Carriage Services, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; financial statements are unaudited. The company filed the report on August 5, 2011.
Business context
Carriage operated 151 funeral homes in 25 states and 33 cemeteries in 12 states. Funeral homes generated about 75% of revenue and cemeteries about 25%. Results reflect both existing operations and acquisitions, including two funeral-home acquisitions completed in Q2 for $5.1 million cash.
Financial performance
Amounts below are in millions except per-share data. Margins are calculated from reported figures.
| Metric | Q2 2010 | Q2 2011 | Six months 2010 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $44.5 | $47.9 | $91.4 | $98.8 |
| Gross profit / margin | $12.0 / 27.0% | $13.5 / 28.3% | $25.6 / 28.0% | $28.7 / 29.0% |
| Operating income / margin | $8.3 / 18.6% | $8.5 / 17.8% | $17.3 / 18.9% | $18.6 / 18.8% |
| Net income | $2.3 | $2.6 | $5.1 | $5.9 |
| Diluted EPS | $0.13 | $0.14 | $0.29 | $0.32 |
- Q2 revenue increased 7.6% year over year; six-month revenue increased 8.1%. Funeral revenue rose 9.0% for the six months and cemetery revenue 5.5%.
- Six-month operating cash flow was $15.8 million, versus $14.5 million in 2010. Capital expenditures were $4.6 million; investing cash use was $9.7 million, including $5.1 million for acquisitions. Cash increased from $1.3 million at year-end to $5.2 million.
- At June 30, current assets were $29.2 million and current liabilities $29.4 million. The filing reports $40.0 million of revolving-credit capacity, undrawn except for $0.1 million in letters of credit. The company said cash, operating cash flow and available credit should meet needs over the next 12 months.
- Senior debt was $136.3 million, including $130.0 million of 7⅞% Senior Notes due 2015; a further $91.5 million of 7% convertible junior subordinated debentures was outstanding, due 2029. The $40.0 million revolver matures in November 2012. The company reported compliance with debt covenants.
- The board initiated a quarterly common dividend: $0.025 per share, with $0.46 million paid in June. The company also repurchased TIDES for approximately $1.0 million during the six months and recorded a $0.37 million gain.
Changes, outlook and risks
- Growth was supported substantially by acquired funeral operations: six-month funeral volume rose 13.5%, of which management attributed 13.0 percentage points to acquisitions and 0.5 points to organic growth. Same-store funeral revenue rose 1.0%; acquired funeral revenue rose 57.6%.
- Same-store cemetery revenue increased 2.9% for the six months, while interment-rights units sold declined 13.5% and average price per interment increased 8.8%. Cemetery same-store operating profit rose 23.6%, helped by lower promotional, bad-debt and other controllable costs.
- Management said higher overhead—particularly personnel changes and upgrades in regional operations and home-office support—offset some field-level profit growth. Six-month general and administrative expense increased 26.9% to $9.6 million.
- No specific earnings or revenue guidance was provided. Management described a strategy to build concentrated operations in 10–15 markets through selective acquisitions and internal growth projects, and stated its liquidity was adequate for the next 12 months.
- Management highlighted cremation growth, consumer confidence, trust-investment returns, interest rates, pricing, cost control and seasonal death rates as business drivers or sensitivities. Same-store cremation mix increased to 41.2% for the first half; management noted cremation revenue per service is substantially below traditional burial revenue.
- Preneed and perpetual-care trust investments are subject to market-value changes and are largely restricted or tied to future customer and cemetery obligations. No trust-security impairment was identified at June 30. Management also established a $2.2 million valuation allowance related to state net operating losses; approximately $56.1 million of state NOLs could expire from 2013 to 2030.
- A cemetery-related putative class action remains in preliminary stages; the company said it could not assess the likelihood of an unfavorable outcome or estimate a loss. The filing reported no material change in risk factors and no significant change in market-risk exposure.
- Disclosure controls were judged effective as of June 30, 2011, with no material change in internal control over financial reporting reported during the six-month period.
Important facts for investors to verify
- How much of future revenue and earnings growth depends on acquisitions versus organic growth, and whether acquired funeral margins can improve.
- Whether same-store funeral volumes and cemetery interment-rights sales stabilize, particularly amid rising cremation mix and lower unit sales.
- Cash generation, acquisition spending, capital needs and debt-service capacity, including the 2012 revolver maturity and the terms and restrictions associated with the 2029 debentures.
- The sustainability of the new dividend alongside acquisition and growth-capital priorities.
- Trust investment performance, preneed cancellation and collection experience, state NOL utilization, and developments in the cemetery litigation.