H1 net income fell $10.2 million, with higher interest expense and lower funeral-home operating profit among the key factors.
- Funeral contract volume rose 3.9% in Q2 but declined 2.8% in H1; management attributed the H1 decline primarily to fewer COVID-19-related deaths. Cemetery revenue benefited from higher average preneed interment-right prices; H1 rights sold were approximately flat.
- H1 investing cash outflow was $49.9 million, including the $44.0 million acquisition and $9.0 million of capital expenditures. Cash declined to $1.0 million from $1.2 million at year-end. Dividends paid were $3.3 million; no program share repurchases were made in H1 2023.
Debt, liquidity and capital
- At June 30, cash was $1.0 million and revolving-credit borrowings were $204.0 million, up from $190.7 million at December 31, 2022. The $250 million facility had $43.7 million available; it matures May 2026. The company reported covenant compliance.
- Senior notes had $400 million principal, bear fixed interest at 4.25%, and mature in May 2029. Including facility and acquisition debt, funded debt was approximately $608 million at principal/carrying amounts; leases are additional. The senior notes’ reported fair value was $343.1 million.
- Credit-facility weighted average interest was 8.6% in Q2 and 8.3% in H1 2023, versus 2.9% and 2.5% in the comparable 2022 periods. Management estimated a 100-basis-point rate change on the unchanged facility balance would affect pretax income by about $2.0 million.
- Management stated it expected available resources and anticipated cash flows to cover working capital, capital spending, scheduled debt payments and dividends for the next 12 months. Its stated capital priorities include integration, debt repayment, dividends and internal growth investment.
Outlook, developments and risks
- The filing gives no numerical earnings or revenue guidance. Management expects inflationary and supplier cost pressures to continue through 2023; it cited higher labor, utilities, merchandise, insurance and borrowing costs. It had not observed a material consumer-spending impact to date.
- On June 29, the Board announced a review of strategic alternatives, potentially including a sale, merger or other transaction. There is no timetable or assurance that a transaction will occur. The filing warns the process may distract management, create costs, affect employees or operations, and increase share-price volatility.
- Leadership changed in June: Carlos Quezada became CEO, founder Melvin Payne became Executive Chairman, and Steven Metzger became President. The Board also elected Chad Fargason as a director.
- The March 2023 Bakersfield-area acquisition included three funeral homes, two cemeteries and a cremation-focused business for $44.0 million. Purchase accounting, including cemetery-property valuation, remained provisional at quarter-end.
- A $6.0 million vendor incentive received in May was recorded as deferred preneed funeral revenue, not current-period revenue. H1 operating cash flow also included $8.6 million withdrawn from realized gains and earnings on preneed trusts; these withdrawals were not recognized as revenue.
- Principal disclosed risks include strategic-review uncertainty, staffing and retention, competition and death-rate trends, inflation and interest rates, trust-investment performance, acquisition integration, debt service and access to financing, insurance and litigation exposure, and potential financial-services-sector disruption. Ordinary-course legal proceedings were not expected by the company to have a material adverse effect.
Important facts for investors to verify
- Whether the strategic-alternatives review results in a transaction, and any associated costs, timetable or effects on operations.
- How higher floating-rate borrowing costs and increased debt affect earnings, liquidity and covenant headroom.
- Whether funeral volumes, cemetery pricing and operating costs sustain the reported revenue and margin trends.
- The quality and persistence of H1 operating cash flow, separating trust withdrawals and the one-time vendor incentive from recurring cash generation.
- Final purchase-price allocation for the Bakersfield acquisition and subsequent integration performance.