Carriage Services, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 9, 2012. The filing also reports unaudited fourth-quarter results. Carriage operated 159 funeral homes in 25 states and 33 cemeteries in 12 states. Funeral operations generated about 76% of revenue and cemetery operations about 24%.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $190.6 million | $184.9 million |
| Gross profit / margin | $52.3 million / 27.4% | $47.4 million / 25.7% |
| Operating income / margin | $29.5 million / 15.5% | $30.6 million / 16.6% |
| Net income | $7.0 million | $8.1 million |
| Diluted EPS | $0.38 | $0.45 |
| Cash from operations | $31.2 million | $25.7 million |
| Maintenance capex; reported free cash flow | $6.8 million; $24.4 million | Not stated here |
Revenue rose 3.1%, principally from acquisitions and funeral growth, while net income declined 13.6%. Higher gross profit was more than offset by a $6.3 million increase in general and administrative expenses. Management identified $4.0 million of increased “Special Items” within that expense increase, including restructuring-related termination costs, discontinued stock-based performance-plan expense, acquisition costs and debt-offering costs. The company’s adjusted, non-GAAP presentation included these items and withdrawable trust income; reported GAAP results remain the figures above.
Funeral revenue increased 5.1% to $145.2 million; cemetery revenue fell 3.0% to $45.4 million. Same-store funeral revenue declined 0.9%, with service volume down 1.3%; same-store cemetery revenue declined 5.3%, reflecting a 12.1% fall in preneed property sales. The companywide cremation rate reached 46.4%, up from 44.1%.
Fourth-quarter revenue was $47.8 million versus $48.1 million in Q4 2010; gross profit was $13.1 million versus $11.8 million. Net income declined to $0.3 million from $2.1 million, and diluted EPS was $0.02 versus $0.12.
Cash, liquidity and debt
Cash and cash equivalents were $1.1 million at year-end, with $3.1 million drawn on a new $60 million secured revolving facility; reported maximum additional borrowing capacity was approximately $43.6 million. Working capital was negative $1.1 million, compared with positive $2.5 million in 2010. The facility matures in October 2014, with a conditional extension option to October 2016.
Senior debt outstanding was approximately $139.8 million, including $130 million of 7⅞% notes due 2015; the company also had $89.8 million of 7% convertible junior subordinated debentures due 2029. The filing reports compliance with debt covenants at year-end. Cash use included $18.6 million for acquisitions, $10.6 million for capital expenditures, $1.4 million for common dividends and $0.7 million for common-stock repurchases.
Outlook, risks and notable items
- Management expected 2012 cash from operations of $26–$28 million, partly reflecting higher cash taxes after use of federal net operating loss carryforwards. It anticipated approximately $10 million of annual capital spending, about $1.8 million of common dividends in 2012, and could spend up to $4.3 million more under its repurchase authorization.
- The company completed six funeral-home acquisitions in 2011 for $18.6 million, plus assumed liabilities. It acquired another funeral home in Pennsylvania for $4.7 million on February 21, 2012.
- Trust-fund investment returns were negative in 2011: approximately -2.0% for preneed funeral trusts, -2.7% for preneed cemetery trusts and -3.3% for perpetual-care trusts. Management warned that further declines could create funding shortfalls or require operating cash to support trust obligations. No loss provision for expected contract-delivery shortfalls was required at year-end.
- Key business risks include weak consumer confidence and preneed cemetery sales, rising cremation and direct-cremation trends, local competition, the high fixed-cost structure, market-sensitive trust assets, acquisition execution, regulatory and environmental obligations, and covenant restrictions. An Indiana cemetery class action remained at a preliminary stage; the company said it could not estimate potential loss. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
- The company initiated a quarterly common dividend in 2011 and authorized a $5 million share-repurchase program. Management and the independent auditor reported effective disclosure controls and internal control over financial reporting; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether revenue and gross-profit growth can translate into improved operating income after the 2011 increase in corporate and restructuring-related expenses.
- Whether the forecast $26–$28 million of 2012 operating cash flow and stated revolver capacity are sufficient for taxes, debt service, acquisitions, capital spending and shareholder returns.
- How trust-fund investment performance and required funding levels affect future cash flow and obligations to deliver price-guaranteed preneed services.
- Whether preneed cemetery sales stabilize after their 12.1% decline and whether cremation trends affect revenue per funeral and cemetery demand.
- The integration and returns of 2011–2012 acquisitions, and the maturity and refinancing plan for the $130 million notes due in 2015.
- The status and potential exposure of the Indiana cemetery litigation, unrecognized tax benefits of approximately $7.9 million, and other disclosed contingencies.