Carriage Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Carriage operated 167 funeral homes in 27 states and 32 cemeteries in 11 states.
Financial performance and position
| Metric | Q2 2014 | Six months 2014 | Comparable 2013 |
|---|---|---|---|
| Revenue | $56.5 million | $112.2 million | Q2 $53.8 million; six months $110.9 million |
| Gross profit | $18.0 million | $36.0 million | Q2 $16.9 million; six months $35.8 million |
| Operating income | $10.8 million | $19.1 million | Q2 $9.4 million; six months $21.7 million |
| Income from continuing operations | $3.9 million; $0.21 diluted EPS | $5.5 million; $0.30 diluted EPS | Q2 $3.6 million; six months $9.0 million |
| Net income | $3.2 million | $5.5 million | Q2 $4.1 million; six months $9.4 million |
| Operating cash flow | $13.3 million for six months | $22.8 million for six months |
Revenue increased 5.0% in Q2 and 1.1% year to date. Gross margin was approximately 31.8% in Q2 and 32.1% year to date, versus approximately 31.4% and 32.3%, respectively. Operating margin was approximately 19.1% in Q2 and 17.1% year to date, compared with approximately 17.5% and 19.6% in 2013. Basic EPS was $0.18 in Q2 and $0.30 year to date; diluted EPS was $0.17 and $0.29. Quarterly dividends were $0.025 per share.
At June 30, cash was $0.7 million, current assets $32.2 million, and current liabilities $39.1 million. Total assets were $823.2 million and stockholders’ equity $169.4 million. The company reported $42.4 million drawn on its revolving facility, $125.0 million outstanding on its term loan, and $143.75 million principal amount of 2.75% convertible subordinated notes due 2021 (carrying value $113.0 million). The $325 million secured credit facility matures in 2019. The company was in compliance with its covenants; leverage ratio was 2.87 and fixed-charge coverage 2.50, against limits of 3.75 and minimum 1.20, respectively.
Changes versus the prior comparable period
- Q2 operating income rose, but six-month operating income fell to $19.1 million from $21.7 million. Year-to-date continuing income declined to $5.5 million from $9.0 million, reflecting financing and other unusual charges, increased G&A, and lower same-store funeral performance.
- Same-store funeral operating revenue fell 1.5% in Q2 and 4.2% year to date; same-store funeral operating profit declined 8.4% and 10.1%, respectively. Management cited lower contract volumes, higher bad-debt expense, and the absence of favorable prior-year expense adjustments.
- Cemetery same-store operating revenue increased 5.1% in Q2 and 2.8% year to date. Year-to-date cemetery operating profit was slightly lower, partly reflecting reduced trust earnings and increased promotional and bad-debt costs.
- Cash from operations declined by $9.5 million year over year for the first half. Investing cash outflow rose to $64.3 million, principally due to the $54.9 million SCI acquisition, and capital expenditures increased to $9.7 million.
Management commentary, outlook, risks and unusual items
- On May 15, Carriage acquired six SCI businesses—five funeral homes and a combination funeral home/cemetery—for $54.9 million, including $33.8 million of recorded goodwill. Acquired operations contributed to revenue growth; management expects acquired margins to improve as the businesses adopt its operating model.
- In March, the company issued $143.75 million of 2.75% convertible notes and redeemed its 7% junior subordinated debentures. The refinancing included a $3.8 million redemption loss for the six-month period; the credit-facility amendment also generated a $1.0 million debt-extinguishment loss. The notes’ effective interest rate is 6.75% due to discount accretion.
- Other first-half items included a $1.1 million gain on purchasing a previously leased funeral-home building, a $1.2 million goodwill impairment associated with a discontinued business, and a $16.2 million cash payment for surrendered performance-based stock awards. Discontinued operations produced a $0.6 million Q2 loss.
- Management said cash, expected operating cash flow and credit-facility availability should cover anticipated working capital, capital spending, scheduled debt service, dividends and acquisitions for the foreseeable future; it cautioned that changed acquisition or capital plans or weaker cash flow/financing access could affect liquidity. No specific earnings or revenue guidance was provided.
- Key risks include changes in death rates and consumer preferences, competition, hiring and retention, preneed sales and insurance counterparties, trust-investment performance and interest rates, financing availability, regulation, and acquisition execution. The business is seasonal, with death rates generally higher in winter. The company reported no material change to previously disclosed risk factors.
- A long-running putative class action concerning Grandview Cemetery received final settlement approval on June 23, 2014; settlement administration remained pending. Management said other ordinary-course legal matters were not expected to materially adversely affect the financial statements. The IRS completed its examination of the 2011 tax year after quarter-end; Carriage was evaluating any effect on uncertain-tax-position liabilities.
Management stated that liquidity was adequate and disclosure controls were effective at June 30, 2014. Its non-GAAP reconciliation showed adjusted net income of $5.8 million for Q2 and $11.5 million for the first half, versus $4.6 million and $10.5 million in 2013; these measures include management-defined adjustments and are not substitutes for GAAP results.
Important facts for investors to verify
- Whether the SCI acquisition delivers expected revenue, integration benefits and margin improvement, and whether the preliminary purchase-price allocations change.
- Whether same-store funeral contract volumes and profitability stabilize, given the first-half declines and rising cremation mix.
- Whether operating cash flow recovers after its year-over-year decline and supports acquisition, capital-spending and debt-service plans.
- Debt and covenant headroom, including the effect of floating-rate borrowings and the convertible notes’ potential dilution or conversion terms.
- Trust-asset performance, preneed receivable collections and cancellation experience, and the outcome of the tax review and cemetery settlement administration.