Carriage Services, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is Q1 2022. Unless otherwise noted, financial amounts below are in millions of dollars. The company operates funeral homes and cemeteries; at quarter-end it operated 173 funeral homes and 32 cemeteries.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $95.5 | $98.2 |
| Gross profit / margin | $31.1 / 32.5% | $34.5 / 35.1% |
| Operating income / margin | $20.6 / 21.6% | $25.2 / 25.6% |
| Net income | $8.8 | $16.4 |
| Diluted EPS | $0.57 | $1.00 |
| Operating cash flow | $25.9 | $15.8 |
| Capital expenditures | $5.0 | $6.9 |
Revenue declined 2.7%; funeral contract volume fell 8.1%, partly offset by a 2.4% increase in average revenue per contract. Preneed interment rights sold increased 5.3%, attributed to newly acquired cemeteries, while average selling price was approximately flat. Management cited lower COVID-related deaths as the principal driver of reduced funeral volume. Higher operating costs and interest expense contributed to lower profit. The credit facility’s weighted-average interest rate rose to 7.9% from 2.1%, and total interest expense increased to $8.5 million from $5.5 million.
Cash, debt and liquidity
- Cash was $1.3 million at March 31, 2023, versus $1.2 million at year-end 2022. Operating cash flow included a $7.0 million withdrawal of realized gains and earnings from preneed cemetery trusts, as well as favorable accrued-liability movements.
- Investing cash outflow was $47.3 million, including the $44.0 million Bakersfield-area acquisition; financing cash inflow was $21.5 million. Net cash increased $0.1 million.
- Credit-facility borrowings were $213.6 million, up from $190.7 million at year-end; reported availability was $34.1 million. The facility matures May 2026. The company reported compliance with its financial covenants.
- Senior notes had $400.0 million principal, bear 4.25% interest and mature in May 2029. Acquisition debt was $4.0 million. Lease liabilities were $24.9 million. Cash is modest relative to borrowings.
- Current assets were $43.7 million and current liabilities $49.8 million. Management stated it expects available and anticipated resources to cover working capital, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months.
Material changes, outlook and risks
- On March 22, the company acquired three funeral homes, two cemeteries and a cremation-focused business for $44.0 million. Purchase accounting remains provisional; $13.6 million of goodwill was recorded. It also sold one funeral home and two cemeteries for $0.8 million.
- Funeral segment operating profit declined to $29.0 million from $33.7 million; cemetery segment operating profit increased to $12.1 million from $11.7 million. Segment operating margins weakened, with management citing inflation-related wage, utility, supply and merchandise costs.
- Management provided no specific numerical earnings or revenue guidance in this filing. It expects inflationary cost pressures to continue during 2023, while noting uncertainty about their extent and consumer effects. Its capital-allocation priorities include integration, debt repayment, dividends and internal growth investment.
- Unusual comparison items include a $0.3 million net property-fire loss in Q1 2023 versus a $1.9 million insurance-related gain in Q1 2022, and a $0.5 million gain on sale of other real property in Q1 2023. Trust portfolio unrealized losses are generally offset by related trust liabilities under the company’s accounting; market movements remain a risk.
- Key risks include lower death rates or changing cremation preferences, inflation and labor costs, interest-rate exposure on floating-rate debt, acquisition integration and execution, trust investment performance, and access to financing. The company added a risk disclosure concerning financial-institution stress and potential loss of bank deposits above FDIC insurance limits. A 100-basis-point change in the credit-facility borrowing rate would change pretax income by an estimated $2.1 million, assuming balances remain unchanged.
- The company reported ordinary-course legal proceedings and does not expect them to have a material adverse effect; it cautioned that insurance and self-insurance reserves may not cover all claims. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether funeral volume stabilizes and pricing continues to offset lower contract counts.
- Whether margins recover as inflationary labor, operating and merchandise costs evolve.
- How much of operating cash flow is recurring versus driven by trust withdrawals and working-capital timing.
- Post-acquisition performance and final purchase-price allocations for the Bakersfield business.
- Credit-facility availability, borrowing costs, covenant headroom and progress on debt reduction.