Carriage Services, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless otherwise noted. Carriage operated 171 funeral homes in 28 states and 32 cemeteries in 11 states.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $61.1M | $60.1M | $193.1M | $185.3M |
| Gross profit | $15.5M | $18.2M | $57.2M | $58.3M |
| GAAP operating income | $8.9M | $11.7M | $36.5M | $36.0M |
| Net income | $3.0M | $5.7M | $14.5M | $15.5M |
| Diluted EPS | $0.17 | $0.33 | $0.81 | $0.91 |
- Revenue rose 1.5% in Q3 and 4.2% for the first nine months. Funeral revenue increased, while cemetery revenue declined in both comparisons.
- Gross margin was approximately 25.4% in Q3 2017 versus 30.3% in Q3 2016, and 29.6% for the nine months versus 31.5%. The filing attributes pressure chiefly to weaker preneed cemetery revenue and higher costs at businesses acquired in 2016.
- For the nine months, operating cash flow was $30.8M, down from $34.8M. Investing cash outflow was $13.4M versus $32.4M; financing cash outflow was $19.9M versus $2.1M. Cash ended September at $0.8M, compared with $3.3M at year-end 2016.
- At September 30, current assets were $28.0M and current liabilities $40.1M. The filing identifies operating cash flow and availability under the Credit Facility as primary liquidity sources; management said it did not anticipate significant liquidity constraints in the foreseeable future.
- Debt and lease obligations were reported at $218.8M, including $130.3M of term-loan principal and $75.5M drawn on the $150M revolving facility. Separately, $143.75M principal of 2.75% convertible subordinated notes is due in 2021; its balance-sheet carrying value was $123.2M. Credit Facility weighted-average interest rates were 3.4% for Q3 and 3.1% for the nine months. The company was in covenant compliance: leverage ratio 2.99 versus a maximum 3.50, and fixed-charge coverage 1.89 versus a minimum 1.20.
Material changes and management commentary
- Funeral revenue increased 4.7% in Q3 and 6.6% for the nine months. Same-store funeral revenue benefited from higher contract volumes and average revenue per contract; acquired businesses contributed growth but had lower margins than same-store operations.
- Cemetery revenue declined 8.2% in Q3 and 3.6% for the nine months. Same-store preneed interment-right sales weakened, including from key sales-personnel attrition, the absence of prior-year large estate sales, and hurricane-related disruption in Texas and Florida. Higher average prices partly offset lower sales volumes over the nine-month period.
- Q3 gross profit fell 15.1%; nine-month gross profit fell 1.9%. Q3 net income declined 46.5%, while nine-month net income declined 6.0%. Higher interest expense also weighed on results: $3.3M in Q3 and $9.5M for the nine months.
- Operating cash flow declined by $4.0M for the nine months, which management attributed to weaker preneed cemetery revenue, acquired funeral-home margins, and unfavorable working-capital timing, including tax and incentive-compensation payments.
- Management expects acquired-business gross profit margins to improve toward same-store levels as those businesses transition to its operating model. The filing gives no quantified earnings or revenue guidance.
Outlook, risks and unusual items
- Hurricanes Harvey and Irma affected 13 funeral homes and six cemeteries through property damage or business interruption. By September 30, the company had spent about $0.5M on employee assistance and repairs, recorded about $0.4M in expenses, and recognized a $0.1M insurance-reimbursement receivable. Management expected much of the loss to be covered, subject to insurance review.
- In the third quarter, the company repurchased 574,054 shares under its existing program for $14.0M and separately bought 100,000 shares from its CEO and Chairman in a board-approved transaction for $2.4M. The quarter’s total purchases were 674,054 shares. The board subsequently increased the repurchase authorization by $15M, to $40M total.
- After quarter-end, the board raised the quarterly dividend from $0.05 to $0.075 per share, effective for dividends payable December 1, 2017 and later. A new Pennsylvania funeral home began operating October 14.
- The IRS selected tax years 2013–2015 for examination; the 2013 review is limited to items revised in an amended return. The company also corrected an immaterial prior-period deferred-tax error: it increased the December 2016 deferred tax liability and reduced retained earnings by $2.255M, with no effect on the periods’ reported income or cash flows.
- Other disclosed risks include competition, staffing, acquisition execution, death-rate and consumer-preference changes, preneed sales, trust investment performance, interest rates, financing availability, insurance-company performance, and regulation. The filing reported no material change to previously disclosed risk factors. Routine legal proceedings were not expected to have a material adverse effect.
- A 100-basis-point change in floating borrowing rates would change pretax income by approximately $2.1M, assuming balances remain unchanged. A 0.25% interest-rate change was estimated to cause an approximately 1.51% change in the value of trust fixed-income securities.
Most important facts for investors to verify
- Whether cemetery preneed sales and margins recover after personnel attrition and hurricane disruptions.
- Whether acquired funeral-home businesses achieve the margin improvement management expects, and whether operating cash flow stabilizes.
- Debt capacity, interest-rate sensitivity, covenant headroom, and the impact of ongoing repurchases and the higher dividend on liquidity.
- Insurance reimbursement ultimately received for hurricane-related losses and the outcome of the IRS examination.
- How the 2018 revenue-recognition standard affects preneed selling-cost accounting; management expected no material overall financial-statement impact.