Carriage Services, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Carriage operated 178 funeral homes in 29 states and 32 cemeteries in 11 states; funeral homes generated about 78% of revenue and cemeteries about 22%.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $63.8m | $63.9m | $137.2m | $132.0m |
| Gross profit | $16.8m | $18.7m | $41.0m | $41.8m |
| Operating income | $10.0m | $11.7m | $27.1m | $27.6m |
| Net income | $2.7m | $4.4m | $12.1m | $11.5m |
| Diluted EPS | $0.15 | $0.24 | $0.67 | $0.63 |
| Operating cash flow | Not separately presented | Not separately presented | $26.3m | $20.2m |
Gross margin was approximately 26.4% in Q2 versus 29.2% a year earlier, and 29.9% for the first half versus 31.6%. Six-month revenue increased 4.0%; Q2 revenue was essentially flat. The filing reports non-GAAP operating profit margin of 37.6% for Q2 and 40.3% for the first half, compared with 39.6% and 41.5%, respectively, in 2017.
At June 30, cash was $40.5m, current assets $68.2m and current liabilities $26.1m. Total assets were $945.6m and stockholders’ equity $240.0m. Cash increased by $39.6m during the first half, reflecting financing transactions. Capital expenditures were $5.1m, down from $8.8m.
Changes versus the prior comparable periods
- Q2 net income fell $1.7m; first-half net income rose $0.6m. Higher interest expense and weaker gross profit weighed on Q2 earnings; the lower effective tax rate supported the first-half comparison.
- Q2 funeral revenue declined 0.4%; cemetery revenue grew 1.3%. For the first half, funeral and cemetery revenue rose 4.1% and 3.6%, respectively.
- Management attributed lower gross profit primarily to higher health-care costs and higher costs at acquired businesses. Q2 same-store funeral revenue fell 4.8%, while same-store cemetery revenue increased 2.0%.
- The estimated effective tax rate before discrete items declined to 27.5% from 40.0%, primarily reflecting the federal tax-rate reduction under the Tax Cuts and Jobs Act.
Debt, liquidity and significant transactions
- In May, Carriage issued $325.0m of 6.625% senior notes due 2026 and used about $291.4m of net proceeds to repay and terminate its former credit facility. The notes’ June 30 carrying value was $318.8m.
- The company exchanged about $115.0m principal amount of 2.75% convertible notes for approximately $74.8m cash plus accrued interest and 2,822,859 new common shares. Approximately $28.8m principal amount of convertible notes remained outstanding.
- A new $150m secured revolving facility matures in 2023. There were no borrowings at June 30; availability was $148m after a $2m letter of credit. The facility includes a leverage limit of 5.50x and a minimum fixed-charge coverage ratio of 1.20x. Reported ratios were 5.03x and 1.93x, respectively; the company stated it was in compliance.
- Total debt was reported as approximately $360.3m, excluding debt issuance costs, discounts and capital leases. The refinancing increased fixed-rate debt and interest costs; first-half interest expense rose to $8.5m from $6.2m. Q2 included a $0.9m net loss on early extinguishment of debt.
- On July 10, 2018, after quarter-end, Carriage acquired two Virginia funeral-home businesses for $29.2m cash.
Outlook, risks and other items
- No specific revenue or earnings guidance is provided. Management said it expects existing and anticipated cash resources to meet foreseeable working-capital needs, capital expenditures, scheduled debt payments, dividends and acquisitions, while noting liquidity could be affected by weaker cash flow or financing access.
- Management expects acquired businesses’ margins to improve as they transition to its operating model. This is an expectation, not a quantified forecast.
- Principal disclosed risks include leverage and debt service, covenant headroom, variable-rate borrowing exposure, competition, changes in death rates and consumer preferences, staffing and health-care costs, acquisition execution, preneed sales, and investment performance of trust assets.
- Trust investments had unrealized losses, which management assessed as temporary; no trust investments were reported underfunded. The filing also describes ordinary-course legal proceedings and self-insurance; management did not expect known matters to materially adversely affect the financial statements.
- Carriage adopted ASC 606 on January 1, 2018. The company reported no material effect on revenue or earnings; the main balance-sheet changes included reclassification of certain preneed receivables and capitalization of eligible selling commissions.
Investor verification points
- Assess whether funeral volume, average revenue per contract and same-store funeral margins recover after Q2 weakness, and whether rising cremation rates affect revenue mix.
- Monitor covenant ratios against the 5.50x leverage ceiling and 1.20x fixed-charge coverage minimum, along with cash generation and interest expense.
- Verify the economics and integration progress of recent acquisitions, including the two Virginia businesses purchased after quarter-end, and whether acquired margins improve as management expects.
- Review the implications of the convertible-note exchange and new shares issued for dilution, and confirm remaining convertible principal and related conversion terms.
- Track preneed trust investment values, unrealized losses, funding obligations, and the sustainability of trust-related revenue.