Business context and reporting period
Carriage Services, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company operates funeral homes and cemeteries in the United States; at quarter-end it had 169 funeral homes in 27 states and 32 cemeteries in 11 states. Figures below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $61.9 | $59.3 | $125.2 | $122.5 |
| Gross profit | $18.8 | $18.2 | $40.1 | $40.5 |
| Operating income | $12.6 | $11.0 | $24.2 | $25.5 |
| Net income | $5.2 | $4.6 | $9.8 | $11.0 |
| Diluted EPS | $0.30 | $0.24 | $0.57 | $0.57 |
| Cash from operations | Not separately provided for the quarter | $24.5 | $28.3 |
Gross margin was approximately 30.4% in Q2 2016 versus 30.8% a year earlier, and 32.0% for the first half versus 33.0%. Operating margin was approximately 20.4% versus 18.6% in Q2, and 19.4% versus 20.8% for the first half.
At June 30, cash was $0.9; current assets were $28.7 and current liabilities $38.0. Total assets were $842.8 and total liabilities $674.2. The company reported $215.2 of principal in term-loan, revolver, acquisition debt and capital-lease obligations; separately, convertible notes had $143.75 principal outstanding (carrying value $117.4). Revolver borrowings were $60.0 of the $150.0 facility, and term-loan borrowings were $144.4. The credit facility’s weighted-average rate was 2.9% for Q2 and 2.8% for the first half.
Material changes versus the prior comparable period
- Q2 revenue increased 4.4%; management attributed the increase to higher funeral volume and average revenue, and increased cemetery sales and pricing. First-half revenue rose 2.2%.
- Q2 operating income rose 14.6%, helped by improved same-store funeral cost management, acquisition-related contract growth and cemetery revenue. First-half operating income fell 4.9%, as higher corporate costs, incentive compensation, depreciation and cemetery expenses outweighed revenue growth.
- First-half net income declined 11.0%; diluted EPS was unchanged. Higher interest expense, lower trust earnings and increased general and administrative expenses weighed on results. First-half operating cash flow declined $3.9 to $24.5, reflecting lower net income and unfavorable working-capital movements.
- Funeral revenue increased 4.4% in Q2 and 1.2% year to date. Same-store funeral revenue was down 1.5% for the first half, partly offset by growth in acquired operations. Cemetery revenue increased 4.3% in Q2 and 5.6% year to date, led by same-store operations.
- The company acquired two Houston funeral home businesses on May 31 for approximately $10.2, comprising $6.7 paid at closing and deferred purchase-price obligations. It also bought land and buildings at four previously leased funeral homes for approximately $6.3.
Outlook, management commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said it did not anticipate significant liquidity constraints in the foreseeable future and expected cash, operating cash flow and credit-facility borrowings to fund working capital, capital spending, debt service, dividends and acquisitions.
- The Board approved raising the quarterly dividend from $0.025 to $0.05 per share, effective for dividends payable September 1, 2016 and later. A $25.0 million share-repurchase authorization was approved; no shares were repurchased in the first half.
- The company amended its credit facility in February 2016, including extending maturity to no later than February 9, 2021 (subject to the subordinated-debt maturity condition), reducing the LIBOR-based rate by 37.5 basis points and resetting term-loan amortization. The amendment resulted in a $0.6 debt-extinguishment loss. The company was in compliance with covenants at quarter-end: leverage ratio 2.99 against a maximum 3.5, and fixed-charge coverage 2.46 against a minimum 1.20.
- Floating-rate exposure is material: management estimated a 100-basis-point borrowing-rate change would alter pretax income by approximately $2.0, assuming balances remained unchanged. The filing also identifies investment-market risk in preneed and perpetual-care trusts. Trust portfolios had substantial unrealized losses, which management considered temporary; it reported no underfunded preneed or perpetual-care trusts at June 30.
- Other notable first-half items included $1.8 of severance costs related to a former executive’s retirement, a $0.3 gain on sale of land, and the $0.6 debt-extinguishment loss. Management terminated an outsourced transaction-processing and accounting arrangement effective April 30 and said internal processing costs should be lower for the foreseeable future.
- Risks discussed include staffing and competition, death-rate and consumer-preference changes, preneed sales, trust investment performance, interest rates, financing access and cost, insurance-company financial condition, regulation, and execution of the company’s operating and acquisition strategies. The company reported ordinary-course legal proceedings and did not expect them to have a material adverse effect; it noted that insurance and self-insurance reserves may not cover every claim. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether first-half same-store funeral volume weakness persists and whether acquired-business growth and cemetery pricing can continue.
- How operating expenses, incentive compensation, severance and interest costs affect margins and earnings in subsequent quarters.
- Debt maturity, amortization, borrowing availability and covenant headroom, including the separate obligations under the 2021 convertible notes.
- Cash conversion and working-capital trends, particularly preneed receivables and collections, alongside acquisition and capital-spending requirements.
- Performance and valuation of trust investments, and whether any market losses or trust-funding obligations change from management’s quarter-end assessment.
- The effect of the dividend increase and any future repurchases on liquidity and leverage; the filing reports no repurchases through June 30, 2016.