Carriage Services, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the same periods in 2020. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context
Carriage provides funeral and cemetery services and merchandise. At September 30, 2021, it operated 171 funeral homes in 26 states and 32 cemeteries in 12 states. Funeral Home Operations represented approximately 70% of revenue and Cemetery Operations approximately 30%.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $95.0m | $84.4m | $280.0m | $239.4m |
| Gross profit | $33.2m | $27.9m | $97.2m | $76.2m |
| Operating income | $23.3m | $16.5m | $70.4m | $36.9m |
| Net income | $13.0m | $5.5m | $19.8m | $7.7m |
| Diluted EPS | $0.71 | $0.31 | $1.08 | $0.43 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $69.7m | $67.8m |
GAAP gross margin was approximately 34.9% in Q3 and 34.7% for nine months, versus 33.0% and 31.8%, respectively, in 2020. Operating margin was approximately 24.5% in Q3 and 25.2% for nine months, versus 19.5% and 15.4%. Net margin was approximately 13.7% in Q3 and 7.1% for nine months, versus 6.5% and 3.2%.
- Q3 revenue increased 12.6%; nine-month revenue increased 17.0%. Growth reflected higher funeral volumes and average revenue per contract, increased cemetery preneed sales and pricing, and the integration of prior acquisitions.
- Q3 funeral contracts rose 9.2% and average revenue per contract rose 3.2%. Management attributed approximately 60% of the Q3 volume increase to deaths from the Delta variant.
- For the first nine months, funeral contracts rose 5.6% and average revenue per contract rose 4.4%. Preneed cemetery interment rights sold rose 27.9%, and their average selling price rose 21.8%.
- Operating cash flow rose $1.9m year over year. Capital expenditures were $15.3m, compared with $10.0m in 9M 2020. Cash and cash equivalents were $1.1m at September 30.
Liquidity, debt and capital allocation
- Current assets were $36.9m and current liabilities were $60.7m at September 30, a working-capital deficit of $23.8m. Preneed and perpetual-care trust assets are subject to restrictions and should not be treated as general-purpose liquidity.
- Credit-facility borrowings were $86.9m, with $60.8m of remaining availability. The company reported compliance with its credit-facility covenants. The facility has a $150m commitment and matures in May 2026.
- In May, the company issued $400m of 4.25% senior notes due 2029 and redeemed its 6.625% notes due 2026. The redemption generated a $23.8m nine-month extinguishment loss, including a $19.9m call premium. Total principal debt was approximately $492m, excluding leases; the filing separately reports $26.5m of lease liabilities.
- The company repurchased 1.53m shares for $65.5m during the first nine months and paid $5.4m in dividends. On October 27, the board authorized an additional $75m of repurchases and increased the annual dividend by $0.05 per share; it declared a $0.1125 quarterly dividend payable December 1, 2021.
Material changes and unusual items
- Nine-month GAAP net income included the $23.8m debt-extinguishment loss. It also benefited from a substantially smaller loss on divestitures, disposals and impairments than in 2020: $1.4m versus $19.6m.
- Q3 general and administrative expense increased $2.6m, primarily from higher incentive compensation, insurance claims and other overhead. Nine-month regional and unallocated costs also rose, including higher incentives and Hurricane Ida costs.
- The company recorded a $0.5m impairment on assets held for sale in 2021. Its August 2021 annual qualitative assessments found no goodwill or tradename impairment.
- Adjusted net income, a non-GAAP measure, was $15.1m for Q3 and $41.7m for 9M 2021, compared with $9.1m and $23.3m in 2020. These figures exclude specified special items and are not GAAP net income.
Outlook, risks and contingencies
- Management said it expected existing and anticipated cash resources to cover working capital, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months. It anticipated approximately $3–4m of cash proceeds from divestitures over the following six months. No specific earnings or revenue guidance was provided.
- Management said COVID-19 had increased funeral volumes and reported no material adverse effect to date on liquidity, access to capital or cash flows; the duration and effects of the pandemic, including variants, remained uncertain.
- A California putative employee class action alleges wage, break, overtime and related violations. At September 30, the company could not reasonably estimate any possible loss or range of loss.
- The company reported an adverse IRS ruling regarding a tax accounting-method change tied to constructed cemetery property and said discussions were ongoing. A $3.7m reserve for uncertain tax positions was recorded; the 2018 tax audit and refund claim approval process remained in progress.
- Market risks include trust-investment value fluctuations and floating-rate credit-facility exposure. Management estimated that a 100-basis-point borrowing-rate change would change pretax income by approximately $0.9m, assuming borrowings remained unchanged. The company had no interest-rate hedges.
- Other disclosed risks include staffing and retention, competition, death-rate and consumer-preference changes, preneed sales and trust investment performance, financing access, litigation, cybersecurity, and execution of acquisitions, divestitures and capital allocation. A share-based incentive program could issue up to 1,081,287 shares at its highest performance tier, according to the filing.
Important facts for investors to verify
- Whether elevated funeral volumes and average contract revenue persist as pandemic-related deaths and service patterns change.
- How much reported earnings growth reflects recurring operations versus the debt-refinancing charge, prior-year impairment and divestiture comparisons, and other adjusted-net-income exclusions.
- Cash generation and borrowing needs after substantial repurchases, dividends and higher capital expenditures, including the effect of the working-capital deficit and restricted trust assets.
- Progress on the IRS matter and tax refund claim, and any developments in the California employment litigation.
- Compliance with debt covenants and the effects of variable rates, note terms, and the announced increase in repurchase and dividend commitments.