Carriage Services, Inc. — Q3 2013 Form 10-Q
Business context and period. The unaudited quarter and nine months ended September 30, 2013 are compared with the corresponding 2012 periods. Carriage operated 164 funeral homes in 26 states and 32 cemeteries in 10 states. The company’s revenue was approximately 75% funeral and 25% cemetery.
Financial performance
| Metric | Q3 2013 | Nine months 2013 | Prior-year comparison |
|---|---|---|---|
| Revenue | $49.7 million | $161.1 million | Up 3.3% and 9.4%, respectively |
| Gross profit | $14.1 million | $49.9 million | Up from $13.3 million and $43.7 million |
| Gross margin | 28.4% | 31.0% | Prior year: 27.7% and 29.6% |
| Operating income | $6.4 million | $28.2 million | Q3 down from $7.9 million; nine-month up from $27.6 million |
| Continuing-operations net income | $1.9 million | $10.9 million | Prior year: $0.2 million and $6.5 million |
| Net income, including discontinued operations | $5.9 million | $15.3 million | Prior year: $0.6 million and $7.7 million |
| Diluted EPS | $0.32 | $0.78 | Continuing operations: $0.10 and $0.59 |
| Operating cash flow | Not separately reported | $32.2 million | Prior nine months: $15.3 million |
Balance sheet and funding. At September 30, cash was $0.9 million, current assets $32.8 million and current liabilities $47.4 million. Total assets were $724.8 million and stockholders’ equity $152.0 million. Senior debt and capital lease obligations were approximately $152.1 million, in addition to $89.8 million of 7% convertible junior subordinated debentures. The $255 million secured credit facility included $120 million drawn on the term loan and $26 million on the revolver. The facility matures September 30, 2017. The company reported covenant compliance, with a 2.67x leverage ratio against a 3.75x maximum and 2.01x fixed-charge coverage against a 1.20x minimum.
Investing activities used $5.2 million in the first nine months, including $7.4 million of capital expenditures, partly offset by $8.3 million in net sale proceeds. Financing activities used $27.9 million, including $26.2 million of net credit-facility repayments. The quarterly dividend remained $0.025 per share.
Changes versus the prior comparable period
- Nine-month funeral revenue rose 9.3%, largely due to 2012 acquisitions; cemetery revenue rose 9.7%, supported by preneed property sales and higher trust earnings. No businesses were acquired in 2013.
- Same-store funeral revenue fell 3.5% in Q3 as average revenue per contract declined 3.6%; the cremation rate increased. For the nine-month period, same-store funeral revenue increased 1.3%, but average revenue per contract declined 2.2%.
- Q3 operating income fell despite higher revenue. General and administrative expense rose 31.1% in Q3 and 31.9% for the nine-month period, reflecting corporate staffing and organizational changes, compensation, severance and consulting costs.
- Interest expense declined to $9.5 million for the nine months from $13.6 million, mainly due to lower credit-facility rates. The 2012 comparison included $3.0 million of debt-extinguishment costs absent in 2013.
- Cash from operations increased substantially, while acquisitions and new construction spending fell from $24.8 million to $6.1 million. Cash nevertheless declined $0.8 million from year-end to $0.9 million.
Outlook, risks and unusual items
- Management said cash, expected operating cash flow and credit-facility availability should cover anticipated working capital, capital spending, debt service, commitments, dividends and acquisitions for the foreseeable future. No quantified earnings or revenue guidance was provided.
- Discontinued operations materially boosted reported earnings: Q3 included $6.4 million of pre-tax disposition gains and $4.0 million of after-tax income from discontinued operations; nine-month discontinued-operations income was $4.4 million. A Kentucky funeral home sale completed October 2 for $0.6 million, with an approximately $0.3 million gain.
- An IRS-approved accounting-method change generated $54.0 million of additional tax deductions for 2012. The company recorded a $7.0 million deferred tax liability at September 30, primarily associated with use of those deductions and related net operating losses.
- Management identified risks including death-rate and consumer-preference changes, cremation trends, staffing, competition, trust investment performance, interest rates, financing availability, regulation and insurance-provider financial condition. A long-running cemetery class action remained unresolved; the company said it could not estimate the likelihood or potential loss. It reported no material change in previously disclosed risk factors.
- Preneed and perpetual-care trust assets are subject to customer, regulatory and cemetery-care obligations and are not freely available corporate cash. Management considered trust investment unrealized losses temporary and reported no other-than-temporary impairments.
- The company reported effective disclosure controls as of September 30, 2013, and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- How much of revenue and profit growth reflects durable same-store performance versus acquisitions, trust earnings and asset disposals.
- Whether elevated corporate overhead and compensation costs continue, and whether acquired-location margins improve as management expects.
- The cash conversion and sustainability of operating cash flow, given low cash on hand and restricted trust assets.
- Debt repayment capacity, floating-rate exposure, covenant headroom and potential dilution from the convertible debentures; nine-month diluted EPS includes approximately 4.4 million conversion shares.
- The outcome and potential exposure in the unresolved cemetery litigation, which the filing does not quantify.