Carriage Services, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Carriage operates funeral homes and cemeteries in the United States; at year-end it had 167 funeral homes in 26 states and 33 cemeteries in 12 states.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $204.1 million | $187.7 million |
| Gross profit / margin | $61.9 million / 30.3% | $52.1 million / 27.7% |
| Operating income / margin | $38.4 million / 18.8% | $29.3 million / 15.6% |
| Net income from continuing operations | $11.6 million; $0.64 diluted EPS | $6.9 million; $0.37 diluted EPS |
| Net income available to common stockholders | $11.4 million; $0.63 diluted EPS | $7.0 million; $0.38 diluted EPS |
| Cash from continuing operating activities | $25.6 million | $31.0 million |
| Cash and working capital at year-end | $1.7 million; negative $9.0 million | $1.1 million; negative $1.1 million |
Funeral revenue rose 7.6% to $154.1 million; cemetery revenue rose 12.5% to $50.1 million. Management attributed growth chiefly to acquisitions, improved operating performance and higher cemetery trust earnings. Same-store funeral revenue was nearly flat, while same-store cemetery revenue increased 4.6%. The company’s overall cremation rate increased to 46.0% from 45.0%; same-store funeral volume declined 2.6%.
Fourth-quarter revenue was $53.3 million, versus $47.1 million a year earlier. Net income from continuing operations was $4.3 million; net income available to common shareholders was $3.7 million, or $0.21 per diluted share. The quarter included a $615,000 loss from discontinued operations.
Debt, liquidity and capital allocation
At December 31, 2012, principal debt was $178.8 million: $127.5 million under a term loan, $44.7 million drawn on a $105 million revolving facility, and $6.6 million of acquisition debt and capital leases. The company also had $89.8 million of 7% convertible junior subordinated debentures due 2029. The new secured credit facility matures in 2017 and had a weighted-average rate of 3.73%. The company reported covenant compliance, with leverage of 3.06x against a 3.75x limit and fixed-charge coverage of 2.62x against a 1.20x minimum.
Operating cash flow less $5.0 million of maintenance capital expenditures was $20.6 million. Cash use included $42.7 million for acquisitions, $12.9 million of capital expenditures, $4.5 million of share repurchases and $1.8 million of dividends. The board intended to continue dividends in 2013. Management said cash, expected operating cash flow and available credit were expected to cover anticipated needs over the next 12 months.
Material changes, outlook and risks
- Revenue increased 8.8% and operating income rose to $38.4 million. The gross margin improved to 30.3%, while operating cash flow declined from $31.0 million to $25.6 million.
- Seven acquisitions were completed for $42.7 million, with $1.0 million of liabilities assumed. Acquisitions contributed substantially to reported growth.
- In August 2012, Carriage replaced its prior financing with a $235 million secured credit facility, redeemed its 7⅞% senior notes due 2015, and recorded $3.0 million of early-extinguishment and related costs, including a $1.7 million redemption premium.
- Management planned continued selective acquisitions and internal growth investment; expected annual capital expenditures were approximately $10–$15 million. No specific earnings or revenue guidance was provided.
- Management cited cremation growth, price and local competition, dependence on local personnel, preneed sales and trust-investment performance, acquisition execution, and high fixed costs as important risks. A 100-basis-point change in borrowing rates was estimated to change pretax income by approximately $1.7 million, assuming debt balances were unchanged.
- Trust investments are exposed to market fluctuations and state funding requirements. Management reported no charge was required for expected losses on delivery of preneed contracts at year-end. A cemetery class action remained pending; the company said it could not estimate the likelihood or potential loss. Four businesses were classified as held for sale; the Texas locations were sold in February 2013 for approximately $1.9 million.
- The annual goodwill test found no goodwill impairment, although a $1.1 million impairment was recorded for a location held for sale. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and profit growth came from acquired businesses versus comparable existing locations, and whether acquired margins continue to improve.
- Whether lower operating cash flow, low cash on hand and negative working capital remain manageable alongside acquisition spending, dividends and debt service.
- Trust asset performance, applicable state funding or replenishment obligations, and the sensitivity of preneed contract economics to market losses and future service costs.
- Progress in adapting services and pricing to rising cremation rates, including the share of cremations that include memorial services.
- Compliance with credit covenants and the effect of floating-rate debt; also review the pending litigation, held-for-sale transactions and potential dilution or future payments under incentive awards.