Carriage Services, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Carriage operated 171 funeral homes in 28 states and 32 cemeteries in 11 states, reporting Funeral Home and Cemetery segments.
Financial performance
| Metric | Q1 2016 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $63.3 million | $68.2 million | +7.6% |
| Gross profit | $21.3 million | $23.1 million | +8.4% |
| Operating income | $11.7 million | $15.9 million | +36.1% |
| Net income | $4.6 million | $7.1 million | +55.0% |
| Diluted EPS | $0.27 | $0.39 | +$0.12 |
| Operating cash flow | $10.2 million | $8.2 million | -$2.1 million |
| Capital expenditures | $3.6 million | $3.7 million | +$0.1 million |
Gross margin was approximately 33.6% versus 33.9%; operating margin was approximately 23.3% versus 18.4%; and net margin was approximately 10.4% versus 7.2%. Revenue was led by Funeral, up 10.0% to $54.2 million; Cemetery revenue declined 0.6% to $13.9 million. The filing also reports non-GAAP operating profit of $29.5 million, up from $27.7 million; this measure adds field depreciation and amortization and regional and unallocated costs to gross profit.
Liquidity, debt and balance sheet
- Cash was $0.8 million at March 31, down from $3.3 million at year-end. Current assets were $27.4 million and current liabilities $36.4 million.
- Total outstanding principal of long-term debt and capital lease obligations was $214.6 million, including $135.9 million on the term loan, $65.1 million on the revolving facility, and $14.8 million of acquisition debt and capital leases. The company also had $143.75 million principal amount of 2.75% convertible notes due 2021; their balance-sheet carrying value was $120.8 million.
- The secured credit facility totals $300 million, including a $150 million revolving facility and $150 million term loan, with a conditional $75 million accordion. The revolver had $65.1 million outstanding; a $2.0 million letter of credit was also outstanding. The reported weighted-average facility rate was 2.9%.
- Carriage reported compliance with debt covenants: leverage ratio 2.75x against a maximum of 3.50x; fixed-charge coverage 2.29x against a minimum of 1.20x. Management said existing cash, operating cash flows and available borrowing capacity were expected to cover anticipated needs.
Changes, management commentary and risks
- Funeral growth reflected an 8.7% increase in total funeral contracts and a 1.7% increase in average revenue per contract. Same-store funeral revenue rose 3.3%; acquired funeral revenue rose 66.2%, including six businesses acquired in the second half of 2016.
- Cemetery same-store revenue fell 2.6%, principally as preneed interment rights sold declined 20.2%, partly offset by a 20.3% increase in average price. Management cited attrition of key sales personnel at certain businesses. Same-store cemetery operating profit fell 14.3%.
- Management attributed higher gross profit mainly to better cost management in same-store funeral operations and acquired funeral revenue. General and administrative expense fell 26.0%, largely because Q1 2016 included severance and retirement costs relating to a former executive. Q1 2016 also included a $0.6 million loss on early extinguishment of debt, versus none in Q1 2017.
- Operating cash flow declined, primarily due to unfavorable working-capital movements, including payments for accrued severance and incentive compensation. Q1 2017 investing outflow was $3.7 million, all capital expenditures; there were no acquisitions or land purchases reported in the quarter.
- The quarterly dividend doubled to $0.05 per share from $0.025; $0.8 million was paid in Q1 2017. No shares were repurchased under the public program; 9,542 shares reported as purchased during the quarter were employee share surrenders for tax withholding.
- No earnings or revenue guidance was provided. Forward-looking risks include death-rate and seasonal variation, competition and consumer preferences, ability to retain skilled personnel and generate preneed sales, trust investment performance, interest rates, financing access and regulatory changes. The company noted its business is generally affected by higher winter death rates.
- Carriage expected adoption of the new revenue standard in 2018 to change the timing of cemetery interment-right revenue recognition, but did not expect a material financial-statement impact. It reported no material change in risk factors from its 2016 Form 10-K, no goodwill impairment, and no Q1 2017 other-than-temporary impairments in the disclosed trust portfolios. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether funeral volume and acquired-business contributions can continue to offset weaker cemetery preneed sales and lower cemetery same-store profitability.
- Cash conversion and working-capital trends, given lower operating cash flow and cash of only $0.8 million at quarter-end.
- Debt capacity, covenant headroom and exposure to floating rates; management estimated a 100-basis-point borrowing-rate change would affect pretax income by $2.0 million, assuming balances were unchanged.
- Trust investment performance, preneed contract cancellations and collection quality. The filing reported $39.1 million of financed preneed cemetery receivables and specified reserves for recognized contracts 90 or more days past due.
- Any subsequent guidance, acquisition activity, dividend changes, or material developments in legal, insurance and regulatory exposures; the filing provided no specific forward earnings outlook.