Carriage Services, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Carriage operated 167 funeral homes in 26 states and 33 cemeteries in 11 states.
Financial performance
| Metric | Q1 2012 | Q1 2013 |
|---|---|---|
| Revenue | $51.3 million | $58.1 million |
| Gross profit | $16.7 million | $18.7 million |
| Operating income | $11.2 million | $12.6 million |
| Continuing operations income before tax | $6.6 million | $10.0 million |
| Income from continuing operations | $4.1 million | $5.6 million |
| Net income | $4.5 million | $5.3 million |
| Basic / diluted EPS | $0.24 / $0.24 | $0.29 / $0.25 |
| Cash provided by operating activities | $3.5 million | $11.0 million |
| Capital expenditures | $3.1 million | $8.7 million |
Revenue rose 13.2% year over year. Funeral revenue increased 12.8% to $45.2 million; cemetery revenue increased 14.5% to $12.9 million. Reported gross margin was approximately 32.2%, versus 32.5% a year earlier. Net interest expense improved to $2.6 million from $4.6 million. Continuing-operations income growth was stronger than revenue growth, while diluted EPS growth was moderated by including approximately 4.4 million shares issuable upon conversion of the debentures.
Balance sheet, debt and liquidity
- At March 31, cash was $1.3 million, current assets $35.9 million and current liabilities $42.6 million. Total assets were $747.6 million.
- Senior debt and capital lease obligations were approximately $174.3 million, per management, excluding the separate $89.8 million of 7% convertible junior subordinated debentures. The $43.0 million revolving-credit balance and $125.0 million term loan were outstanding.
- Management reported compliance with credit covenants: leverage ratio 3.03x against a maximum of 3.75x, and fixed-charge coverage 2.41x against a minimum of 1.20x.
- Operating cash flow improved substantially, but capital spending rose to $8.7 million, including $6.0 million for funeral-home expansions. Cash declined by $0.4 million during the quarter.
Material changes and management commentary
- Funeral same-store revenue increased 5.3%, primarily as contract volume rose 7.0%; average revenue per contract declined 2.1%. Overall funeral volume increased 13.3%, with trailing-twelve-month acquisitions contributing to growth.
- Cemetery same-store operating revenue increased 7.8%. Interment-right sales volume fell 4.2%, but average price increased 12.3%; at-need revenue also rose. Cemetery trust earnings increased 58.5% to $2.4 million, supporting reported cemetery growth.
- General and administrative expenses increased 10.2% to $5.8 million, principally due to incentive compensation and added corporate staff.
- There were no acquisitions in Q1 2013. The company sold Texas funeral homes previously classified as held for sale and reported a $0.6 million loss on disposition in discontinued operations. New letters of intent covered funeral homes in Kansas and California; related assets were classified as held for sale.
- The quarterly common dividend remained $0.025 per share. No share repurchases occurred during the quarter.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said cash, expected operating cash flow and credit-facility availability should be sufficient for anticipated working capital, capital spending, debt service, dividends and acquisitions, while noting that changed plans or weaker cash flow or financing access could affect liquidity.
- On April 24, 2013, the credit facility was amended: revolving commitments increased from $105 million to $125 million and interest-rate margins fell by 50 basis points at each leverage tier. The amendment also permits specified subordinated-debt issuance and refinancing and allows up to $15 million of repurchases of stock-based employee awards.
- Floating-rate borrowings expose earnings to rate changes: management estimated that a 100-basis-point increase would raise annual interest expense and reduce pretax income by approximately $1.7 million, assuming balances remain unchanged. Trust investment performance and interest rates also affect results.
- Management identified risks including death-rate and cremation trends, consumer preferences, competition, staffing, preneed sales and insurer financial strength, trust-investment performance, financing access, regulation and costs. The business is seasonal, with generally higher death rates in winter.
- A cemetery-related putative class action remains in preliminary stages; the company said it cannot estimate the likelihood or range of loss. It reported no material change in previously disclosed risk factors and no material effect expected from ordinary-course legal proceedings.
Key facts for investors to verify
- Whether revenue and profit growth persist after separating same-store performance, acquisitions and cemetery trust earnings.
- Cash conversion and funding needs as growth capital expenditures remain elevated relative to operating cash flow.
- Debt, covenant headroom, refinancing plans for the 7% debentures, and the impact of floating-rate exposure.
- Performance and funding obligations of preneed and perpetual-care trusts, including investment returns and customer cancellation/refund exposure.
- Progress and final sale terms for the Kansas and California businesses held for sale, and developments in the cemetery class action.