Carriage Services, Inc. — Q3 2011 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Carriage operated 155 funeral homes in 25 states and 33 cemeteries in 12 states.
Financial performance
Amounts are in millions except per-share data; balance-sheet comparisons are September 30, 2011 versus December 31, 2010.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $44.1 | $45.5 | $142.8 | $136.8 |
| Gross profit | $10.6 | $10.1 | $39.3 | $35.6 |
| Operating income | $5.6 | $5.9 | $24.2 | $23.2 |
| Net income | $0.8 | $0.9 | $6.7 | $5.9 |
| Diluted EPS | $0.04 | $0.05 | $0.36 | $0.33 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $25.3 | $16.5 |
- Q3 revenue fell 3.1%; nine-month revenue increased 4.4%. Funeral revenue rose 1.2% in Q3 and 6.4% year to date, while cemetery revenue fell 14.8% and 1.6%, respectively.
- Gross margin was approximately 24.2% in Q3 2011 versus 22.1% in Q3 2010, and 27.5% for the first nine months versus 26.0%. Operating income declined 5.6% in Q3 but increased 4.2% year to date.
- Q3 cemetery same-store revenue fell 17.7%, reflecting fewer interment rights sold and lower average prices; same-store funeral revenue fell 4.3% as contract volume declined. Nine-month funeral same-store revenue was flat, while cemetery same-store revenue declined 4.4%.
- Cash and cash equivalents were $4.3 million, up from $1.3 million at year-end. Current assets were $28.9 million and current liabilities $28.9 million, indicating essentially no reported working capital surplus.
- Nine-month investing cash use was $18.1 million, including $10.3 million for acquisitions and $7.8 million of capital expenditures. Financing cash use was $4.2 million, including common dividends and debenture repurchases.
- Senior debt principal was $136.2 million, including $130.0 million of 7⅞% notes due 2015 and acquisition debt/capital leases. Affiliate-held 7% convertible junior subordinated debentures were $89.8 million, due 2029. The filing reports covenant compliance.
Material changes, outlook and risks
- Carriage acquired two funeral businesses in Q3 for $5.2 million; acquisitions totaled $10.3 million for the first nine months. A further funeral-home acquisition for $2.5 million closed October 20, 2011.
- In August, the company replaced its prior revolving facility with a $60 million secured facility, with an accordion feature for up to $15 million. At quarter-end, the maximum available draw was approximately $54 million and there were no borrowings. Management said cash, operating cash flow and available facility capacity should meet needs and obligations over the next 12 months.
- General and administrative expense increased 26.5% year to date to $14.4 million, attributed primarily to expanded regional and home-office staffing, incentive compensation, director fees and acquisition activity.
- The company initiated a quarterly common dividend in 2011, declaring $0.05 per share through September 30. It said it currently expects to continue paying distributions on the 7% debentures as due; deferring those payments could restrict common dividends and share repurchases.
- Management highlighted funeral-market sensitivity to cremation mix, pricing and volume, cemetery exposure to consumer confidence and sales, and market-value changes in trust securities. Trust assets are generally restricted for their intended purposes; fair value was 84.6% of cost for preneed cemetery trusts, 89.1% for preneed funeral trusts and 83.7% for perpetual-care trusts.
- No numerical earnings or revenue guidance was provided. Results are seasonal, with death rates generally higher in winter. Management cautioned that historical performance does not assure future margins or earnings.
- A cemetery-related putative class action remains in discovery. The company said it could not assess the likelihood or estimate a potential loss. It also reported no material change in previously disclosed risk factors.
- Q3 included a $0.5 million gain on repurchasing junior subordinated debentures and a $0.2 million loss on early debt extinguishment. The company’s non-GAAP reconciliation also adjusts for withdrawable trust income and acquisition expenses; these adjustments should not be confused with reported GAAP results.
Investor verification points
- Confirm whether cemetery sales and same-store revenue stabilize after the pronounced Q3 decline, and track interment-right sales and average prices.
- Assess funeral growth quality: nine-month revenue gains were largely acquisition-driven, while same-store Q3 contract volume declined.
- Review unrestricted liquidity, facility availability and refinancing needs alongside the nearly balanced current assets and liabilities and substantial debt burden.
- Evaluate trust-portfolio market exposure, the significance of unrealized losses, and the rules governing access to trust income and principal.
- Monitor dividend capacity and the terms that could restrict common dividends if debenture distributions were deferred; assess the unresolved litigation as developments emerge.