Carriage Services, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited fourth-quarter results. Amounts are in U.S. dollars; annual figures are compared with 2013 unless noted.
Business context
Carriage operates funeral homes and cemeteries in the United States, with funeral operations contributing approximately 77% of revenue and cemetery operations approximately 23%. At year-end it operated 164 funeral homes in 27 states and 32 cemeteries in 11 states. Its strategy emphasizes decentralized local management, operating standards, selective acquisitions and growth in preneed sales.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $226.1 million | $213.1 million |
| Gross profit / gross margin | $70.0 million / 31.0% | $64.3 million / 30.2% |
| Operating income / margin | $39.7 million / 17.6% | $36.9 million / 17.3% |
| Net income from continuing operations | $15.4 million | $15.1 million |
| Net income attributable to common shareholders | $15.8 million | $19.3 million |
| Diluted EPS, continuing operations / total | $0.83 / $0.85 | $0.82 / $1.00 |
| Cash from operating activities | $36.6 million | $39.8 million |
| Capital expenditures | $23.7 million | $10.7 million |
Revenue increased 6.1%, and gross profit increased 8.9%. Operating cash flow declined 8.2%. Year-end cash was $0.4 million, working capital was $3.8 million, and total assets were $827.5 million. The company paid $0.10 per share in dividends for 2014, or approximately $1.8 million.
Debt and liquidity: At year-end, the company had $120.3 million outstanding on its term loan, $40.5 million on its revolving facility, and $4.5 million in acquisition debt and capital leases. It also had $143.75 million principal amount of 2.75% convertible subordinated notes due 2021, carried at $114.5 million net of discount. The $200 million revolving facility matures in 2019; approximately $159.5 million of its commitment was unused at year-end. The company reported compliance with debt covenants; leverage was 2.70x against a 3.75x limit through March 30, 2015 and 3.50x thereafter. Management said available cash, operating cash flow and credit access should cover anticipated needs, while noting financing access could be affected if cash flows or funding conditions fall short of expectations.
Fourth-quarter results
Fourth-quarter 2014 revenue was $59.4 million, compared with $52.6 million in fourth-quarter 2013. Gross profit was $18.9 million versus $14.4 million; continuing-operations net income was $5.4 million versus $4.2 million; and diluted EPS was $0.29 versus $0.22. Total net income was $5.4 million in Q4 2014 versus $4.0 million in Q4 2013.
Material changes and management commentary
- The May 2014 SCI acquisition added six businesses for approximately $54.9 million, including four New Orleans businesses and two Alexandria funeral businesses. The acquisition added approximately $37.7 million of goodwill.
- Acquired operations were the main driver of annual revenue growth. Funeral revenue rose 6.5%; same-store funeral revenue declined 0.7%, reflecting 1.2% lower same-store contract volume, partly offset by a 0.6% increase in average revenue per contract. Acquired funeral revenue increased 33.5%.
- Cemetery revenue increased 4.8%; same-store cemetery revenue increased 2.7%. Preneed cemetery sales increased 5.4% overall. Total field-level gross margin was 31.0%.
- The company’s cremation rate rose to 47.3% from 46.9%. Management noted that direct cremations typically generate lower revenue, particularly for cemeteries, and is seeking to increase cremation customers’ selection of services and merchandise.
- Operating cash flow fell to $36.6 million, while acquisition and construction-related outlays rose. Investing activities used $79.4 million, including $57.9 million for acquisitions and land, and capital expenditures totaled $23.7 million.
- In March 2014, the company issued $143.75 million of convertible notes and redeemed its former 7% convertible junior subordinated debentures and associated TIDES. Debt-related charges included a $3.8 million redemption loss, a $1.0 million credit-facility amendment loss and $2.5 million of convertible-note discount accretion.
- 2014 continuing-operations results included a $1.7 million tax benefit following completion of the IRS examination of tax year 2011, plus a $0.6 million interest-expense credit related to settled tax positions. Discontinued-operations income fell to $0.4 million from $4.2 million in 2013, which included larger disposal gains.
- All outstanding performance-based stock awards were canceled for cash payments of approximately $16.2 million. General and administrative expenses rose 11.5%, partly due to higher incentive and stock-based compensation.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management intends to pursue acquisitions and internal growth projects, including cemetery development and funeral-home expansion, and expects to pay dividends in 2015. It cited expected U.S. demographic growth in deaths as supportive of industry demand, but also described a continuing shift toward cremation.
- Key risks include local competition and price pressure, changing consumer preferences, lower same-store funeral volumes, and the high fixed-cost structure of funeral and cemetery operations.
- Preneed sales can support future revenue and market share, but may reduce near-term cash flow because of commissions, installment payments and required trust deposits. Trust investment losses, market changes, or insufficient growth in insurance-funded benefits could also create funding pressure.
- Interest-rate changes affect floating-rate debt and trust investments. Management estimated that a 100-basis-point borrowing-rate change, with debt balances unchanged, would alter pretax income by approximately $1.6 million. The company reported no interest-rate hedges.
- Debt covenants restrict certain business actions; noncompliance could lead to default or accelerated repayment. Other risks include environmental and regulatory requirements, employee retention, acquisition execution, goodwill impairment, and possible future incentive-program payouts.
- The company reported no material adverse effect expected from its ordinary-course legal proceedings. A cemetery class-action settlement received final court approval in June 2014, with eligible relief expected to be administered in spring 2015.
- The annual goodwill impairment assessment identified no impairment; the company did record approximately $1.2 million of impairment related to a discontinued location. It also recorded $0.4 million of impairment charges on certain trust investments.
Important facts for investors to verify
- Whether acquired-business growth and integration can offset continued softness in same-store funeral volumes and maintain margins.
- Future cash generation, acquisition and capital-spending levels, and the company’s ability to preserve liquidity given year-end cash of only $0.4 million.
- Debt balances, covenant headroom, floating-rate exposure and the potential dilution or repayment implications of the 2021 convertible notes.
- Trends in cremation mix, preneed contract sales and fulfillment, trust investment performance, and the funding adequacy of guaranteed-price obligations.
- Execution and cash-cost exposure for the class-action settlement, incentive programs and other commitments.