Business context and reporting period
Carriage Services, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. It operated 166 funeral homes in 26 states and 33 cemeteries in 11 states. Funeral homes generated about 75% of revenue and cemeteries about 25%. The company’s growth strategy combines local operating standards with selective acquisitions and dispositions.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $54.2 vs. $48.7; up 11.3% | $111.6 vs. $99.4; up 12.3% |
| Gross profit / margin | $16.9 / 31.3% vs. $13.9 / 28.6% | $35.9 / 32.2% vs. $30.4 / 30.6% |
| Operating income | $9.5 vs. $8.8 | $21.8 vs. $19.8 |
| Continuing-operations net income | $3.6 vs. $2.5 | $9.0 vs. $6.4 |
| Net income | $4.1 vs. $2.7 | $9.4 vs. $7.1 |
| Diluted EPS from continuing operations | $0.20 vs. $0.14 | $0.46 vs. $0.35 |
For the six months, funeral revenue rose 12.1% and cemetery revenue rose 12.9%. Management attributed growth mainly to 2012 acquisitions, increased contracts at existing locations, higher cemetery preneed property sales, and higher trust earnings. Same-store funeral revenue increased 3.6%; same-store cemetery operating revenue increased 8.3%. The cremation rate at same-store funeral homes rose to 45.8% from 43.9% for the comparable six-month period.
General and administrative expense increased 45.9% in the quarter and 32.3% in the first half, to $7.1 million and $13.4 million, respectively. Management cited corporate staffing and organizational upgrades, severance and consulting costs, and higher incentive and stock-based compensation. Net interest expense declined to $3.7 million for the quarter and $6.3 million for the first half, from $4.5 million and $9.1 million, respectively, primarily due to lower credit-facility rates. The second-quarter credit-facility amendment also resulted in a $0.4 million pretax charge for unamortized loan costs.
Cash flow, debt and liquidity
First-half operating cash flow was $24.0 million, compared with $13.4 million in 2012. Investing activities used $7.8 million, versus $22.4 million, reflecting lower acquisition spending and $2.7 million of business-sale proceeds. Capital expenditures were $4.5 million. Financing activities used $16.4 million, including $15.1 million of credit-facility repayments and $0.9 million of common dividends. Cash ended the period at $1.5 million, compared with $1.7 million at year-end 2012.
At June 30, revolving borrowings were $34.6 million and term-loan borrowings were $122.5 million; the company also reported acquisition debt and capital-lease obligations. It had $89.8 million of 7% convertible junior subordinated debentures due 2029. The secured credit facility matures in 2017 and has a $125 million revolver; no letters of credit were outstanding. The company reported covenant compliance, with a 2.77:1 leverage ratio against a maximum of 3.75:1 and fixed-charge coverage of 2.28:1 against a minimum of 1.20:1. Management said current cash, expected operating cash flow and facility availability should cover anticipated needs, while noting that changed capital-spending or acquisition plans could require additional financing.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management expects its operating and acquisition models to support long-term growth, but cautions that performance may vary and that historical results are not necessarily indicative of future results. Key risks include changes in death rates and consumer preferences, competition, staffing, trust investment returns and interest rates, access to financing, preneed sales and insurer financial condition, and regulatory changes. The company also noted seasonal death-rate fluctuations.
There were no acquisitions in the first half of 2013. The company sold a California funeral home during the second quarter and had four additional locations classified as held for sale at June 30. After quarter-end, it sold an Ohio funeral home for $0.6 million with a reported net gain of about $0.1 million, and a Virginia cemetery for $5.0 million with a reported net gain of about $6.3 million. The unusually large reported cemetery gain merits review. A putative class-action cemetery lawsuit remains unresolved; the company said it could not estimate the likelihood or range of loss. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported $6.3 million gain on the Virginia cemetery sale after quarter-end, including its basis and accounting treatment.
- Assess how much revenue and profit growth is attributable to acquisitions and trust earnings versus continuing same-store operating performance.
- Review the increase in corporate costs and the nature and recurrence of severance, consulting, incentive-compensation and financing charges.
- Examine preneed and perpetual-care trust restrictions, investment performance and exposure to market and interest-rate changes; trust assets are not freely available operating cash.
- Check debt covenant headroom, floating-rate sensitivity, convertible-debenture dilution and the terms governing interest deferral.
- Monitor the held-for-sale transactions, the cemetery litigation and other contingencies.