Carriage Services, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in millions except per-share data, percentages, and operating statistics. Carriage operated 181 funeral homes in 29 states and 29 cemeteries in 11 states; funeral homes generated about 80% of revenue.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $67.8 | $63.8 | $136.8 | $137.2 |
| Gross profit | $19.3 | $16.8 | $40.9 | $41.0 |
| Operating income | $13.2 | $10.0 | $28.8 | $27.1 |
| Net income | $4.9 | $2.7 | $11.4 | $12.1 |
| Diluted EPS | $0.27 | $0.15 | $0.63 | $0.67 |
| Operating cash flow | Not stated separately | Not stated separately | $21.9 | $26.3 |
- Q2 revenue rose 6.1%; operating income increased about 32% and net income about 77%. Gross margin was approximately 28.4% versus 26.4%; operating margin was approximately 19.5% versus 15.6%.
- First-half revenue declined 0.3% and gross profit declined 0.4%, while operating income increased 6.2%. Net income fell 5.9%, primarily reflecting higher interest costs.
- Q2 funeral revenue increased $4.0 million. Same-store funeral contract volume rose 3.8%, with average revenue per contract broadly flat. First-half same-store funeral revenue and profit declined, partly because the prior-year first quarter benefited from a severe flu season.
- Same-store cemetery revenue rose 11.3% in Q2 and 6.0% for the first half, supported by higher preneed interment-right sales. Q2 average interment-right price fell 8.5%; first-half price increased 3.1%. Three cemeteries ceased operating after a management agreement expired in 2018, reducing reported year-over-year cemetery revenue.
Cash, debt, and liquidity
- Cash was $0.7 million at June 30, 2019, versus $0.6 million at year-end. First-half operating cash flow was $21.9 million; capital expenditures were $8.7 million, up from $5.1 million in the prior-year period. Operating cash flow was lower by $4.4 million, primarily due to increased interest payments.
- At June 30, the balance sheet showed current assets of $25.6 million and current liabilities of $32.5 million. Management said it did not anticipate significant liquidity constraints, citing operating cash flows and the revolving credit facility.
- Debt included $325 million face value of 6.625% senior notes due 2026 (carrying value $319.4 million), $24.6 million drawn on a $150 million revolving facility, $6.3 million principal on 2.75% convertible notes due 2021, and $8.2 million acquisition debt. The credit facility also had a $2.0 million letter of credit outstanding. Lease liabilities totaled $30.5 million after adoption of the new lease standard.
- Interest expense increased to $6.3 million in Q2 from $4.7 million and to $12.6 million for the first half from $8.5 million, mainly reflecting the senior notes issued in May 2018. The company was in compliance with credit covenants: leverage ratio 5.05x and fixed-charge coverage ratio 2.15x.
- First-half financing used $13.3 million of cash, including $7.8 million for repurchases of 400,000 shares and $2.7 million of dividends. Quarterly dividends remained $0.075 per share.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance is provided. Management expects existing and anticipated resources to cover working capital, capital expenditures, scheduled debt payments, commitments, dividends, and acquisitions for the foreseeable future, while noting that changed spending plans or weaker cash flows or financing access could adversely affect liquidity.
- Management attributed improved Q2 margins partly to operational changes introduced in late 2018, including a renewed focus on local leadership and operating standards. The company emphasizes sustainable growth, local market share, and selective acquisitions.
- Key disclosed risks include staffing and retention, acquisition execution, competition, death-rate and consumer-preference changes, preneed sales, trust investment returns, interest rates, insurance counterparties, debt service, regulation, and costs such as insurance and taxes. The filing reports no material changes to previously disclosed risk factors.
- Carriage adopted lease accounting Topic 842 on January 1, 2019, recording operating lease right-of-use assets and liabilities; the company said the change materially affected the balance sheet but not earnings, cash flows, liquidity measures, or covenant ratios.
- A California employee class action settlement was preliminarily approved; the company’s $0.65 million accrual remained adequate at June 30. Management did not expect other ordinary-course legal matters to materially adversely affect the financial statements.
- Subsequent to quarter-end, the credit facility amendment increased the permitted use of revolving-loan proceeds for share repurchases from $30 million to $50 million. The board also authorized a new repurchase program of up to $25 million.
Most important facts for investors to verify
- Whether funeral volume, average revenue per contract, and cemetery preneed sales sustain their Q2 trends, and how the prior-year flu comparison affects future periods.
- Debt-service capacity and covenant headroom, given low cash, the 6.625% senior notes, higher interest expense, and reported leverage of 5.05x.
- How increased capital spending and the new share-repurchase authorization affect liquidity, investment needs, and shareholder returns.
- Performance and funding of preneed and perpetual-care trusts, including the effect of market movements and realized investment gains or losses.
- Progress and final cost of the California settlement, and whether other legal, insurance, or self-insurance claims require additional reserves.