Carriage Services, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance sheet compared with December 31, 2013. The company operated 161 funeral homes in 26 states and 31 cemeteries in 10 states. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results
| Metric | Q1 2013 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $57.315 | $55.847 | Down 2.6% |
| Gross profit | $18.913 | $18.047 | Down 4.6% |
| Operating income | $12.284 | $8.370 | Down 31.9% |
| Income from continuing operations | $5.409 | $1.651 | Down 69.5% |
| Net income | $5.258 | $2.218 | Down 57.8% |
| Diluted EPS | $0.25 | $0.12 | Down $0.13 |
| Operating cash flow | $9.913 | $(1.618) | Declined $11.531 |
Gross margin was approximately 32.3% versus 33.0%; operating margin was approximately 15.0% versus 21.4%. The quarterly dividend remained $0.025 per share.
Business and segment trends
- Funeral: Revenue fell 2.0% to $44.159 million. Same-store operating revenue declined 6.5%, with contracts down from 6,435 to 6,049; average revenue per contract was flat at $5,469. Acquired operations grew 11.3% in revenue and 17.4% in operating profit, partly offsetting weaker same-store results. The cremation rate for same-store operations rose to 46.6% from 45.8%.
- Cemetery: Revenue fell 4.7% to $11.688 million and operating profit fell 13.2%. Lower preneed property sales and trust earnings were partly offset by stronger at-need revenue. Cemetery trust earnings declined 27.8% to $1.584 million.
- Management attributed the overall revenue decline primarily to fewer same-store funeral contracts, lower cemetery preneed property sales, and lower cemetery trust earnings. General and administrative costs rose 48.6% to $9.335 million, reflecting higher incentive and stock compensation, acquisition/divestiture expenses, severance, and consulting costs.
Cash, debt, and liquidity
- Cash and cash equivalents were $21.958 million at March 31, up from $1.377 million at year-end. Current assets were $51.162 million and current liabilities $41.217 million.
- Operating cash use was $1.618 million, versus $9.913 million generated in Q1 2013. The filing cites working-capital outflows, including reductions in accounts payable and accrued liabilities, as well as lower net income and other noncash adjustments.
- Investing cash use was $4.848 million, including $5.048 million of capital expenditures. Financing provided $27.047 million, principally reflecting the convertible notes issuance and related debt refinancing.
- At quarter-end, the company had $114 million outstanding under its term loan and no revolving-credit borrowings. It issued $143.75 million of 2.75% convertible subordinated notes due 2021, with a $112.261 million carrying value and $31.489 million unamortized discount. The notes’ disclosed fair value was $151.7 million. The remaining convertible junior subordinated debentures had a $27.860 million carrying value; redemption was completed April 16, 2014.
- The company reported compliance with credit covenants at March 31: leverage ratio 2.18x and fixed-charge coverage 1.83x. Management said cash, expected operating cash flows, and available credit should meet anticipated needs, but noted financing needs could change with capital expenditures or acquisitions.
Material changes, outlook, and risks
- Q1 continuing-operations earnings included a $3.778 million loss on redemption of convertible debentures, including a debt-cost write-off and redemption premium. A $1.130 million gain from purchasing a previously leased building partly offset the impact. Discontinued operations contributed $0.567 million, including a $0.909 million gain on sale of a Florida cemetery.
- Management reported non-GAAP net income of $5.4 million for Q1 2014, compared with $6.0 million in Q1 2013, after adjustments for specified items. This is a company-defined measure and is not a substitute for GAAP results.
- On March 3, the company agreed to acquire seven SCI businesses—six funeral businesses and one cemetery—in Louisiana and Virginia for approximately $54.9 million, subject to customary conditions including FTC approval. Management anticipated closing in Q2 2014; the filing does not provide earnings guidance.
- An April 14 credit-facility amendment, effective upon the SCI acquisition, provides for a $200 million revolving facility and a $125 million term loan, extends maturity to March 31, 2019, and revises covenants. These are post-quarter developments, not quarter-end borrowing balances.
- Key risks identified include changes in death rates and consumer preferences, competition, attracting skilled personnel, trust investment performance and interest rates, access to financing, preneed sales and insurer financial condition, regulation, and completion of the SCI acquisition. A proposed class settlement in the Grandview Cemetery litigation had preliminary court approval; final approval was scheduled for June 23, 2014. The company stated other legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the SCI transaction closed, its final funding and purchase accounting, and resulting leverage and covenant headroom.
- Whether the deterioration in same-store funeral volumes, cemetery preneed sales, and operating margins persisted beyond Q1.
- Cash conversion and working-capital trends, given negative Q1 operating cash flow despite reported net income.
- The effective cost and potential dilution of the convertible notes, including their conversion terms and market value relative to carrying value.
- Actual outcomes for trust investment earnings, the Grandview settlement, and other contingencies or material changes disclosed after this filing.