Carriage Services, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Carriage operates funeral homes and cemeteries in the United States; at year-end it had 178 funeral homes and 32 cemeteries. Funeral operations generated about 78% of revenue and cemetery operations about 22%.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $258.1 million | $248.2 million |
| Gross profit | $76.8 million; 29.8% margin | $79.7 million; 32.1% margin |
| Operating income | $48.9 million; 19.0% margin | $50.2 million; 20.2% margin |
| Net income | $37.2 million; $2.09 diluted EPS | $19.6 million; $1.12 diluted EPS |
| Cash from operations | $45.2 million | $50.0 million |
- Revenue grew 4.0%, led by funeral revenue, up 6.1% to $200.9 million. Cemetery revenue declined 2.6% to $57.3 million.
- Gross profit fell 3.6%, primarily due to weaker preneed cemetery revenue, higher insurance costs, and costs at recently acquired businesses. Cemetery segment operating profit declined 10.7%; funeral segment operating profit increased 3.5%.
- Net income includes a $17.2 million discrete tax benefit from remeasuring deferred taxes after the Tax Cuts and Jobs Act. Excluding the filing’s specified special items, adjusted net income was $24.7 million, down from $28.3 million in 2016.
- Cash and cash equivalents were $1.0 million at year-end, versus $3.3 million a year earlier. Current assets were $30.1 million and current liabilities $42.7 million.
- Year-end debt and capital lease obligations were reported at $236.7 million, excluding the convertible notes’ $143.75 million principal. The $150 million revolver had $92.0 million drawn; the $150 million term loan had $127.5 million outstanding. The 2.75% convertible notes mature in March 2021.
- Credit covenants were met: leverage ratio 3.15x against a 3.50x maximum; fixed-charge coverage 2.14x against a 1.20x minimum. A 100-basis-point change in borrowing rates would change pretax income by an estimated $2.2 million, assuming debt balances remain unchanged.
Fourth-quarter results
Fourth-quarter 2017 revenue was $65.1 million, gross profit was $19.6 million, net income was $22.7 million, and diluted EPS was $1.31. Fourth-quarter 2016 revenue was $62.9 million, gross profit was $21.3 million, net income was $4.1 million, and diluted EPS was $0.22. The large year-over-year earnings increase chiefly reflects the 2017 tax benefit, not comparable operating growth.
Changes, outlook, and material items
- Seven funeral home businesses were acquired for $27.5 million in cash; two new funeral homes began operating. One Kentucky funeral home was sold for $0.6 million.
- Funeral contract volume rose 5.2% and average revenue per funeral contract increased 1.1%. The company-wide cremation rate rose to 51.4%, continuing a shift toward lower-average-revenue services.
- Cemetery preneed interment rights sold declined; management cited attrition among key sales personnel, hurricanes in Texas and Florida, and the absence of certain large property sales recorded in 2016.
- Cash from operations declined $4.8 million. Investment outflows included $28.8 million for acquisitions and land and $16.4 million in capital expenditures. Financing included $16.4 million of treasury-stock purchases and $3.7 million of dividends.
- The quarterly dividend increased from $0.05 to $0.075 per share, effective for the December 2017 payment. The company repurchased 574,054 shares under its program for $14.0 million and separately bought 100,000 shares from CEO Melvin C. Payne for $2.4 million in a board-approved transaction.
- Hurricanes Harvey and Irma affected 13 funeral homes and six cemeteries. The company incurred about $0.9 million in employee assistance and repair spending, recognized $0.6 million in expenses, and received about $0.3 million in insurance proceeds.
- Management said it expected no significant liquidity constraints and intends to pursue selective acquisitions and internal growth while improving existing operations. The filing provides no numerical revenue or earnings guidance. Management expected the tax changes to benefit 2018, while noting longer-term effects and state-law responses were uncertain.
Risks and contingencies
- Business performance depends on local reputation and retaining key managing partners, sales personnel, and other skilled employees. Competition, pricing pressure, cremation trends, death-rate fluctuations, and preneed sales can affect revenue and margins.
- Preneed and perpetual-care trust assets are subject to market and interest-rate risk and are generally restricted by state law. Trust underfunding or weak returns could require the company to contribute cash or impair future economics.
- Floating-rate debt, covenant limits, and the 2021 maturities of the credit facility and convertible notes create refinancing and interest-rate risks. Debt agreements may also constrain dividends, repurchases, acquisitions, and other actions.
- The IRS selected amended federal returns for 2013–2015 for a limited-scope examination to verify refunds; the filing expected the examinations to conclude in 2018.
- The company disclosed ordinary-course litigation, including potential burial-practice claims, and environmental, worker-safety, regulatory, insurance, and cybersecurity exposures. Management did not expect pending legal matters to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time $17.2 million tax benefit, and what earnings level is sustainable without it?
- Whether funeral growth can offset continued cemetery weakness and lower gross and operating margins.
- Available revolver capacity, covenant headroom, debt repayment and refinancing plans, and the effect of higher interest rates.
- The outcome of the IRS refund examination and the ongoing cash and profitability performance of acquired businesses.
- Trust funding, investment performance, and restrictions on trust assets; these balances should not be treated as freely available corporate liquidity.
- The cash-flow implications of future acquisitions, dividends, and repurchases, including the related-party share purchase from the CEO.