Carriage Services, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Carriage operates funeral homes (about 77% of revenue) and cemeteries (about 23%); at year-end it operated 167 funeral homes in 27 states and 32 cemeteries in 11 states.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $242.5 million | $226.1 million | +7.2% |
| Gross profit | $77.5 million | $70.0 million | +10.7% |
| Gross margin | 32.0% | 31.0% | +1.0 percentage point |
| Operating income | $48.6 million | $39.7 million | +22.5% |
| Net income from continuing operations | $20.9 million | $15.4 million | +35.0% |
| Diluted EPS from continuing operations | $1.12 | $0.83 | +$0.29 |
| Cash from operating activities | $49.9 million | $36.6 million | +$13.3 million |
- FY 2015 funeral revenue was $185.8 million (+7.0%); cemetery revenue was $56.7 million (+8.2%). Same-store funeral revenue rose 3.3%, and same-store cemetery revenue rose 5.0%.
- Fourth-quarter 2015 revenue was $61.6 million, gross profit $19.7 million, and continuing-operations net income $5.4 million. Fourth-quarter diluted EPS was $0.31, versus $0.29 in Q4 2014.
- Operating cash flow increased, with management citing working-capital benefits, including income taxes payable, accounts payable and incentive accruals, and receivable collections. Cash was $0.5 million at year-end; working capital was negative $3.5 million.
- At December 31, senior debt and capital lease/acquisition obligations totaled about $211.6 million, including $92.6 million drawn on the revolving facility and $110.9 million on the term loan. The $143.75 million face amount of 2.75% convertible subordinated notes is additional debt. The notes mature in 2021.
- Credit-facility leverage was 2.97x and fixed-charge coverage was 2.79x; the company reported compliance with covenants. The revolving facility was $200 million at year-end. A February 2016 amendment subsequently reduced the revolver to $150 million, increased the funded term loan to $150 million, reduced the LIBOR-based rate by 0.375 percentage point, and extended maturity, subject to specified terms.
- Capital expenditures were $29.7 million (including $20.0 million of growth spending); dividends paid were $1.8 million. The company repurchased 1.93 million shares for $45.0 million, averaging $23.34 per share.
Material changes versus the prior year
- Revenue growth reflected higher funeral contract volume and cemetery preneed property sales, the full-year contribution of businesses acquired in 2014, two 2015 funeral-home acquisitions, and three newly constructed funeral homes. The two 2015 acquisitions cost approximately $15.0 million in aggregate.
- Funeral same-store contract volume increased 0.9% and average revenue per contract increased 2.1%. The company-wide cremation share rose to 48.9% from 47.3%; same-store cremation share reached 50.9%.
- Preneed funeral contracts sold rose to 7,797 from 6,940; the funeral preneed backlog increased to 84,353 contracts. Cemetery preneed sales increased 13.3%, while cemetery preneed backlog edged down to 63,178 from 63,322.
- General and administrative expense, as presented in the income statement, declined to $27.1 million from $28.9 million. Higher field incentive compensation reflected improved performance and margins.
- Net income benefited from higher operating income and the absence of 2014 debt-extinguishment and redemption losses. The 2014 tax provision also included a $1.7 million benefit from resolution of an IRS examination; the 2015 effective tax rate was 39.7%.
- Trust investment returns were negative in 2015: -2.2% for preneed funeral trusts, -3.0% for preneed cemetery trusts, and -3.3% for perpetual-care trusts. The company reported no required loss charge for anticipated delivery obligations, but recorded $1.8 million in impairment charges for other-than-temporary declines in certain investments.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management said cash, operating cash flow, and credit availability were expected to fund anticipated working capital, capital spending, debt service, commitments, dividends, and acquisitions for the foreseeable future, while noting that changed investment plans or weaker cash flows or financing access could affect liquidity.
- Management intends to continue selective acquisitions and internal growth projects and stated an intention to pay dividends in 2016. The company emphasizes long-term market share, service, and sustainable profitability rather than maximizing short-term earnings.
- Key risks include local competition and price pressure; reliance on qualified local leaders and staff; rising cremation and direct-cremation preferences, which can reduce revenue; variable death volumes; preneed sales and cancellation trends; investment-market and interest-rate exposure in trusts; and possible trust replenishment needs.
- Other material risks include covenant limitations and refinancing needs, insurance-company capacity to fund preneed policies, environmental and other regulatory compliance costs, and potential future impairment of goodwill or long-lived assets. Management reported no goodwill, intangible-asset, or long-lived-asset impairment in 2015.
- Management did not expect ordinary-course litigation to materially adversely affect the financial statements; a previously disclosed cemetery class action had reached an approved settlement and was being administered. Grant Thornton issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether operating cash flow remains strong after considering the sizable year-over-year movements in preneed trust investments and deferred trust receipts, rather than relying only on the reported $49.9 million.
- Debt capacity, refinancing terms, amortization, and covenant headroom after the February 2016 credit-facility amendment; also assess the convertible notes’ 2021 maturity and potential dilution.
- Whether revenue and margin growth can continue on a same-store basis, apart from acquisitions, and whether acquired locations sustain their reported improvement.
- Whether the company can offset lower average revenue from cremation and direct cremation through service packages, merchandise, and cemetery offerings.
- Trust portfolio performance, investment losses, applicable state funding requirements, and the adequacy of assets to meet future preneed service, merchandise, and cemetery-care obligations.
- The sustainability of capital returns after the $45.0 million repurchase, given year-end cash of $0.5 million, negative working capital, and planned dividends and growth spending.