Carriage Services, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Carriage operated 162 funeral homes in 26 states and 32 cemeteries in 11 states. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance
| Metric | Q1 2011 | Q1 2012 |
|---|---|---|
| Revenue | $50.7 million | $52.3 million |
| Gross profit / margin | $15.0 million / 29.7% | $16.9 million / 32.4% |
| Operating income / margin | $10.0 million / 19.8% | $11.4 million / 21.9% |
| Income from continuing operations | $3.3 million | $4.2 million |
| Net income | $3.3 million | $4.5 million |
| Diluted EPS | $0.18 | $0.24 |
| Cash from operating activities | $3.4 million | $3.5 million |
Q1 2012 net income included $249,000 from discontinued operations, principally a $427,000 gain on disposition, partly offset by a $169,000 tax provision. Continuing-operations diluted EPS was $0.23. The company declared and paid a $0.025-per-share common dividend.
Material changes and operating trends
- Revenue increased 3.2% year over year, driven primarily by acquired funeral homes. Funeral revenue rose 4.8%; cemetery revenue declined 2.4%.
- Funeral same-store revenue fell 4.9%, with contracts down 6.2%, partly offset by a 2.2% increase in average revenue per contract. Funeral same-store operating profit increased 6.5% as several expense categories declined.
- Cemetery same-store revenue decreased 1.6% and operating profit fell 15.4%; management cited lower revenue and higher promotional expenses. Interment rights sold rose 13.9%, but average price declined 3.8%.
- General and administrative expense increased 10.4% to $5.2 million, mainly from severance and legal costs related to a management reorganization, as well as acquisition expenses.
- The company completed two funeral-home acquisitions for $11.6 million cash, recording $6.3 million of goodwill. Capital expenditures were $3.1 million, versus $1.9 million a year earlier.
Cash, liquidity and debt
- Cash was $0.9 million at March 31, down from $1.1 million at year-end. Operating cash flow of $3.5 million was more than offset by acquisitions, capital expenditures, dividends and $2.7 million of treasury-stock purchases.
- The company drew $13.9 million on its revolving facility; $17.0 million was outstanding at quarter-end. The $60 million facility matures in October 2014, with an option to extend under certain conditions. Approximately $40.1 million remained available.
- Debt obligations included $130.0 million of 7.875% senior notes, $17.0 million on the revolving facility, and $6.7 million of acquisition indebtedness and capital-lease obligations. Separately, $89.8 million of 7% convertible junior subordinated debentures payable to an affiliate remained outstanding.
- Debt covenants were satisfied: leverage ratio was 3.37x against a maximum of 4.25x; fixed-charge coverage was 1.93x against a minimum of 1.25x. Management said existing cash, operating cash flows and facility availability should meet anticipated needs, but noted changed acquisition or capital-spending plans could require additional financing.
- Trust investments are substantial but relate to preneed customer and perpetual-care obligations; they should not be treated as unrestricted operating cash. Current assets were $32.3 million and current liabilities $27.2 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described long-term priorities as growing market share and profitability through its operating standards and selective acquisitions, and noted seasonal death-rate fluctuations.
- Management identified risks including death-rate declines, changing consumer preferences and cremation mix, competition, staffing, acquisition execution and financing, trust-fund investment performance and funding requirements, preneed sales, insurance counterparties, and regulatory changes.
- Preneeds and cemetery trust assets are exposed to financial-market movements. The filing states that a 0.25% interest-rate change would produce an approximate 1.91% change in fixed-income securities’ value. A 100-basis-point change in the prime rate, assuming unchanged revolver borrowings, would affect annual interest expense by less than $0.2 million.
- A cemetery management agreement in Ohio ended during the quarter, resulting in the reported disposition gain. The company also disclosed a cemetery-related putative class action; it said the matter was at a preliminary stage and it could not estimate the likelihood or amount of loss.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether acquired-funeral-home growth can offset the decline in funeral same-store contract volume and the weakness in cemetery profitability.
- Cash generation and the use of revolver borrowings to fund acquisitions, capital spending, dividends and share repurchases.
- Debt covenant headroom, refinancing needs and the terms or availability of the revolving facility.
- Trust-fund market exposure, funding obligations, and the distinction between trust assets and unrestricted liquidity.
- The continuing impact of severance, legal and acquisition costs, and the outcome or potential exposure from the disclosed litigation.