Carriage Services, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; financial statements are unaudited. Carriage operated 164 funeral homes in 27 states and 32 cemeteries in 11 states.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $54.5 | $49.5 | $166.7 | $160.4 |
| Gross profit | $15.1 | $14.1 | $51.1 | $49.9 |
| Operating income | $8.2 | $6.4 | $27.3 | $28.1 |
| Continuing-operations net income | $4.6 | $1.9 | $10.1 | $10.9 |
| Net income | $5.0 | $5.9 | $10.5 | $15.3 |
| Diluted EPS | $0.26 | $0.32 | $0.56 | $0.78 |
| Operating cash flow | — | — | $27.6 | $31.2 |
Gross margin was approximately 27.6% in Q3 2014 versus 28.5% a year earlier, and 30.6% for the first nine months versus 31.1%. Operating margin was approximately 15.0% in Q3 versus 12.9%, but 16.4% for nine months versus 17.5%.
Financial position and liquidity
- At September 30, cash was $3.0 million, total assets $825.7 million and stockholders’ equity $174.5 million.
- Credit Facility borrowings were $42.3 million on the revolving facility and $122.7 million on the term loan. The company also had $143.75 million principal amount of 2.75% convertible subordinated notes due 2021; their balance-sheet carrying value was $113.7 million. The prior $89.8 million convertible junior subordinated debentures were redeemed in 2014.
- The $325 million secured Credit Facility matures March 2019. The company reported covenant compliance, with leverage of 2.83x against a maximum of 3.75x through March 2015 (3.50x thereafter), and fixed-charge coverage of 2.60x against a 1.20x minimum.
- Nine-month investing cash outflow was $73.1 million, including the $54.9 million SCI acquisition and $18.2 million of capital expenditures. Financing activities provided $47.0 million. Cash increased $1.6 million from year-end 2013.
- Management said cash, expected operating cash flows and Credit Facility availability should be sufficient for anticipated working capital, capital expenditures, debt service, commitments, dividends and acquisitions for the foreseeable future.
Material changes and management commentary
- Q3 revenue increased 10.2%; nine-month revenue rose 3.9%. The Q3 increase reflected acquired funeral operations and higher funeral revenue. The May 2014 SCI transaction added six businesses for $54.9 million.
- For nine months, funeral revenue increased 4.5%, largely from acquired operations, while same-store funeral revenue fell 2.1% and same-store operating profit declined 6.5%. Management cited lower same-store contract volume and fixed costs that did not fall with revenue.
- Nine-month cemetery revenue increased 2.0%, but cemetery operating profit decreased 2.6%. Same-store cemetery operating profit declined 5.7%, primarily due to higher bad-debt expense; Q3 same-store cemetery revenue and operating profit also fell.
- Q3 continuing income improved partly because of a $1.7 million tax benefit from resolution of the IRS examination of 2011 tax positions and a $0.6 million interest-expense credit. Nine-month continuing income included $1.0 million of debt-extinguishment loss, $3.8 million loss on redemption of old debentures, and $1.6 million accretion of the new notes’ discount; it also included a $1.1 million gain on purchasing a previously leased property.
- Net income fell year over year for both the quarter and nine months, in part because 2013 discontinued operations included significant disposal gains. The 2014 nine-month discontinued-operations income was $0.4 million versus $4.4 million.
- The company paid $1.4 million in common dividends during the first nine months; the quarterly dividend was $0.025 per share.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management’s stated liquidity outlook is subject to operating cash flow, financing availability and acquisition or capital-spending plans.
- Management’s strategy emphasizes local operating standards, market share, preneed sales and selective acquisitions. It expects acquired businesses’ operating margins to improve as they transition to its operating model; this is an expectation, not a quantified forecast.
- Risks identified include changes in death rates and consumer preferences, rising cremation mix, competition, hiring and retention, trust investment performance and interest rates, preneed sales and insurance-company performance, access to financing, costs, and laws and regulation. The business is seasonal, with generally higher winter death rates.
- Trust investments are exposed to market-price and interest-rate changes; a 0.25% rate change was estimated to change fixed-income security values by approximately 1.54%. A 100-basis-point change in floating borrowing rates would change pretax income by approximately $1.6 million, assuming balances remain unchanged.
- The company reported no material changes to previously disclosed risk factors. It was party to ordinary-course legal matters and stated it did not expect them to have a material adverse effect. A previously disclosed cemetery class action settlement received final court approval in June 2014 and was being administered.
Most important facts for investors to verify
- Whether same-store funeral volume and cemetery sales/profit trends improve, and whether acquired operations deliver the expected margin progression.
- How acquisition spending and higher capital expenditures affect operating cash flow, liquidity and debt levels.
- Debt covenant headroom, floating-rate exposure, and the economic and potential dilution effects of the 2021 convertible notes.
- The sustainability of earnings excluding the IRS tax benefit, interest credit, debt-restructuring costs and discontinued-operation gains or losses.
- Trust investment performance, preneed receivable collections and bad-debt trends, and any subsequent changes in legal or insurance exposures.