Carriage Services, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Unless stated otherwise, amounts are in U.S. dollars. The company operated 167 funeral homes in 27 states and 32 cemeteries in 11 states, across Funeral Home and Cemetery segments.
Financial performance
| Metric | Q1 2015 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $63.253 million | $63.331 million | Up 0.1% |
| Gross profit | $22.209 million | $21.303 million | Down $0.906 million |
| Operating income | $14.519 million | $11.658 million | Down 19.7% |
| Income before taxes | $11.023 million | $7.618 million | Down $3.405 million |
| Net income | $6.418 million | $4.571 million | Down 28.8% |
| Diluted EPS | $0.34 | $0.27 | Down $0.07 |
| Operating cash flow | $12.622 million | $9.742 million | Down $2.880 million |
Gross margin was approximately 33.6%, compared with 35.1% a year earlier. Management’s total field margin measure improved to 43.7% from 43.5%. The quarterly dividend was $0.025 per share.
Segments and material changes
- Funeral: Revenue declined 1.7% to $49.302 million. Same-store revenue fell 4.5%, principally as contract volume declined 5.4% to 7,102; average revenue per contract rose slightly. Acquired revenue increased 12.6%, and acquired operating profit increased 17.4%.
- Cemetery: Revenue increased 7.0% to $14.029 million. Same-store revenue rose 7.9%, supported by higher average preneed interment prices and more at-need contracts. Cemetery operating profit increased 6.1% to $6.167 million.
- General and administrative expense rose 29.0% to $9.247 million, largely due to $2.5 million of severance expense, including $2.2 million related to a former executive’s retirement. Regional and unallocated costs increased 20.8%, mainly from higher field incentive compensation and severance.
- Interest expense increased to $2.851 million, primarily reflecting higher debt balances. The company recorded a $0.567 million loss on early debt extinguishment following a credit-facility amendment.
Cash flow, debt and liquidity
Cash and cash equivalents were $0.871 million at March 31, 2016, versus $0.535 million at year-end. Operating activities provided $9.742 million; investing activities used $5.725 million, including $3.595 million of capital expenditures and $2.685 million for acquisitions and land for new construction. Financing activities used $3.681 million. The company reported $2.0 million of growth and $1.6 million of maintenance capital expenditures.
At quarter-end, revolving borrowings were $54.0 million, term-loan borrowings were $147.2 million, and acquisition debt and capital lease obligations were approximately $7.7 million. These totaled approximately $208.9 million, excluding the convertible notes. The notes have $143.75 million principal, mature in 2021, and carry a 2.75% coupon; their balance-sheet carrying value was $116.3 million. The $150 million revolving facility had approximately $96 million of unused capacity, with no letters of credit outstanding.
A February amendment reduced the LIBOR-based variable-rate margin by 37.5 basis points, extended facility maturity to no later than February 9, 2021 (subject to an earlier maturity trigger tied to subordinated debt), and revised term-loan amortization. The company reported covenant compliance: leverage ratio of 3.05 versus a maximum 3.50, and fixed-charge coverage of 2.54 versus a minimum 1.20. Management stated it expected cash, operating cash flow and facility availability to meet anticipated requirements for the foreseeable future.
Outlook, risks and unusual items
- No specific revenue, earnings or other numerical guidance is provided. Management describes its strategy as decentralized local operations, sustainable growth and selective acquisitions; it cautions that results may vary and historical performance is not indicative of future results.
- Key risks include changes in death rates, competition and consumer preferences; ability to recruit and retain skilled personnel; preneed sales and trust investment performance; interest rates; access to financing; insurance-company financial condition; and regulatory changes. The business is seasonal, with death rates generally higher in winter.
- Preneed and perpetual-care trust portfolios were not underfunded at quarter-end. Trust investments had substantial unrealized losses; management considered remaining losses temporary. Certain trust-investment impairments are reflected against deferred trust obligations or trust corpus rather than current earnings. Trust assets are not equivalent to unrestricted company cash.
- The company estimated that a 100-basis-point change in borrowing rates would change pretax income by about $2.0 million, assuming balances remained unchanged; it had no interest-rate hedges.
- On April 23, 2016, after quarter-end, the company entered a release agreement with L. William Heiligbrodt for $1.8014 million, payable in installments on or before January 1, 2017. The board authorized a $25 million share-repurchase program in February; no shares were repurchased in Q1.
- The company reported ordinary-course legal proceedings that it did not expect to have a material adverse effect, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether funeral same-store volume weakness persists and how acquired-business growth develops.
- Whether severance and other elevated corporate costs recur, and the full financial impact and timing of the post-quarter $1.8014 million release-agreement payment.
- Debt levels, scheduled term-loan amortization, variable-rate exposure, covenant headroom and actual revolver availability.
- Cash generation relative to capital spending, acquisitions, dividends and any future share repurchases.
- Trust-portfolio performance, unrealized losses and potential obligations to replenish trust shortfalls; trust assets should be distinguished from unrestricted liquidity.