Carriage Services, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Carriage operated 165 funeral homes in 27 states and 32 cemeteries in 11 states. Funeral homes generated approximately 77% of revenue and cemeteries approximately 23%.
Financial performance
| Metric | Q1 2014 | Q1 2015 |
|---|---|---|
| Revenue | $55.7 million | $63.3 million |
| Gross profit / margin | $18.0 million / 32.4% | $22.2 million / 35.1% |
| Operating income / margin | $8.3 million / 15.0% | $14.5 million / 23.0% |
| Income from continuing operations | $1.6 million | $6.4 million |
| Diluted EPS from continuing operations | $0.09 | $0.34 |
| Operating cash flow | $(1.6) million | $12.6 million |
- Funeral revenue rose 14.0% to $50.1 million; cemetery revenue rose 12.2% to $13.1 million. Growth included acquired operations, particularly funeral homes purchased from SCI in May 2014.
- Management-reported segment operating profit was $21.7 million for funeral and $5.8 million for cemetery operations. These segment measures exclude depreciation and amortization and regional and unallocated costs, so they are not directly comparable with consolidated gross profit or operating income.
- Cash and cash equivalents were $0.3 million at March 31, down from $0.4 million at year-end. Current assets were $31.3 million and current liabilities $30.1 million.
- Investing cash outflow was $10.6 million, including $6.4 million of capital expenditures and $4.3 million cash paid for an acquisition. Financing cash outflow was $2.1 million.
- Debt and capital leases: the company reported $167.6 million of term-loan, revolving, acquisition and lease obligations, plus $143.75 million principal on its 2021 convertible notes (carrying value $115.4 million). The $200 million revolver had $41.0 million drawn. Credit Facility weighted-average interest rate was 2.7%.
- The company declared a quarterly dividend of $0.025 per share. Effective tax rate was 40.5% versus 39.0% a year earlier.
Changes versus the prior period
- Revenue increased 13.7%; operating income increased 74%; and operating cash flow improved by $14.2 million from a use of cash to cash generation.
- Same-store funeral contract volume increased 4.6% and average revenue per contract 1.5%. Same-store funeral operating profit margin rose to 40.6% from 38.3%. The same-store cremation rate increased to 50.9% from 48.5%.
- Same-store cemetery revenue increased 5.7% and operating profit increased 25.1%; management cited stronger preneed property sales, lower bad-debt expense and expense control.
- Q1 2014 included a $3.8 million loss on redemption of convertible junior subordinated debentures and a $1.1 million gain related to a building purchase; neither recurred in Q1 2015. General and administrative expense declined 23.2%, partly because Q1 2014 included one-time bonus and performance-award costs.
- Adjusted non-GAAP net income was $8.0 million versus $5.7 million. This measure excludes specified special items and is not a substitute for GAAP results.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said cash, expected operating cash flows and Credit Facility availability should meet anticipated needs for the foreseeable future, while noting changed investment or acquisition plans or weaker cash flows or financing access could affect liquidity.
- The company acquired one funeral home in Clarksville, Tennessee, for approximately $8.8 million, including $4.3 million paid at closing and deferred payments with a $4.5 million present value.
- Q1 2015 included $1.8 million of other-than-temporary investment impairments in preneed and perpetual-care trusts. The filing says these trust impairments do not affect earnings until losses are realized and allocated to contracts as services or merchandise are delivered. The trusts were not underfunded at quarter-end.
- Key stated risks include changes in death rates and consumer preferences, rising cremation, competition, retention of skilled staff, trust-investment performance, interest rates, preneed sales and insurance providers, regulation, and the ability to finance acquisitions. The business is seasonal, with generally higher deaths in winter.
- The company reported compliance with Credit Facility covenants: leverage ratio 2.46 to 1.00 against a 3.50 maximum; fixed-charge coverage 3.15 to 1.00 against a 1.20 minimum. A 100-basis-point borrowing-rate change would affect pretax income by an estimated $1.6 million, assuming debt balances stay unchanged.
- Carriage said it did not expect ordinary-course legal proceedings to have a material adverse effect. A previously disclosed cemetery class action settlement was approved in 2014 and was being administered. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of revenue and profit growth came from acquired businesses versus same-store performance, and whether acquired margins are sustainable.
- Whether strong operating cash flow continues, given low reported cash, capital spending, acquisition commitments and scheduled debt payments.
- Total debt exposure, including the convertible notes’ principal versus balance-sheet carrying value, and remaining revolver availability under covenant requirements.
- Trust-asset performance, impairment developments and any future funding obligations if preneed trusts become underfunded.
- Trends in cremation, average revenue per contract, preneed sales and collection performance, alongside the company’s seasonal results.