Carriage Services, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018; comparison is with the three months ended March 31, 2017. Carriage operated 178 funeral homes in 29 states and 32 cemeteries in 11 states. Funeral homes generated about 80% of revenue and cemetery operations about 20%.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $73.4 million | $68.2 million | +7.7% |
| Gross profit | $24.2 million | $23.1 million | +4.7% |
| GAAP operating income | $17.1 million | $15.9 million | +7.9% |
| Net income | $9.4 million | $7.1 million | +32.1% |
| Diluted EPS | $0.52 | $0.39 | +33.3% |
| Operating cash flow | $14.9 million | $8.2 million | +$6.7 million |
| Capital expenditures | $2.1 million | $3.7 million | -$1.6 million |
Gross margin was approximately 33.0%, versus 33.9% in the prior-year quarter. Management’s non-GAAP operating profit was $31.2 million, with a 42.6% margin, compared with $29.5 million and 43.3%. The lower margin reflected cost growth, including investment in local leadership; the filing defines this measure separately from GAAP operating income.
Cash and cash equivalents were $0.8 million at March 31, 2018. Current assets were $27.7 million and current liabilities $40.8 million. Operating cash flow increased, primarily due to favorable working-capital comparisons, including lower incentive-plan and severance payments than in Q1 2017. Cash flow less capital expenditures was approximately $12.8 million; this figure should be considered in light of those working-capital effects.
At quarter-end, borrowings included $84.2 million under the revolving facility and $123.8 million under the term loan. Total long-term debt and capital-lease obligations were reported at $224.9 million, excluding the convertible notes; the notes had $143.75 million principal due in 2021. Interest expense rose to $3.7 million from $3.0 million. The company reported covenant compliance, a 2.96-to-1 leverage ratio and a 2.04-to-1 fixed-charge coverage ratio. Trust investments are subject to preneed and cemetery-care obligations and should not be treated as unrestricted liquidity.
Material changes versus the prior comparable period
- Funeral revenue increased 8.1% to $58.6 million, and cemetery revenue increased 6.1% to $14.8 million. Funeral growth included recently acquired businesses; same-store funeral revenue grew 4.0% and same-store cemetery revenue grew 8.1%.
- Funeral same-store contracts increased 3.4%, while average revenue per contract rose 0.5%. Cemetery same-store preneed interment-right sales volume increased, although average price per interment right declined 4.5%.
- Net income benefited from lower income-tax expense: $2.9 million versus $4.7 million. The estimated effective tax rate before discrete items fell to 27.5% from 40.0%, primarily reflecting the federal tax-rate reduction under the Tax Cuts and Jobs Act.
- Interest expense increased by about $0.7 million, principally due to higher borrowing rates and additional credit-facility borrowings. The quarterly dividend declared rose to $0.075 per share from $0.050.
- Adoption of Topic 606 on January 1, 2018 had no material effect on reported quarterly earnings. It changed certain balance-sheet classifications and capitalized qualifying preneed selling commissions; opening retained earnings increased about $2.8 million. Comparative periods were not restated.
Outlook, commentary, risks and unusual items
- Management gave no specific numeric earnings or revenue guidance. It said it did not anticipate significant liquidity constraints and expected existing and anticipated resources to cover working capital, capital expenditures, scheduled debt service, dividends and acquisitions, while noting financing or operating cash flow could differ from expectations.
- Management attributed some same-store funeral margin pressure to adding managing partners and said it expects acquired-business margins to improve as those businesses adopt its operating model. It described its strategy as decentralized local leadership, sustainable growth and selective acquisitions.
- After quarter-end, an April 25, 2018 credit amendment increased revolving commitments from $150 million to $200 million and modified the senior secured leverage covenant. The maximum ratio steps down from 4.50 through June 2018 to 3.50 beginning at the end of June 2019. The quarter-end covenant figures above reflect the terms then in effect.
- Key disclosed risks include staffing and retention, execution of growth and acquisition plans, competition, death-rate and consumer-preference changes, preneed sales, trust investment performance, interest rates, financing availability, insurance-company risk, taxes and regulation. The company noted seasonal death-rate fluctuations, generally higher in winter.
- Trust portfolios had unrealized losses, but the company considered them temporary and recorded no other-than-temporary impairment in the quarter. No material adverse effect was expected from ordinary-course legal proceedings; the company cautioned that self-insurance reserves and coverage may not cover every claim.
Important facts for investors to verify
- Whether operating cash flow remains strong after normalizing for working-capital movements and prior-year incentive and severance payments.
- Progress on same-store and acquired-business margins, including whether added leadership costs produce sustained revenue growth.
- Debt-service capacity and covenant headroom as floating-rate costs change; review the April 2018 amendment and its step-down leverage limits.
- Whether reported revenue and balance-sheet trends are comparable after Topic 606 reclassifications, and how capitalized preneed commissions amortize over time.
- The sustainability of the higher dividend alongside acquisition, capital-spending and debt-repayment plans; the filing reports no repurchases under the announced program during the quarter, while separately disclosing 5,350 shares surrendered by employees for taxes.