Carriage Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts are in millions, except per-share data. Carriage operated 169 funeral homes in 26 states and 31 cemeteries in 11 states; funeral operations generated about 70% of revenue and cemetery operations about 30%.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $87.5 | $95.0 | $276.3 | $280.0 |
| Gross profit | $25.6 | $33.2 | $87.8 | $97.2 |
| Gross margin | 29.3% | 34.9% | 31.8% | 34.7% |
| Operating income | $15.2 | $23.3 | $60.1 | $70.4 |
| Net income | $5.9 | $13.0 | $33.2 | $19.8 |
| Diluted EPS | $0.38 | $0.71 | $2.09 | $1.08 |
- Cash flow: Nine-month operating cash flow was $50.0 million, down from $69.7 million. Investing used $22.7 million, including $20.3 million of capital expenditures; financing used $27.7 million. Cash ended the period at $0.8 million.
- Debt and liquidity: Credit-facility borrowings were $169.0 million, senior-note principal was $400.0 million, and acquisition debt was $4.5 million. The 4.25% senior notes mature in 2029. The $250 million revolving facility had $78.7 million available; the company reported compliance with its covenants at quarter-end. The facility’s maximum leverage ratio was 5.25 to 1.00 and minimum fixed-charge coverage ratio was 1.20 to 1.00.
- Other metrics: Q3 declared dividends of $0.1125 per share. The company repurchased no shares in Q3; $48.9 million remained authorized for repurchases. Total assets were $1,147.4 million and stockholders’ equity was $128.9 million at September 30, 2022.
Changes versus the prior comparable period
- Q3 revenue fell 7.9%; nine-month revenue fell 1.3%. Management attributed lower volumes primarily to COVID-19-related deaths declining and death rates normalizing toward pre-pandemic levels.
- Q3 funeral contracts declined 11.6%, while average revenue per contract increased 2.9%. Q3 preneed cemetery interment rights sold fell 13.6%, and their average selling price fell 4.1%.
- Q3 gross profit declined $7.6 million and net income declined $7.2 million. Higher operating costs, including labor, supplies, utilities and insurance, also pressured margins. The reported non-GAAP operating-profit margin fell to 40.3% from 47.0%.
- Nine-month net income increased despite lower revenue and gross profit, principally because 2021 included a $23.8 million loss on extinguishment of debt; 2022 included a $3.3 million insurance-reimbursement gain and lower interest expense.
- Nine-month operating cash flow declined $19.7 million, mainly due to unfavorable changes in accrued liabilities, partly offset by favorable changes in income-tax receivables. Credit-facility borrowings increased from $155.4 million at year-end 2021 to $169.0 million.
Outlook, commentary, risks and unusual items
- Management provided no quantified revenue or earnings guidance in the supplied filing text. It said it expected the death-rate normalization and inflationary cost trends to continue through year-end, while stating that existing and anticipated resources should cover working capital, capital expenditures, debt payments, commitments and dividends over the next 12 months.
- Inflation increased costs for hourly labor, utilities, funeral supplies, merchandise and insurance. Management said it was taking steps to mitigate the increases but could not predict their full scope or duration; higher consumer prices could also affect discretionary spending.
- Interest-rate risk is material: a 100-basis-point change in the floating borrowing rate, assuming borrowings stayed constant, would change income before taxes by approximately $1.7 million. The company had no interest-rate hedges. Trust investments also faced market-value declines; these assets are held for preneed and perpetual-care obligations and are not generally available for corporate use.
- On October 25, 2022, Carriage acquired three funeral-home businesses, one cemetery and one cremation-focused business in the Charlotte area for $25 million, funded with cash and credit-facility borrowings. It obtained lender consent for the acquisition notwithstanding exceeding the facility’s leverage ratio applicable to permitted acquisitions.
- The CFO planned to resign effective January 2, 2023 and remain as a consultant for six months; the filing states the departure was not due to a disagreement with the company.
- The 2022 annual quantitative goodwill and tradename impairment assessments were incomplete at filing, though management did not expect impairment. A wage-and-hour class settlement was finalized and $1.2 million paid in August 2022. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Track funeral and cemetery volumes, pricing, and margins as death rates normalize and inflation continues to affect costs.
- Review the post-quarter Charlotte acquisition’s financing, leverage impact, and covenant headroom; also monitor the $78.7 million of facility availability reported at September 30.
- Assess sensitivity to floating interest rates and the performance and restrictions of preneed and perpetual-care trust assets.
- Monitor CFO succession and completion of the annual goodwill and tradename impairment tests.
- Reconcile a filing inconsistency: the statements of operations report nine-month 2022 net income of $33.161 million, while the EPS note lists a $33.361 million net-income numerator. The filing text does not explain the difference.