Carriage Services, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Carriage operates funeral homes and cemeteries in the United States; at year-end it had 170 funeral homes and 32 cemeteries.
Financial performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $248.2 million | $242.5 million | +2.3% |
| Gross profit | $79.7 million | $77.5 million | +2.8% |
| Gross margin | 32.1% | 32.0% | +0.1 percentage point |
| Operating income | $50.2 million | $48.6 million | +3.2% |
| Operating margin | 20.2% | 20.1% | +0.1 percentage point |
| Net income | $19.6 million | $20.9 million | -6.1% |
| Diluted EPS | $1.12 | $1.12 | Unchanged |
| Cash from operations | $49.5 million | $49.9 million | -$0.4 million |
Funeral revenue was $189.4 million, up 1.9%; cemetery revenue was $58.8 million, up 3.7%. Reported net income declined despite higher operating income, largely alongside higher interest and other expense. The filing reports non-GAAP adjusted net income of $28.3 million versus $27.3 million; this measure includes adjustments such as convertible-note discount accretion and severance costs.
Same-store funeral revenue fell 1.6%, with contract volume down 1.9%; cost reductions helped keep same-store operating profit nearly flat. Cemetery same-store operating revenue rose 4.9%, while operating profit increased 3.2%. The company-wide cremation rate rose to 50.7% from 48.9%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $3.3 million at year-end, versus $0.5 million a year earlier. Current assets were $33.0 million and current liabilities $44.3 million.
- Principal outstanding on long-term debt and capital lease obligations was $221.6 million, excluding $143.75 million principal on convertible subordinated notes due 2021. The notes’ balance-sheet carrying value was $119.6 million. The credit facility’s term loan and revolver carried $138.8 million and $67.7 million, respectively.
- The $150 million revolving facility matures in February 2021; approximately $2.0 million of letters of credit was also outstanding. Credit covenants were met: leverage ratio 2.92x against a 3.50x maximum, and fixed-charge coverage 2.21x against a 1.20x minimum.
- Operating cash flow was nearly level year over year. Capital expenditures were $16.8 million, including $9.4 million for growth and $7.4 million for maintenance. The company spent $23.9 million cash at closing for six funeral-home acquisitions, with additional deferred consideration.
- Dividends paid were approximately $2.5 million; the quarterly rate increased from $0.025 to $0.05 per share during 2016. No shares were repurchased under the new $25 million authorization.
Material changes, outlook and risks
- Six funeral-home businesses were acquired for an aggregate purchase price of approximately $32.8 million. One Tennessee funeral home was sold for $1.35 million.
- The credit facility was amended, including a 37.5-basis-point reduction in the LIBOR-based rate, an extension of maturity to February 2021, and revised term-loan amortization. A $0.6 million write-off of debt issuance costs was recorded.
- Executive retirement-related severance costs were significant; the filing identifies $3.5 million in severance costs associated with two former executives. A separate five-year “Good to Great” incentive period concluded, with approximately $2.4 million payable to 12 managing partners.
- Management said current cash, operating cash flow and credit-facility availability should meet anticipated needs, including capital expenditures, scheduled debt payments, dividends and acquisitions. The filing gives no specific revenue or earnings guidance.
- Key risks include increasing cremation and direct-cremation preferences, local competition and pricing pressure, retaining skilled local leaders, acquiring and integrating suitable businesses, trust investment returns and interest-rate changes, preneed contract funding and cancellations, debt covenants, and environmental, regulatory and litigation exposure. Trust investment returns rebounded sharply in 2016 after negative returns in 2015; investment performance remains a source of volatility.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing states that ordinary-course legal matters are not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile reported earnings to adjusted net income, particularly severance, debt accretion, asset-sale losses and other special items.
- Review same-store funeral volume trends and the effect of rising cremation rates on average revenue and margins.
- Assess total debt, cash, revolver availability, covenant headroom and the 2021 convertible-note maturity and potential dilution.
- Track acquisition returns and deferred purchase obligations against operating cash flow and capital spending.
- Review preneed trust performance, funding requirements and the distinction between trust assets and cash available for corporate use.