Carriage Services, Inc. — Q1 2019 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Carriage operated 181 funeral homes in 29 states and 29 cemeteries in 11 states; funeral operations generated about 80% of revenue and cemetery operations about 20%.
Key financial results
| Metric | Q1 2018 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $73.4 million | $69.1 million | Down 5.9% |
| Gross profit | $24.2 million | $21.6 million | Down 10.7% |
| Gross margin | 33.0% | 31.3% | Down 1.7 percentage points |
| Operating income | $17.1 million | $15.6 million | Down 8.9% |
| Net income | $9.4 million | $6.5 million | Down 30.3% |
| Diluted EPS | $0.52 | $0.36 | Down 30.8% |
| Operating cash flow | $14.9 million | $11.0 million | Down $3.9 million |
| Capital expenditures | $2.1 million | $3.5 million | Up $1.4 million |
Interest expense rose to $6.3 million from $3.7 million, principally reflecting the 6.625% senior notes issued in May 2018; lower interest and discount accretion on the reduced convertible-note balance partly offset the increase. The effective tax rate before discrete items was 28.0%, compared with 27.5%.
At March 31, 2019, cash was $0.7 million and current assets were $27.3 million versus current liabilities of $33.5 million. The company reported $21.0 million outstanding on its $150 million revolving credit facility and a $2.0 million letter of credit. It was in covenant compliance, with a 5.19-to-1 leverage ratio and 1.83-to-1 fixed-charge coverage ratio. The balance sheet included $325 million principal of 6.625% senior notes due 2026 and $6.3 million principal of 2.75% convertible notes due 2021. Operating lease liabilities were $16.7 million and finance lease liabilities were $6.4 million.
Material changes and management commentary
- Funeral revenue fell to $56.2 million from $58.6 million, and cemetery revenue fell to $12.9 million from $14.8 million. Same-store funeral contract volume declined 5.7% (8,490 versus 9,002); average revenue per same-store contract, including preneed trust earnings, declined to $5,546 from $5,660.
- Management attributed weaker same-store funeral results partly to unusually high Q1 2018 volumes during a severe flu season. Cemetery same-store revenue was roughly flat: preneed interment-right sales volume fell 13.4%, offset by a 17.0% increase in average price.
- Gross profit and segment operating results weakened; management cited lower funeral revenue and fewer preneed interment rights sold. Same-store funeral and cemetery operating profit margins each declined 190 basis points.
- Operating cash flow was lower, reflecting reduced net income and unfavorable working-capital changes. Cash used for financing was $7.5 million, including $6.6 million of net debt payments and $1.4 million of dividends. The quarterly dividend remained $0.075 per share.
- Management said it did not anticipate significant liquidity constraints in the foreseeable future, based on results, cash position, and anticipated cash flows. It expects to use cash and credit-facility borrowings for acquisitions, internal growth projects, dividends, and debt obligations. No numerical earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities; the company said adoption did not materially affect earnings, cash flows, liquidity measures, or the effective tax rate.
- A California employee class action settlement agreement was executed in February 2019. The company had accrued $650,000 and considered the accrual adequate; court preliminary approval was pending at the filing date.
- Key stated risks include staffing and retention, competition, death-rate and consumer-preference changes, preneed sales, trust investment performance, interest rates, financing access and cost, debt service, insurance funding, regulation, and unanticipated insurance or tax costs. Trust assets are exposed to market-value changes; a 0.25% interest-rate change was estimated to change fixed-income security values by about 1.74%. A 100-basis-point change in the floating borrowing rate, with facility borrowings unchanged, would affect pretax income by about $0.2 million.
- Management reported no material change in previously disclosed risk factors, no goodwill or intangible impairment, and no other-than-temporary impairment of trust investments during the quarter.
Important facts for investors to verify
- Whether funeral contract volumes and average revenue recover after the unusually strong Q1 2018 comparison, and how cremation trends affect pricing and margins.
- Whether weaker preneed interment-right sales persist, despite higher average selling prices.
- Debt-service capacity and covenant headroom given the $325 million senior notes, elevated interest expense, and 5.19x reported leverage ratio.
- Operating cash flow and working-capital trends, including the effect of preneed trust activity and capital spending.
- Outcome and final cost of the California class settlement, and any changes to the $650,000 accrual.
- Performance and funding status of preneed and perpetual-care trusts; their investments are market-sensitive and some customer proceeds and trust principal are restricted.