Carriage Services, Inc. — Q3 2019 Form 10-Q
Business and period: U.S. funeral and cemetery services and merchandise provider; quarter and nine months ended September 30, 2019, compared with the same 2018 periods. At quarter-end, operated 179 funeral homes in 29 states and 29 cemeteries in 11 states. Funeral operations generated about 80% of revenue and cemetery operations about 20%.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $66.1m | $64.2m | $203.0m | $201.5m |
| Gross profit | $18.1m | $17.1m | $58.9m | $58.1m |
| Operating income | $11.9m | $10.3m | $40.7m | $37.4m |
| Net income | $0.6m | $2.2m | $12.0m | $14.3m |
| Diluted EPS | $0.03 | $0.11 | $0.66 | $0.78 |
| Cash from operations | Not stated for quarter | $36.1m | $38.7m |
- Q3 revenue rose 2.9%; nine-month revenue rose 0.7%. Q3 gross margin was approximately 27.3%, versus 26.6%; nine-month gross margin was approximately 29.0%, versus 28.9%.
- Q3 operating income increased 16.4%, while net income fell 73.8%. Nine-month operating income increased 9.0%, while net income declined 16.4%.
- Management’s non-GAAP operating profit was $25.7m for Q3 and $81.2m for nine months, with reported margins of 38.9% and 40.0%, respectively. Adjusted net income was $5.0m for Q3 and $17.6m for nine months; these non-GAAP measures exclude items described in the filing.
- Cash and equivalents were $5.8m at September 30, up from $0.6m at year-end 2018. Nine-month capital expenditures were $11.5m. Financing activities used $21.6m, including $7.8m of share repurchases and $4.1m of dividends.
Financial position and liquidity
- Total assets were $952.1m and total liabilities $727.6m at September 30, 2019. Current assets were $32.0m versus current liabilities of $38.9m.
- Debt included $325.0m principal amount of 6.625% senior notes due 2026, $18.0m outstanding under the $150m revolving credit facility, and $6.3m principal of 2.75% convertible notes due 2021. Acquisition debt was $7.8m. The company also reported $29.5m of lease liabilities following adoption of the new lease standard.
- Credit-facility covenants were met; leverage ratio was 4.89x and fixed-charge coverage ratio 2.20x. The revolver matures in May 2023. Management said it did not anticipate significant liquidity constraints in the foreseeable future, while noting that materially different operating cash flow or financing access could adversely affect liquidity.
- Preneed and perpetual-care trust assets are substantially restricted or associated with future customer obligations and should not be treated as freely available corporate cash.
Material changes, commentary and unusual items
- Q3 same-store funeral contract volume increased 6.6%, but average revenue per contract declined 3.2%. Nine-month funeral contract volume rose 1.1% on a same-store basis, while average revenue per contract declined 1.7%.
- Same-store cemetery operating revenue increased 15.6% in Q3 and 9.1% for nine months, supported by more preneed interment-right sales and higher average prices. Excluding the three cemeteries discontinued in 2018, management said cemetery comparisons improved.
- Management attributed stronger Q3 gross profit to same-store funeral revenue growth and expense management. It cited changes to operating standards, staffing, pricing, social-media presence, and cemetery sales and inventory practices.
- Net income was weighed down by a $3.9m loss on sale of businesses, $0.5m goodwill impairment, $0.2m tradename impairment, and $0.9m tax expense related to a divested business. The quarter also included a $0.6m insurance reimbursement gain. Nine-month interest expense increased $4.1m, mainly because of the 2026 notes issued in May 2018.
- During 2019, the company ceased operating or sold certain funeral businesses and merged another into an existing market. It recorded $0.7m of goodwill and tradename impairments in total during the first nine months.
- Subsequent to quarter-end, Carriage acquired four Buffalo-area funeral homes for $15.3m on October 9 and Dallas-area funeral, cemetery, and related businesses for $23.6m on October 28, funded with cash and revolver borrowings.
- A California wage-and-hour class settlement received final court approval on October 29; the expected $676,000 payment was to be made in Q4. The filing reported no material change in previously disclosed risk factors and no material adverse effect expected from other ordinary-course legal proceedings.
- No numerical earnings or revenue guidance was provided. Risks highlighted include staffing and retention, competition, death-rate and consumer-preference changes, preneed sales and trust investment performance, interest rates, insurance funding, indebtedness, and ability to finance acquisitions.
Important facts for investors to verify
- Whether funeral revenue-per-contract pressure and changes in cremation mix affect pricing, margins, and future same-store growth.
- How much of the Q3 and nine-month earnings decline reflects nonrecurring divestiture, impairment, and tax items, and whether additional charges may arise.
- Post-quarter acquisition funding, resulting revolver borrowings, and covenant headroom relative to the reported 4.89x leverage ratio.
- Whether operating cash generation can support planned acquisitions, capital spending, dividends, and debt service while maintaining liquidity.
- The investment performance and funding obligations associated with preneed and perpetual-care trusts, and the impact of interest-rate or market-value changes.