Carriage Services, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; compared with the corresponding 2014 periods unless noted. Amounts are in U.S. dollars. The company operated 166 funeral homes in 27 states and 32 cemeteries in 11 states.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $58.4m | $54.5m | $180.9m | $166.7m |
| Operating income | $10.7m | $8.2m | $36.2m | $27.3m |
| Net income from continuing operations | $4.4m | $4.6m | $15.4m | $10.1m |
| Diluted EPS from continuing operations | $0.24 | $0.24 | $0.82 | $0.54 |
| Total field margin, as reported by management | 39.9% | 37.8% | 41.1% | 39.5% |
| Cash provided by operating activities | — | — | $43.0m | $27.6m |
Q3 revenue increased 7.0% and operating income rose 31.0%; nine-month revenue grew 8.5% and operating income 32.6%. Nine-month net income also benefited from the absence of 2014 debt-extinguishment and redemption losses and other prior-year unusual items. Q3 continuing-operations income was slightly lower despite stronger operations, in part because Q3 2014 included a $1.7m tax benefit related to uncertain tax positions.
Funeral revenue grew 5.6% in Q3 and 8.4% year to date; cemetery revenue grew 11.8% and 8.7%, respectively. Management cited improved cemetery preneed sales and pricing, higher funeral revenue per contract, acquired-business growth, and expense management. Q3 basic and diluted EPS were each $0.24; nine-month basic and diluted EPS were $0.84 and $0.82. Dividends declared were $0.025 per share in Q3.
Cash flow, debt and liquidity
- Cash was $0.4m at September 30, 2015, versus $0.4m at year-end 2014. Operating cash flow was $43.0m; investing used $33.1m and financing used $9.9m. The company said working-capital timing materially supported reported operating cash flow, including an approximately $8.0m favorable change related to income taxes payable.
- Capital expenditures were $22.8m for the nine months ($15.9m growth and $6.9m maintenance). Investing also included $4.3m for acquisitions and new-construction land and $6.1m to buy previously leased properties.
- At September 30, borrowings included $113.3m under the term loan and $63.0m under the revolver, plus acquisition debt and capital leases. The filing separately reports $143.75m principal of 2.75% convertible subordinated notes due 2021; their carrying value was $117.1m and fair value approximately $158.8m. Do not treat trust assets as unrestricted cash.
- The secured credit facility has a $200m revolver and $125m term loan, with a further $50m accordion subject to conditions. The revolver had $63.0m drawn. The company was covenant-compliant; leverage was 2.66x against a 3.50x maximum and fixed-charge coverage was 2.78x against a 1.20x minimum. Leverage above 2.50x triggered a 50-basis-point increase in the revolving-credit rate in Q3. Credit Facility weighted-average rates were 2.6% for Q3 and 2.5% for the nine months.
- The board authorized up to $45m in share repurchases. Through September 30, the company had repurchased 1,204,985 shares for approximately $27.3m; approximately $3.4m of purchases settled after quarter-end. Repurchases were a major use of financing cash.
Material changes, outlook and risks
- Q3 same-store funeral revenue increased 2.9%; same-store cemetery revenue increased 12.4%. Management attributed cemetery improvement partly to sales incentive programs and higher-value interments. Cremation represented 51.2% of same-store funeral contracts in Q3, while the burial rate declined to 41.7%.
- Management said it did not anticipate significant liquidity constraints, based on operating results, expected cash flows and available financing, but noted liquidity could be affected by changes in capital spending, acquisitions, operating cash flow, or financing access and cost. No numerical earnings or revenue guidance was provided.
- Market-sensitive investments in preneed and perpetual-care trusts had unrealized losses. At September 30, market value was 87.6% of cost for cemetery preneed and perpetual-care trust investments and 90.2% for funeral preneed trust investments. The company recorded first-quarter 2015 other-than-temporary impairments of $0.7m, $0.6m and $0.5m, respectively, and said the remaining loss positions were temporary. These trust funds support obligations and are subject to investment-market risk.
- Other stated risks include changes in death rates and consumer preferences, competition, employee retention, trust investment performance, interest rates, preneed sales and insurance providers, regulation, and the availability and cost of financing. The business is seasonal, with deaths generally higher in winter. The company reported no material change in previously disclosed risk factors, no expected material adverse effect from ordinary-course legal proceedings, and effective disclosure controls.
- Management’s non-GAAP adjusted net income was $6.1m for Q3 2015 and $20.5m for the first nine months of 2015; these measures adjust GAAP results for specified special items and should not be viewed as substitutes for GAAP results.
Important facts for investors to verify
- Whether operating-cash-flow growth persists after the favorable working-capital and tax-payable movements unwind.
- Debt and covenant headroom, the effect of the leverage-triggered rate increase, and the separate economic impact of the 2021 convertible notes.
- Whether cemetery preneed sales growth and recent incentive programs are sustainable, and how funeral cremation trends affect revenue per contract.
- Trust investment performance, impairment exposure, and any obligations to replenish underfunded trusts; trust balances are not freely available for corporate liquidity.
- The remaining repurchase authorization and the balance between buybacks, capital spending, acquisitions, and debt reduction.