Carriage Services, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended June 30, 2012 cover a U.S. deathcare operator with 164 funeral homes in 26 states and 33 cemeteries in 11 states. Funeral homes generated approximately 75% of revenue and cemeteries approximately 25%.
Financial performance
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Revenue | $50.1 million; +5.1% year over year | $102.4 million; +4.1% |
| Gross profit / gross margin | $14.3 million / 28.5% | $31.2 million / 30.5% |
| Operating income / operating margin | $9.2 million / 18.3% | $20.6 million / 20.1% |
| Net income | $2.7 million, or $0.15 diluted EPS | $7.1 million, or $0.39 diluted EPS |
| Operating cash flow | Not separately reported for the quarter | $13.4 million, versus $15.8 million |
At June 30, cash was $1.0 million and current assets were $29.6 million against current liabilities of $30.2 million. The company had $17.3 million drawn on its $60 million revolving credit facility, with $42.7 million of remaining availability. Long-term debt and capital lease/acquisition obligations totaled $153.9 million, excluding $89.8 million of 7% convertible junior subordinated debentures due 2029. The revolving facility and senior notes carried financial covenants; the reported leverage ratio was 3.32x against a 4.25x maximum, and fixed-charge coverage was 1.97x against a 1.25x minimum.
Material changes versus prior periods
- First-half revenue and earnings increased: revenue rose from $98.3 million to $102.4 million, and net income from $5.9 million to $7.1 million. Diluted EPS increased from $0.32 to $0.39.
- Growth was acquisition-led in funeral operations. First-half funeral revenue increased 5.0%, while same-store funeral revenue fell 3.4%; same-store contract volume declined 5.5%.
- First-half cemetery revenue rose 1.3%, supported by higher trust earnings and finance charges, but cemetery operating profit declined 1.3%. Same-store cemetery operating profit fell 12.6%, with promotional expenses and bad debts contributing.
- Operating cash flow declined by $2.4 million year over year. Investing outflows increased to $22.4 million, including $16.4 million of acquisitions and $6.0 million of capital expenditures; the company funded much of its investment with $14.2 million of revolving-credit borrowings.
- The company repurchased 686,208 shares for $4.5 million during the first half and paid $0.9 million in common dividends. Its board increased the repurchase authorization to $8 million.
Outlook, commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance. It stated that cash, expected operating cash flows and revolver availability should meet anticipated working-capital needs, capital spending, debt service and dividends; changed acquisition or capital-spending plans, or weaker cash flows or financing access, could require additional capital.
- Management’s strategy emphasizes operating standards, market-share growth and selective acquisitions in strategic markets. It said the models are intended to support long-term sustainable revenue, earnings and cash-flow growth, rather than maximize short-term earnings.
- First-half discontinued operations included $250,000 of net income, principally reflecting a reported $426,000 loss on disposition offset by a tax benefit. The company ended a cemetery management agreement in Ohio; no businesses were held for sale at June 30.
- Withdrawable trust income, which management says increases operating cash flow but is not recorded as revenue, fell to $0.8 million for the first half from $3.6 million a year earlier, largely because of substantial trust gains in Q2 2011. The company also reported lower realized gains and higher realized losses in preneed trust investment activity in 2012.
- Risks include funeral volume and cremation trends, competition, hiring and retention, trust investment performance, interest rates, preneed collections and insurance-company strength, acquisition financing, regulation and industry-specific uncertainties. A putative class action involving a cemetery formerly owned by subsidiaries remained in discovery; the company said the potential loss could not then be estimated.
- The company reported compliance with debt covenants and effective disclosure controls as of June 30, 2012. It reported no material change in internal control over financial reporting during the first half.
Key facts for investors to verify
- Whether acquisition-driven growth can offset declining same-store funeral volume and weaker same-store cemetery profitability.
- Whether operating cash generation can support acquisition spending, capital expenditures, repurchases and dividends without materially increasing revolving debt.
- The sustainability of trust-related revenue and cash flows, including investment returns, realized gains and losses, and obligations to replenish underfunded trusts.
- Developments and potential exposure in the Leathermon cemetery litigation, which the filing says could not be reasonably quantified.
- Progress on the company’s acquisition strategy, debt-covenant headroom and use of the remaining share-repurchase authorization.