Carriage Services, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Carriage operated 166 funeral homes in 27 states and 32 cemeteries in 11 states.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $59.3 million | $56.5 million | $122.5 million | $112.2 million |
| Operating income | $11.0 million | $10.8 million | $25.5 million | $19.1 million |
| Net income from continuing operations | $4.6 million | $3.9 million | $11.0 million | $5.5 million |
| Diluted EPS | $0.24 | $0.21 | $0.57 | $0.30 |
| Cash from operating activities | — | $28.3 million | $13.3 million |
- Q2 revenue rose 4.9%; operating income rose 1.9%. Six-month revenue rose 9.2% and operating income rose 33.4%.
- Gross profit was $18.2 million in Q2 versus $18.0 million; six-month gross profit was $40.5 million versus $36.0 million. Field margin was 39.7% versus 39.6% in Q2 and 41.7% versus 40.3% for the half.
- At June 30, cash was $0.6 million and current assets were $29.0 million against current liabilities of $34.0 million. Operating cash flow increased $15.0 million year over year; management attributed the increase partly to working-capital movements, including tax payable and improved collections.
- Cash used in investing was $25.6 million, including $15.3 million of capital expenditures. Cash used in financing was $2.6 million. Cash increased $0.1 million from year-end.
- Reported outstanding term-loan and revolving-facility borrowings were $162.0 million, with $8.6 million of acquisition debt and capital lease obligations; the company also had $143.75 million principal amount of 2.75% convertible subordinated notes due 2021. The notes’ balance-sheet carrying value was $116.2 million.
- The $200 million revolving facility had $46.4 million drawn and no letters of credit outstanding. The company reported compliance with covenants; leverage was 2.57x versus a maximum of 3.50x, and fixed-charge coverage was 2.69x versus a minimum of 1.20x. The facility matures in 2019.
Material changes and operating drivers
- Funeral revenue increased 5.5% in Q2 and 9.8% for the six months. Growth reflected acquired locations and improved same-store results; six-month same-store funeral revenue rose 4.2%, supported by higher contract volumes and average revenue per contract.
- Cemetery revenue increased 3.1% in Q2 and 7.2% for the six months. Six-month same-store cemetery revenue rose 2.1%; Q2 same-store revenue declined 1.0%, principally due to fewer preneed interment rights sold.
- Management cited improved control of salaries, benefits, bad debt and other expenses in the first half. General and administrative expense declined 13.1% for the six months, partly because prior-year one-time compensation and acquisition-related costs did not recur.
- Prior-year comparisons included a $1.0 million Q2 2014 early-debt-extinguishment loss. First-half 2014 also included a $3.8 million loss on redemption of junior subordinated debentures and a $1.1 million gain related to a building purchase. No comparable items were reported in first-half 2015.
- The company acquired a funeral-home business in February 2015 and purchased previously leased funeral-home properties. It completed a new funeral home in College Station, Texas, and continued construction and remodeling projects.
- The board authorized up to $25 million in share repurchases; 125,000 shares were bought for $3.1 million in Q2. The quarterly dividend remained $0.025 per share.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said cash, expected operating cash flow and credit-facility availability should meet anticipated working capital, capital spending, debt service, dividends and acquisitions for the foreseeable future, while noting that changed investment plans or weaker cash flows or financing access could pressure liquidity.
- Management’s outlook depends on execution of its operating, leadership and acquisition strategies. Disclosed risks include death volumes, consumer preferences, competition, staffing, trust-fund investment performance, interest rates, preneed sales, insurance providers, regulation, costs and access to financing. Results are seasonal, with deaths generally higher in winter.
- Trust investments were not reported as underfunded at June 30. The company recorded other-than-temporary trust investment impairments of approximately $0.7 million in cemetery preneed trusts, $0.6 million in funeral preneed trusts and $0.5 million in perpetual-care trusts; management said the losses do not affect earnings until realized and allocated to contracts.
- Ordinary-course legal proceedings were not expected to have a material adverse effect, though the company self-insures certain risks and notes that reserves or insurance may not cover all claims. No material changes to previously disclosed risk factors were reported.
- A 100-basis-point change in borrowing rates would change pretax income by an estimated $1.6 million, assuming debt balances remain unchanged. The company had no interest-rate hedges.
Important facts for investors to verify
- Whether revenue and margin growth persist in same-store operations, separately from acquired-business contributions.
- Whether improved operating cash flow is sustainable after the favorable working-capital movements, and how planned growth and maintenance capital spending convert to returns.
- Available liquidity after debt service, acquisitions and repurchases; covenant headroom and sensitivity to floating interest rates.
- Trends in preneed sales, receivable aging, cancellations and collections, together with trust portfolio values and potential funding obligations.
- The impact of the 2021 convertible notes, share repurchases, seasonal death volumes and disclosed legal or insurance contingencies.