Carriage Services, Inc. (CSV) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly figures below are for the fourth quarter. Unless otherwise indicated, amounts are in U.S. dollars.
Business context
Carriage provides funeral and cemetery services and merchandise in the United States. At year-end it operated 186 funeral homes in 29 states and 31 cemeteries in 11 states. Funeral homes generated about 80% of revenue and cemeteries about 20%. The business combines at-need services with advance-planned, or preneed, contracts.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $274.1 million | $268.0 million |
| Gross profit | $79.6 million | $75.9 million |
| Operating income | $52.3 million | $43.3 million |
| Net income | $14.5 million | $11.6 million |
| Diluted EPS | $0.80 | $0.63 |
| Cash flow from operations | $43.2 million | $49.0 million |
| Cash and cash equivalents at year-end | $0.7 million | $0.6 million |
- Revenue increased 2.3%; gross margin rose to about 29.0% from 28.3%, operating margin to 19.1% from 16.2%, and net margin to 5.3% from 4.3%.
- Fourth-quarter revenue was $71.1 million versus $66.5 million in Q4 2018; net income was $2.6 million versus a $2.7 million loss, and diluted EPS was $0.14 versus a $0.14 loss.
- Non-GAAP adjusted net income was $22.5 million, compared with $21.6 million in 2018. The company also reported non-GAAP operating profit of $109.8 million and an operating profit margin of 40.0%, versus $104.3 million and 38.9%.
- Operating cash flow fell $5.8 million, principally due to about $5.0 million of additional cash interest paid and unfavorable working-capital changes. Capital expenditures were $15.4 million; operating cash flow less capital expenditures was approximately $27.8 million.
- Investing activities used $158.9 million, including $140.9 million for acquisitions and a $5.0 million deposit on a subsequent acquisition. Financing activities provided $115.7 million.
- Year-end total debt was approximately $497.1 million, excluding lease obligations: $400.0 million of 6.625% senior notes due 2026, $83.8 million drawn on the revolving facility, $6.3 million of convertible notes due 2021, and acquisition debt. The company reported $104.2 million of revolver availability after letters of credit.
- Current assets were $39.9 million and current liabilities $35.6 million. Total assets were $1.13 billion and stockholders’ equity $226.6 million. Preneed and perpetual-care trust assets are generally restricted and should not be treated as unrestricted corporate liquidity.
Material changes versus 2018
- Revenue rose $6.1 million, with total funeral contracts increasing 5.8% to 38,940. Average revenue per funeral contract declined 3.1% to $5,499, reflecting service mix and pricing; the company’s cremation rate increased to 53.7%.
- Funeral segment revenue increased to $216.9 million. Cemetery revenue was essentially flat at $57.2 million overall, while same-store cemetery revenue grew $4.3 million, supported by more preneed interment-right sales and higher average prices.
- Net income improved by $2.9 million. Lower general and administrative expenses and higher gross profit more than offset higher interest expense and a larger loss on divested businesses. 2018 comparisons also included unusual items, including a performance-award cancellation charge and prior-period debt transactions.
- Carriage acquired two funeral-home-and-cemetery combinations, seven funeral homes, and three ancillary businesses for an aggregate purchase price of $140.9 million. It issued an additional $75.0 million of senior notes, bringing their principal balance to $400.0 million, and increased its revolver commitment from $150.0 million to $190.0 million.
- The company repurchased 400,000 shares for $7.8 million and paid $5.4 million in dividends. The quarterly dividend remained $0.075 per share.
Outlook, risks, and unusual items
- Management provided no quantified earnings or revenue guidance. For 2020, it expected to integrate recent acquisitions and use cash and revolver borrowings for internal growth projects, debt obligations, and dividends; it also cited possible share repurchases and purchases of remaining convertible notes.
- Management stated it did not anticipate significant liquidity constraints in the foreseeable future, while noting that changes in acquisition or capital-spending plans, operating cash flow, or financing access and cost could affect liquidity.
- Key risks include substantial leverage and restrictive debt covenants, variable-rate revolver exposure, competition and price pressure, rising cremation rates, local death-volume variability, reliance on key personnel, and execution and integration of acquisitions. Preneed sales can consume cash initially, while trust investment results and third-party insurance providers affect future contract funding and obligations.
- Trust investment returns rebounded sharply in 2019 after negative returns in 2018. A sustained downturn could reduce trust funding and potentially require the company to support obligations from operating cash or other sources.
- 2019 unusual items included acquisition and divestiture expenses, a $3.3 million loss on sale of businesses and related costs, impairments, litigation costs, and a $0.9 million tax expense related to a divested business. The company recorded $0.2 million of tradename impairment and goodwill impairments associated with businesses sold or planned for sale.
- A California employee class-action settlement was approved and $0.7 million was paid in November 2019. The company said other ordinary-course legal matters were not expected to materially affect its financial statements. An IRS examination of amended returns for 2013–2015 remained ongoing.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. The company reported effective disclosure controls and internal controls as of year-end.
Important facts for investors to verify
- Whether recent acquisitions, including the $102.0 million Fairfax transaction and the $33.0 million Lafayette acquisition completed January 3, 2020, deliver expected growth and returns.
- How leverage, interest costs, covenant headroom, and the 2020 convertible-note maturity affect cash available for investment, dividends, and repurchases.
- Whether funeral contract growth can offset lower average revenue per contract as cremation adoption and discounting continue.
- Whether cemetery preneed sales and same-store margin gains are sustainable, and how trust investment performance affects future obligations.
- The completion of acquisition purchase-price accounting, the outcome of the IRS examination and other tax matters, and any developments in litigation or planned divestitures.