Business context and reporting period
Carriage Services, Inc. operates funeral homes and cemeteries in the United States. At September 30, 2018, it operated 182 funeral homes in 29 states and 29 cemeteries in 11 states. Funeral operations generated about 78% of revenue and cemetery operations about 22%. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $64.2m | $61.1m | $201.5m | $193.1m |
| Gross profit | $17.1m | $15.5m | $58.1m | $57.2m |
| Operating income | $10.3m | $8.9m | $37.4m | $36.5m |
| Net income | $2.2m | $3.0m | $14.3m | $14.5m |
| Diluted EPS | $0.11 | $0.17 | $0.78 | $0.81 |
| Operating cash flow | Not provided for the quarter | $38.7m | $30.8m |
Q3 revenue rose 5.1%; net income fell 27.6%. For the nine months, revenue rose 4.4% while net income declined 1.6%. GAAP gross margin was approximately 26.6% in Q3 (25.4% in 2017) and 28.9% for the nine months (29.6% in 2017). Interest expense increased to $6.3m in Q3 from $3.3m and to $14.8m for the nine months from $9.5m, primarily reflecting the new senior notes.
Cash and cash equivalents were $9.5m at September 30, versus $1.0m at year-end 2017. Nine-month investing cash outflow was $47.0m, including $38.0m for acquisitions and $9.0m of capital expenditures. Operating cash flow less capital expenditures was approximately $29.7m. These figures exclude trust assets held for preneed and perpetual-care obligations, which are not general-purpose cash.
The company reported approximately $360.3m of total debt, excluding debt discounts, issuance costs and capital leases. This includes $325.0m face value of senior notes, $28.8m principal of convertible notes, and $9.8m of acquisition debt. It had no revolver borrowings and reported $148.0m of availability under its $150m secured revolving facility after a $2.0m letter of credit. It reported covenant compliance: leverage ratio 4.86x against a 5.50x maximum and fixed-charge coverage 1.95x against a 1.20x minimum. Capital leases totaled about $6.5m.
Material changes versus the prior period
- Q3 revenue growth reflected a 5.1% increase in total funeral contracts and higher cemetery preneed interment-right sales and prices. Nine-month funeral contracts increased 5.2%, while average revenue per funeral contract decreased 0.7%.
- Same-store funeral revenue declined 3.4% in Q3 and 1.2% for the nine months; same-store funeral operating profit fell 10.3% and 5.7%, respectively. Management cited lower same-store volume, higher salaries and benefits (including health-care costs), and expense-management pressure.
- Cemetery same-store operating revenue rose 7.8% in Q3 and 6.3% for the nine months, supported by preneed sales and higher average interment-right prices. Nine-month cemetery results also benefited from revenue recognized on a completed garden.
- In May, Carriage issued $325m of 6.625% senior notes due 2026 and used proceeds to repay its former credit facility. It exchanged about $115m principal of 2.75% convertible notes for approximately $74.8m cash plus accrued interest and 2.82m shares, leaving about $28.8m principal outstanding. The refinancing increased reported interest expense.
- Carriage acquired four funeral-home businesses for approximately $38.0m during the first nine months. On September 30, it ceased operating three Florida cemetery businesses after a municipal management agreement expired.
- Dividends declared increased to $0.075 per share in each of the first three quarters of 2018, from $0.05 per quarter in 2017.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management said it did not anticipate significant liquidity constraints in the foreseeable future and believed cash resources and expected cash flows would cover working capital, capital spending, scheduled debt payments, dividends and acquisitions. It also cautioned that changed acquisition or capital-spending plans, weaker cash flow, or reduced access to or higher-cost financing could adversely affect liquidity.
Reported results included a $0.9m net loss on early extinguishment of debt for the nine months and an approximately $0.35m loss associated with the expired cemetery management agreement. The company adopted Topic 606 on January 1, 2018; it said the effect on revenue accounting was not material, though it capitalized certain preneed selling commissions and recorded an approximately $2.1m cumulative increase to opening retained earnings. The filing reports no goodwill or intangible-asset impairment.
Key risks include the ability to recruit and retain skilled personnel, execute acquisitions and growth plans, competition, changes in death rates and consumer preferences, preneed sales, trust investment performance, interest-rate changes, and the company’s leverage and debt-service needs. The company reported ordinary-course legal matters and did not expect them to have a material adverse effect, while noting that self-insurance reserves and insurance may not cover all claims. The business is seasonal, with death rates generally higher in winter.
After quarter-end, COO Mark R. Bruce resigned effective November 1, 2018. His separation agreement provides for 18 months of base-salary continuation and potentially up to 18 months of continued health coverage.
Important facts for investors to verify
- Whether same-store funeral volume, revenue, and margins recover, given continued pressure from lower volume and higher labor and benefit costs.
- Acquisition performance and integration, including the returns expected from the approximately $38.0m of 2018 funeral-home purchases.
- Debt-service capacity, covenant headroom, and the effect of the 6.625% notes and remaining convertible notes on interest expense and cash flows.
- Performance and restrictions of preneed and perpetual-care trust assets, including exposure to market and interest-rate movements.
- Financial and operating effects of the expired Florida cemetery agreement and the COO transition.
- The senior-notes maturity date: the filing’s notes state June 1, 2026, while its MD&A states September 1, 2026; confirm against the governing indenture.