Carriage Services, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Carriage operates funeral homes (about 75% of revenue) and cemeteries (about 25%); at year-end it had 178 funeral homes in 26 states and 32 cemeteries in 12 states.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $329.4 million | $274.1 million | +20.2% |
| Gross profit | $105.9 million | $79.6 million | +33.1% |
| Operating income | $57.2 million | $47.4 million | +20.6% |
| Net income | $16.1 million | $14.5 million | +10.7% |
| Diluted EPS | $0.89 | $0.80 | +11.3% |
| Operating cash flow | $82.9 million | $43.2 million | +$39.7 million |
| Capital expenditures | $15.2 million | $15.4 million | −1.2% |
Gross margin was 32.1% and operating margin was 17.4% in 2020. Operating cash flow less capital expenditures was approximately $67.7 million, a simple derived measure. Year-end cash was $0.9 million.
Total debt was $455.3 million, excluding lease obligations and debt issuance adjustments: $400.0 million of 6.625% senior notes due 2026, $47.2 million drawn on the revolving credit facility, $5.5 million acquisition debt and $2.6 million of convertible notes due March 2021. The credit facility had $140.7 million available after letters of credit. The company reported compliance with its credit-facility financial covenants at year-end, after receiving a limited waiver for its March 2020 leverage-covenant breach and amending borrowing margins.
Fourth-quarter 2020 revenue was $90.1 million, gross profit $29.7 million, net income $8.4 million and diluted EPS $0.46. Fourth-quarter 2019 figures were $71.1 million, $20.7 million, $2.6 million and $0.14, respectively.
Changes versus 2019
- Funeral contracts rose 21.2%, reflecting acquired operations, market-share gains and increased deaths during the COVID-19 pandemic. Average revenue per funeral contract fell 6.4% to $5,145, as gathering restrictions reduced service scale and attendance.
- Preneed cemetery interment rights sold increased 31.9%, with acquisitions contributing; average price per right rose 10.4% to $4,033. Same-store preneed right sales were slightly lower, which management attributed partly to pandemic restrictions.
- Gross profit increased $26.3 million. Management cited higher revenue and disciplined expense control. Same-store funeral and cemetery operating margins also improved.
- Net income growth was limited by higher interest expense and increased divestiture and impairment charges. Interest expense rose to $32.5 million from $25.5 million.
- Operating cash flow increased substantially, which management attributed to stronger operating income and favorable working-capital changes. Credit-facility borrowings declined to $47.2 million from $83.8 million.
Outlook, risks and unusual items
- Outlook: Management planned to focus in 2021 on integrating acquired businesses and using cash and credit-facility borrowings for general corporate purposes, dividends and debt obligations, including the remaining convertible notes. It expected further divestitures over the next 6–12 months, potentially generating $10–11 million. Management said existing and anticipated resources should cover working capital, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months. No specific earnings or revenue guidance is provided.
- COVID-19: Higher death volumes supported revenue, while gathering restrictions reduced funeral service scale and average revenue per contract and constrained some preneed cemetery sales. Management reported no material negative effect on liquidity, capital access or cash flows to date, but emphasized continuing uncertainty.
- Impairments and divestitures: The company recorded $13.6 million of goodwill impairment, $1.1 million of tradename impairment and a $6.7 million net loss on divestitures in 2020. The eight funeral homes sold generated $8.4 million of proceeds. Total net loss on divestitures and impairment charges was $21.4 million.
- Debt and capital allocation: The company has significant interest and principal obligations, restrictive debt covenants and variable-rate credit-facility exposure. Its $400 million senior notes carry a 6.625% coupon; a 100-basis-point change in the facility borrowing rate would change pretax income by approximately $0.5 million, assuming borrowings remain unchanged. Dividends increased during 2020; the stated annualized rate reached $0.40 per share beginning in the fourth quarter. Dividends and repurchases remain subject to debt restrictions.
- Other risks: Key-personnel retention, competition and pricing, changing cremation preferences, trust investment performance, preneed contract funding and collections, regulatory and environmental compliance, litigation, and execution of acquisitions and divestitures. The company increased its credit-loss allowance amid pandemic-related economic uncertainty.
- Subsequent events: A ransomware incident was detected on January 25, 2021; systems were restored by February 11. The company expected insurance recovery after a deductible and did not expect a material financial impact, but cannot assure similar incidents will not recur. A holder submitted a conversion notice for remaining convertible notes in January 2021. In February, the CEO’s employment term was extended to February 2028, with a higher minimum base salary and stock options tied to share-price targets.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The auditor identified goodwill and tradename impairment testing as a critical audit matter because of the estimation uncertainty and significant assumptions involved.
Important facts for investors to verify
- Whether elevated funeral volumes persist and whether average revenue per funeral contract recovers as service restrictions ease.
- Actual progress and proceeds from planned divestitures, and any additional impairment charges.
- Debt repayment and refinancing plans, covenant headroom, and the cash needs associated with the March 2021 convertible-note maturity and conversion notice.
- Cash-flow durability, credit-loss trends, and the effect of preneed sales and trust investment returns on future earnings and liquidity.
- Whether the ransomware incident results in costs or data impacts beyond the company’s stated expectations and insurance coverage.