Carriage Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless otherwise noted, amounts are in millions of dollars. Carriage operated 171 funeral homes in 26 states and 32 cemeteries in 11 states.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $90.5 | $87.5 | $283.7 | $276.3 |
| Gross profit | $27.4 | $25.6 | $89.7 | $87.8 |
| Operating income | $15.7 | $15.2 | $57.1 | $60.1 |
| Net income | $4.6 | $5.9 | $21.8 | $33.2 |
| Diluted EPS | $0.30 | $0.38 | $1.39 | $2.09 |
| Operating profit margin (company-defined non-GAAP) | 39.9% | 40.3% | 41.6% | 43.2% |
| Cash provided by operating activities | — | $61.8 | $50.0 |
Q3 revenue rose 3.4%, while net income fell 20.7%. Higher cemetery revenue and improved funeral cost management lifted gross profit, but higher interest and corporate expenses reduced earnings. For the first nine months, revenue rose 2.7%, but operating income declined 5.1% and net income declined 34.3%. Interest expense increased to $27.2 million from $18.2 million, primarily reflecting higher variable-rate borrowing costs.
Cemetery performance was the main revenue growth driver: Q3 cemetery operating revenue increased to $24.6 million from $21.3 million, supported by more preneed interment rights sold and higher average prices. Funeral contract volume was broadly flat in Q3; for the nine months, it declined 2.0%, which management attributed mainly to fewer COVID-19-related deaths versus early 2022. The nine-month average price per preneed interment right increased 12.2%.
Cash, debt and liquidity
- Cash was $1.7 million at September 30, 2023, versus $1.2 million at year-end 2022.
- Revolver borrowings were $187.3 million; $60.1 million of facility availability remained. The $250 million facility matures May 2026. The company reported compliance with its financial covenants.
- Senior notes had $400 million principal outstanding, carry a 4.25% coupon and mature in May 2029. Acquisition debt was $3.9 million. Balance-sheet debt and lease obligations also include lease liabilities; total lease liabilities were $25.7 million.
- The revolver’s weighted-average interest rate was 9.0% in Q3 2023 versus 4.3% a year earlier. Management estimated that a 100-basis-point rate change on the outstanding revolver balance would change pretax income by approximately $1.9 million.
- Operating cash flow was $61.8 million; investing activities used $53.4 million, including the $44.0 million Bakersfield acquisition; financing activities used $8.0 million. Management said it did not anticipate significant liquidity constraints and expected resources to cover requirements for the next 12 months and long-term obligations.
Material developments, outlook and risks
- In March 2023, Carriage acquired three funeral homes, two cemeteries and a cremation-focused business in Bakersfield, California, for $44.0 million in cash.
- Operating cash flow benefited from an $8.6 million withdrawal of realized gains and earnings from preneed trusts and a $6.0 million vendor incentive payment for a future prearranged-services marketing partnership. The incentive is deferred revenue until the program is implemented and sales begin; trust withdrawals also increased deferred revenue rather than current-period revenue.
- The Board announced a review of potential strategic alternatives in June 2023. No outcome or timetable was assured. Q3 general and administrative expense included a $0.9 million increase in consulting fees related to the review; management warned the process may be costly and disruptive.
- Management cited inflation and supplier surcharges, higher labor, utility, merchandise and insurance costs, and higher floating-rate interest expense. It said consumer impact had not been material to date, but the duration and scope of these pressures and death-rate fluctuations were uncertain. No specific quantitative earnings or revenue guidance is provided in the supplied filing text.
- The company recorded a $0.2 million tradename impairment for two funeral homes and reported impairment charges that also included property and equipment. Goodwill was not impaired in the 2023 annual assessment.
- Other risks include strategic-review execution, staffing and retention, competition, preneed trust investment performance and counterparty/insurance exposure, access to financing, cybersecurity, and ordinary-course litigation. Management did not expect current legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Whether operating margins and funeral-segment profitability stabilize as inflationary costs and lower funeral volumes affect results.
- How the strategic alternatives review progresses, its costs, and whether it results in a transaction.
- Whether operating cash flow remains sustainable after the trust withdrawals and vendor incentive that supported 2023 cash generation.
- Interest-rate exposure, revolver availability, covenant headroom and the company’s ability to reduce or refinance debt.
- Execution and returns from the Bakersfield acquisition, alongside preneed sales, trust investment performance and any further impairments.