Carriage Services, Inc. — 2020 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. Carriage operated 180 funeral homes in 27 states and 32 cemeteries in 12 states. Funeral Home Operations accounted for about 75% of revenue and Cemetery Operations about 25%.
Financial performance and position
Amounts below are in millions, except per-share data and percentages. Comparative periods ended September 30.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $84.4 | $66.1 | $239.4 | $203.0 |
| Gross profit | $27.9 | $18.1 | $76.2 | $58.9 |
| Operating income | $16.5 | $7.4 | $36.9 | $36.1 |
| Net income | $5.5 | $0.6 | $7.7 | $12.0 |
| Diluted EPS | $0.31 | $0.03 | $0.43 | $0.66 |
| Gross margin | 33.0% | 27.3% | 31.8% | 29.0% |
Cash flow and liquidity: Operating cash flow for the first nine months was $67.8 million, versus $36.1 million a year earlier. Capital expenditures were $10.0 million. Cash was $0.7 million at September 30, essentially unchanged from year-end 2019. The company reported $56.0 million outstanding on its $190.0 million revolving credit facility and said it expected available resources to meet anticipated needs for the next 12 months.
Debt: In addition to the revolver, the company had $400.0 million principal amount of 6.625% senior notes due 2026, $2.6 million principal amount of 2.75% convertible notes due March 2021, and $6.1 million of acquisition debt. The company repurchased $3.8 million principal amount of convertible notes for $4.5 million plus accrued interest during September. It was in compliance with its credit-facility financial covenants at quarter-end.
Other metrics: Q3 funeral contracts increased 24.6% overall, while average revenue per funeral contract declined 5.8%. Preneed interment rights sold increased 39.7%, and their average price rose 1.1%. Dividends declared were $0.0875 per share for Q3. The Board subsequently approved a $0.10 quarterly dividend, payable December 1, 2020.
Material changes and drivers
- Q3 revenue rose 27.6% year over year, driven by acquired businesses, market-share gains, pandemic-related death-rate growth and higher cemetery revenue. Management attributed improved gross profit to revenue growth and cost controls.
- Q3 operating income more than doubled, while nine-month operating income was broadly flat. Nine-month net income fell despite higher revenue and gross profit, principally reflecting $19.6 million of divestiture and impairment charges and $5.9 million of additional interest expense.
- Q3 funeral volume benefited from COVID-19-related deaths, but lower average contract revenue reflected a shift toward cremations and fewer or smaller in-person services. Gathering restrictions also constrained preneed cemetery selling during the year.
- Acquisitions contributed materially to revenue and operating profit. The company paid $33.0 million for a funeral-home-and-cemetery combination in Lafayette, California, and sold six funeral homes for $7.3 million during Q3, recording a $4.9 million net loss on divestitures.
- COVID-19-related goodwill and tradename impairments recorded in Q1 were $13.6 million and $1.1 million, respectively. The August annual impairment review identified no further impairment.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance is provided in the filing. Management said discretionary growth spending would remain tightly managed, anticipated increased divestiture activity over the next 12 months, and planned to focus on integrating acquired businesses.
- Management said it had not experienced material adverse effects on liquidity, access to capital or cash flows from COVID-19 to date, but emphasized that the pandemic’s duration and ultimate effects were uncertain. Potential pressures include weaker preneed sales, contract defaults, higher cremation rates, smaller services, delayed customer payments and constraints on capital access.
- The company reported $7.3 million of net unrealized losses in trust investments at quarter-end, equal to 3% of their original cost basis. Trust assets are subject to market and interest-rate risk and are restricted to support preneed and perpetual-care obligations.
- Credit-facility covenants tighten at year-end: the maximum total leverage ratio declines from 5.75x to 5.50x for the quarter ending December 31, 2020 and subsequent quarters. The filing warns that covenant failure could accelerate debt and impair liquidity.
- The CARES Act tax refund for 2018 was received in August. A $2.9 million reserve for uncertain tax positions was recorded because IRS approval of certain accounting-method changes is uncertain; the company planned to seek a 2019 tax refund in Q4.
- On October 30, 2020, the company sold one West Virginia funeral home for $0.5 million and ceased operating in that state. The filing also identifies interest rates, trust investment performance, competition, staffing, acquisition integration and legal claims as risks.
Important facts for investors to verify
- Whether funeral-volume growth and acquired-business contributions persist, and whether average revenue per funeral contract stabilizes as service restrictions and cremation mix evolve.
- Whether preneed cemetery sales and receivable collections recover, particularly in markets affected by COVID-19 restrictions.
- Whether divestitures, acquisitions and cost controls translate into sustained operating cash flow and debt reduction, given low reported cash balances and substantial interest expense.
- Progress against credit-facility covenants as the leverage threshold tightens, and repayment or refinancing plans for the remaining convertible notes due March 2021.
- Whether trust investment values recover and whether the CARES Act tax benefits and related uncertain tax positions are resolved as expected.