Carriage Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the same 2020 periods. The company operates funeral homes and cemeteries. At quarter-end it operated 171 funeral homes in 26 states and 32 cemeteries in 12 states. Figures below are in millions unless noted.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $88.3 | $77.5 | $184.9 | $155.0 |
| Gross profit | $28.9 | $25.2 | $64.0 | $48.3 |
| Operating income | $20.9 | $18.3 | $47.2 | $20.4 |
| Net income (loss) | $(6.2) | $6.4 | $6.8 | $2.2 |
| Diluted EPS | $(0.33) | $0.36 | $0.37 | $0.12 |
- Revenue grew 14.0% in Q2 and 19.3% for the first half. Gross margin was 32.8% in Q2 versus 32.5%; first-half gross margin was 34.6% versus 31.2%.
- Q2 net loss primarily reflected a $23.8 million loss on extinguishment of debt, including the premium and write-offs associated with redeeming the 6.625% notes due 2026. First-half results also benefited from the absence of $14.7 million in goodwill and tradename impairment charges recorded in 2020.
- Operating cash flow was $41.4 million for the first half, up from $31.0 million. Capital expenditures were $8.8 million versus $5.8 million; operating cash flow less capital expenditures was approximately $32.7 million versus $25.2 million.
- Cash was $1.5 million at June 30, 2021. Total assets were $1,169.0 million and stockholders’ equity was $232.9 million.
Performance changes and management commentary
- Q2 cemetery growth was a major revenue driver: cemetery segment revenue rose to $28.4 million from $18.4 million, helped by preneed interment-right sales and higher average prices. Funeral segment revenue edged up to $59.8 million from $59.1 million.
- Q2 funeral contracts fell 7.6% year over year as the elevated comparison-period death volume eased; average revenue per contract increased 9.7%. For the first half, funeral contracts increased 3.9%, reflecting a first-quarter COVID-19-related volume spike, while average revenue per contract rose 5.1%.
- Management said funeral volumes and service patterns were normalizing toward pre-pandemic levels. It attributed cemetery sales improvement partly to fewer social-distancing restrictions, acquired cemetery integration, and the rollout of a two-year sales strategy.
- Regional and unallocated costs increased, including higher incentive compensation tied to improved performance. Management’s stated strategy emphasizes local leadership, organic growth, selective acquisitions, divestitures of lower-performing businesses, and capital allocation across investment, dividends, repurchases, and debt.
Debt, liquidity, and capital allocation
- In May, the company issued $400 million of 4.25% senior notes due 2029 and replaced its revolving facility with a $150 million secured facility maturing in 2026. Proceeds, cash, and revolver borrowings funded redemption of the prior $400 million 6.625% notes due 2026.
- At June 30, the revolver balance was $60.5 million, with $87.4 million available; the company reported compliance with its leverage and fixed-charge-coverage covenants. Senior-note carrying value was $394.3 million. Acquisition debt was $5.2 million. These figures exclude lease liabilities.
- Management said existing and anticipated cash resources should cover working capital, capital expenditures, scheduled debt payments, commitments, and dividends for the next 12 months. It anticipated approximately $3–5 million of proceeds from further divestitures over the following six months.
- The company repurchased 324,700 shares for $12.3 million during the first half and declared dividends of $0.20 per share, up from $0.15. After quarter-end, the board authorized an additional $25 million for repurchases.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management’s outlook includes continued assessment of COVID-19 and potential variants; it said the pandemic had not materially harmed liquidity, access to capital, or cash flows to date.
- Key disclosed risks include changes in death rates and consumer preferences, staffing and compensation, competition, preneed sales and trust investment performance, interest rates, debt service and financing access, regulation, litigation, and pandemic-related impacts.
- A putative California employee class action alleges wage, overtime, meal/rest-break, wage-statement, and expense-reimbursement violations. The company could not reasonably estimate a possible loss or range at June 30.
- The company’s 2018 tax refund claim remains subject to IRS review and Joint Committee approval; a $3.7 million reserve for uncertain tax positions was recorded. Market sensitivity disclosures estimate that a 100-basis-point change in the floating borrowing rate would change pretax income by about $0.6 million, assuming borrowings remain unchanged.
- Performance-based awards could create dilution: the filing states that 1,064,740 shares would be awarded under the highest tier of the Good To Great II program if its specified price target is achieved.
Important facts for investors to verify
- Whether cemetery sales growth and higher average prices persist as pandemic restrictions ease, and whether funeral volumes continue to normalize.
- The ongoing cash-flow and interest-cost effects of the refinancing, including the $19.9 million redemption premium and variable-rate revolver exposure.
- Progress on planned divestitures, capital spending, repurchases, and dividends relative to available liquidity and debt covenants.
- Developments in the employee lawsuit and IRS review, and any resulting changes to reserves or cash requirements.
- Potential share dilution from performance awards and the effect of future incentive compensation on expenses.