Carriage Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Carriage operated 186 funeral homes in 29 states and 32 cemeteries in 11 states. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $77.5m | $67.8m | $155.0m | $136.8m |
| Gross profit | $25.2m | $19.3m | $48.3m | $40.9m |
| Gross margin | 32.5% | 28.4% | 31.2% | 29.8% |
| Operating income | $18.3m | $13.2m | $20.4m | $28.8m |
| Net income | $6.4m | $4.9m | $2.2m | $11.4m |
| Diluted EPS | $0.36 | $0.27 | $0.12 | $0.63 |
| Operating cash flow | Not separately reported for the quarter | $31.0m | $21.9m |
Q2 revenue rose 14.4% and net income rose 31.6% year over year. First-half revenue increased 13.3%, but net income fell primarily because of $14.7m of goodwill and tradename impairments recorded in Q1 and higher interest expense. First-half operating income also includes those impairments; excluding the non-cash charge, management said operating income increased $6.3m. Adjusted net income, a non-GAAP measure, was $8.0m versus $5.7m in Q2 and $14.1m versus $12.5m for the first half.
Q2 total funeral contracts increased 25.3%, primarily reflecting acquisitions, while average revenue per funeral contract declined 11.7%. Preneed cemetery interment rights sold increased 13.7% overall, with the average price up 9.0%; same-store cemetery preneed rights sold declined 13.1%. Q2 operating profit margin, a company-defined non-GAAP measure, was 42.9%, versus 40.0% a year earlier. Same-store cemetery performance weakened: Q2 operating profit decreased $1.1m and its margin fell 4.9 percentage points to 31.4%.
Cash, debt and liquidity
- Cash and cash equivalents were $0.7m at June 30, 2020, essentially unchanged from year-end. First-half operating cash flow of $31.0m was more than offset by $33.7m of investing outflows, including acquisition spending, and other financing activity; cash ended the period at $0.692m.
- Credit-facility borrowings were $89.7m, up from $83.8m at December 31, 2019. The $190m revolving facility matures May 2023. The company also had $400m principal of 6.625% senior notes due 2026, $6.3m principal of 2.75% convertible notes due March 2021, and $6.4m of acquisition debt. Lease liabilities totaled $28.6m.
- Interest expense increased to $8.4m in Q2 from $6.3m and to $16.8m in the first half from $12.6m, principally due to additional senior notes issued in December 2019 and increased credit-facility borrowings.
- Carriage received a waiver for noncompliance with its total leverage covenant at March 31, 2020; the amendment increased applicable borrowing margins by up to 0.625%. The company reported compliance with all stated credit-facility financial covenants at June 30.
- Management said it expected available and anticipated cash resources to meet working capital, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months. It also noted that trust investments are restricted for preneed and cemetery-care obligations and are not equivalent to unrestricted cash.
Material changes, outlook and risks
- COVID-19 restrictions limited gatherings and memorial services, reduced funeral contract averages as the burial mix declined and cremation share increased, and constrained cemetery preneed sales in some markets. The company reported the effects on Q2 and year-to-date results as not material overall, while noting that impacts remained uncertain.
- Acquisitions drove a significant portion of revenue growth: Carriage acquired a funeral-home and cemetery combination in Lafayette, California, for $33.0m in January 2020. Q2 and first-half acquired-business contributions also reflected 2019 acquisitions.
- Management said it would tightly manage discretionary spending, including growth capital expenditures, during the rest of 2020. It expected increased divestiture activity over the following 12–18 months, with approximately $15m of additional cash proceeds. Two post-quarter sales were disclosed: one Florida funeral home for $0.8m and two Colorado funeral homes for $3.2m.
- The annual dividend was increased by $0.05 to $0.35 per share, beginning with the next declaration in Q3. No shares were repurchased in the first half; approximately $25.6m remained available under the repurchase program.
- Trust investments had $10.8m of net unrealized losses at June 30, equal to 4% of original cost. Management said it did not intend, and was unlikely to be required, to sell the securities before anticipated recovery. A 100-basis-point change in credit-facility borrowing rates would change pretax income by approximately $0.9m, assuming borrowings stayed constant.
- Other disclosed items include a $2.9m reserve for uncertain tax benefits related to CARES Act loss carrybacks and pending accounting-method changes, and $0.8m of reported natural-disaster and pandemic costs in the first half within the non-GAAP reconciliation. The company stated that the ultimate COVID-19 impact could not be reasonably estimated.
Important facts for investors to verify
- Whether funeral contract averages and cemetery preneed sales recover as gathering restrictions ease, and how much reported growth reflects acquisitions rather than same-store operations.
- Progress on leverage and covenant headroom, the March covenant waiver terms, and the company’s ability to address the $6.3m convertible notes due in March 2021.
- Cash conversion and unrestricted liquidity, including the effects of acquisition spending, planned divestitures, dividends and reduced growth capital expenditures.
- Assumptions supporting the Q1 impairment charges, the August 2020 annual impairment testing, and the collectability of receivables amid COVID-related credit-loss increases.
- Actual CARES Act tax refunds or credits, the resolution of the $2.9m uncertain-tax-benefit reserve, and any further changes in trust investment values or required funding.