Carriage Services, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the same periods in 2011. Carriage operated 163 funeral homes in 26 states and 33 cemeteries in 12 states. Funeral homes generated about 75% of revenue and cemeteries about 25%.
Financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $49.5 | $43.4 | $151.1 | $140.8 |
| Gross profit | $13.9 | $10.6 | $45.0 | $39.1 |
| Operating income | $8.4 | $5.5 | $29.0 | $24.1 |
| Net income | $0.6 | $0.8 | $7.7 | $6.7 |
| Diluted EPS | $0.03 | $0.04 | $0.42 | $0.36 |
| Operating cash flow, continuing operations | Not separately provided | Not separately provided | $15.2 | $25.0 |
- Revenue increased 14.1% in Q3 and 7.3% year to date. Funeral revenue was up 10.8% and 6.9%, respectively; cemetery revenue increased 25.0% and 8.4%.
- Gross margin was approximately 28.1% in Q3 2012 versus 24.4% in Q3 2011, and 29.8% year to date versus 27.8%. Operating margin was approximately 17.1% versus 12.8% in Q3 and 19.2% versus 17.1% year to date.
- At September 30, cash was $0.5 million and current assets were $30.6 million against current liabilities of $26.0 million. Cash was $1.1 million at December 31, 2011.
- Debt and lease obligations described in the filing totaled about $164.5 million, including $130.0 million in term loans, $28.0 million drawn on the revolver, and $6.5 million of acquisition debt and capital leases. The company also had $89.8 million of 7% convertible junior subordinated debentures due 2029.
Material changes versus prior comparable periods
- Q3 net income declined despite higher revenue and operating income, principally reflecting a $3.0 million pre-tax charge for early debt extinguishment and related costs. The company redeemed its 7⅞% senior notes due 2015 after refinancing through a new credit facility.
- Year-to-date net income and diluted EPS improved. Growth was supported by acquisitions, higher average revenue per funeral, improved funeral cost management, cemetery preneed sales and higher cemetery trust earnings.
- Same-store funeral revenue fell 1.1% year to date as contract volume declined 3.2%, partly offset by higher average revenue per contract. Same-store cemetery revenue rose 3.5%; cemetery same-store operating profit was nearly flat.
- Continuing operating cash flow fell to $15.2 million from $25.0 million, while continuing investing cash outflow increased to $32.7 million from $18.0 million, largely reflecting higher acquisition spending. Acquisitions cost $22.4 million and capital expenditures were $10.3 million year to date.
- The company acquired five funeral homes and one cemetery in the first nine months for $22.4 million, and repurchased 686,208 shares for $4.5 million. No share repurchases occurred in Q3.
Outlook, management commentary, risks and unusual items
- Management said cash, operating cash flow and borrowing availability were expected to meet anticipated working-capital needs, capital expenditures, debt payments, dividends and acquisitions, and it did not anticipate significant near-term liquidity constraints. It noted that changed acquisition or capital expenditure plans, or weaker cash flow or financing access, could adversely affect liquidity. No specific earnings or revenue guidance is provided.
- The new $235 million secured credit facility, entered into August 30, 2012, matures September 30, 2017 and includes a $105 million revolver and $130 million term loan, with an accordion for up to $40 million in additional revolver capacity. At quarter end the company was compliant with covenants: leverage ratio 3.06x against a maximum of 3.75x, and fixed-charge coverage 2.41x against a minimum of 1.20x.
- Management cited death rates, consumer preferences and cremation trends, competition, staffing, trust investment performance, interest rates, financing access, preneed sales and insurance-provider condition, costs, and regulation as risks. The business is seasonal, with death rates generally higher in winter.
- Trust investments are subject to market risk and are largely held for preneed obligations or perpetual care; they should not be treated as unrestricted operating liquidity. The filing reports no identified trust investment impairments at September 30. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by about $0.3 million, assuming revolver borrowings remained unchanged.
- Four businesses were presented as held for sale at quarter end. The company ended a cemetery management contract, sold two Kentucky funeral homes, and had a letter of intent outstanding for Texas funeral homes. Discontinued operations contributed $0.4 million of year-to-date income, including a $0.6 million disposal gain.
- A putative class action concerning alleged conduct at a cemetery formerly owned by subsidiaries remains in preliminary proceedings. The company said it could not assess the likelihood or estimate a potential loss. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the filing’s stated full-year capital expenditure outlook of approximately $4.5 million with reported year-to-date capital expenditures of $10.3 million.
- Review the new credit agreement’s interest-rate terms, collateral, amortization, covenant definitions and remaining borrowing availability; confirm ongoing covenant headroom.
- Assess the sustainability of operating improvement apart from acquisitions, trust income and the debt-refinancing charge, including funeral volume and cremation mix.
- Evaluate cash conversion and the causes of lower operating cash flow, including receivables, accrued liabilities, taxes and trust-related movements.
- Monitor held-for-sale transactions and the cemetery litigation, for which the filing provides no estimable loss range.