CARRIAGE SERVICES INC quarterly report, Q3 FY2016

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Carriage Services, Inc. — Q3 2016 Form 10-Q

Business context and reporting period

Quarter ended September 30, 2016; comparisons are with the three and nine months ended September 30, 2015, unless noted. Carriage operated 169 funeral homes in 27 states and 32 cemeteries in 11 states. Funeral homes generated about 76% of revenue and cemeteries about 24%.

Financial performance

  • Q3 revenue: $60.1 million, up 3.0%. Funeral revenue was $45.2 million (+2.5%); cemetery revenue was $15.0 million (+4.7%).
  • Q3 profit: Gross profit was $18.2 million (30.3% margin), versus $17.4 million (29.7%). Operating income was $11.7 million (19.5% margin), up 9.7%. Net income was $5.7 million versus $4.4 million; diluted EPS was $0.33 versus $0.24.
  • Nine-month results: Revenue was $185.3 million, up 2.5%; gross profit was $58.3 million, up 0.9%; operating income was $36.0 million, down 0.6%; net income was $15.5 million, approximately flat. Diluted EPS rose to $0.91 from $0.82.
  • Cash flow: Nine-month operating cash flow was $34.3 million, down from $43.0 million. Investing cash outflow was $32.4 million; financing cash outflow was $1.6 million. Cash ended at $0.855 million.
  • Debt and liquidity: At September 30, cash was $0.9 million, current assets $29.2 million and current liabilities $38.8 million. Revolver borrowings were $63.3 million of a $150 million facility; term-loan borrowings were $141.6 million. The company reported $215.4 million of term, revolver, acquisition and capital-lease obligations, plus $143.75 million principal on 2.75% convertible notes due 2021. The credit facility’s weighted-average rate was 2.8%; covenant ratios were within limits (leverage 2.96x; fixed-charge coverage 2.40x).
  • Dividend: The quarterly dividend increased from $0.025 to $0.05 per share, effective for payments beginning September 2016.

Material changes and management commentary

  • Q3 operating income improved on better cost management in same-store funeral homes and growth in acquired funeral and cemetery operations. Same-store funeral revenue declined 0.8% for the quarter; same-store cemetery revenue grew 5.8%.
  • For the first nine months, revenue growth was led by acquired funeral homes and same-store cemetery operations. Same-store funeral revenue fell 1.2%, while same-store cemetery revenue rose 7.8%. Trust earnings declined in both segments.
  • Operating cash flow decreased $8.7 million year over year, primarily from unfavorable working-capital movements, including higher tax payments and increased preneed financed receivables.
  • Three funeral homes were acquired during the first nine months for a reported purchase price of $15.9 million, including deferred payments. On October 20, the company sold a Tennessee funeral home for about $1.35 million and Georgia real estate for about $0.6 million.
  • Management said it did not anticipate significant liquidity constraints in the foreseeable future, while noting that materially different operating cash flow or financing access and costs could adversely affect liquidity. No specific earnings or revenue guidance was provided.

Risks, contingencies, and unusual items

  • Q3 included $0.8 million of severance and retirement costs in the company’s non-GAAP reconciliation, including costs related to the retiring president and vice chairman, effective September 30. Nine-month severance and retirement costs were $2.6 million on that basis.
  • A $0.6 million loss was recorded on the February credit-facility amendment. A $0.145 million tradename impairment related to a funeral home held for sale was also recorded.
  • A $1.1 million tax benefit from state tax matters and the conclusion of an IRS audit reduced the nine-month effective tax rate to 35.2% from the estimated 40.0% rate before discrete items.
  • Floating-rate debt creates interest-rate exposure: management estimated that a 100-basis-point rate change would change pretax income by about $2.0 million, assuming balances remained unchanged. The company had no interest-rate hedges.
  • Other stated risks include competition, staffing, death-rate and consumer-preference changes, preneed sales, trust investment performance, regulation, and access to financing. The company reported ordinary-course legal proceedings not expected to have a material adverse effect; it self-insures certain risks.

Important facts for investors to verify

  • Whether funeral-volume, average-revenue-per-contract, and cemetery interment-right trends persist; quarterly funeral contract volume rose, but average funeral revenue per contract declined.
  • How working capital and preneed receivable collections affect operating cash flow and the company’s low cash balance.
  • Debt maturities, floating-rate exposure, covenant headroom, and available revolver capacity, including the relationship between the credit facility and 2021 convertible notes.
  • Whether acquisition returns and integration support growth without eroding margins, and the outcome of pending purchase-price valuations and asset sales.
  • The sustainability of earnings excluding discrete tax benefits and severance, and the investment performance and obligations associated with trust assets.