Crawford & Company — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Crawford provides claims management and outsourcing services globally. International results for most operations are reported on a two-month lag, so the filing cautions that results may not indicate full-year performance.
Financial results
Amounts below are in millions of dollars, except per-share data. Revenue before reimbursements excludes pass-through customer expenses.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue before reimbursements | $234.4 | $256.9 | $471.9 | $503.9 |
| Total revenue | $242.9 | $267.8 | $488.9 | $524.2 |
| Income (loss) before taxes | $12.4 | $5.5 | $(9.2) | $14.2 |
| Net income (loss) attributable to Crawford shareholders | $5.9 | $2.6 | $(5.5) | $8.8 |
| Diluted EPS, Class A / Class B | $0.11 / $0.11 | $0.06 / $0.04 | $(0.10) / $(0.12) | $0.18 / $0.14 |
- Q2 revenue before reimbursements fell 8.7% year over year; management estimated COVID-19 reduced revenue by $22–$26 million in the quarter. Foreign exchange reduced reported Q2 revenue by about $5.8 million.
- Q2 segment operating earnings were $2.8 million for Claims Solutions, $3.2 million for TPA Solutions, and $14.0 million for Specialty Solutions. Their respective operating margins on segment revenue were 3.4%, 3.7%, and 21.1%.
- For the first half, segment operating earnings were $(0.9) million, $9.5 million, and $21.0 million, respectively. Consolidated first-half results included a $17.7 million goodwill impairment and $5.7 million of restructuring costs, both recorded in Q1.
- Q2 consolidated cases received declined 8.4%; first-half cases declined 6.9%. Q2 revenue declines affected all three segments, with the sharpest pressure in TPA Solutions and Contractor Connection activity.
- Operating cash flow for the first half was $12.0 million, versus $8.7 million in 2019. Investing cash outflow was $14.4 million, mainly property/equipment and software spending; financing cash inflow was $11.4 million.
Financial position and liquidity
- At June 30, cash and equivalents were $60.0 million, versus $51.8 million at year-end 2019; working capital was approximately $90.0 million, up $11.1 million.
- Short-term borrowings were $39.9 million and long-term debt and finance leases, net of current installments, were $155.6 million. Total short- and long-term borrowings including finance leases were $195.6 million, up from $177.0 million at December 31, 2019.
- Management reported total liquidity of $210.0 million: $60.0 million cash and $150.0 million of additional borrowing capacity based on trailing-twelve-month EBITDA. The credit facility’s available balance, including the letter-of-credit facility, was $275.1 million; $11.5 million of letters of credit were outstanding.
- Operating lease liabilities totaled $123.1 million. Pension liabilities were $58.4 million; the company contributed $3.0 million to its U.S. defined benefit plan and $0.3 million to U.K. plans in the first half.
Material changes, outlook, and risks
- Revenue weakness reflected COVID-19-related economic contraction, especially in the U.S. and Canada, as well as lower weather-related activity in some areas and adverse currency movements. Management warned that future case referrals and results could be materially negatively affected; it provided no overall revenue or earnings guidance.
- Management estimated a 2020 effective tax rate of approximately 35%–37%, after known discrete items. The first-half reported effective tax rate was 23.6%, affected by the goodwill impairment and the prior-year arbitration settlement.
- Liquidity measures included reducing planned capital spending, pausing discretionary U.S. pension contributions for the rest of 2020, suspending share repurchases under its 10b5-1 plan, and adjusting staffing through furloughs and reductions in force. The company deferred $4.3 million of payroll taxes under the CARES Act and said it had not applied for government loans.
- A Canadian wage subsidy reduced compensation expense by $4.3 million in Q2 and the first half; management said an extension might benefit the company through year-end.
- On June 12, Crawford sold its 51% interest in Lloyd Warwick International. Because of the reporting lag, the transaction was to be recognized in Q3; preliminary estimated after-tax gain was $10–$12 million, or $0.19–$0.23 per diluted share.
- Other unusual items: Q2 included a $0.3 million loss on disposition of a business. A separate sale of Crawford Compliance Inc. generated a $3.3 million note receivable and a $0.3 million loss. The 2019 comparison included an $11.4 million arbitration settlement expense.
- Key risks include pandemic duration and client demand, customer payment/collectability, claim volumes and weather activity, currency movements, pension funding, debt covenant compliance, goodwill impairment, and the ability to retain clients and personnel. Management stated disclosure controls were effective; the auditor performed an interim review, not a full audit.
Important facts for investors to verify
- Whether claims volumes and revenue stabilize or continue to weaken as pandemic conditions and economic activity evolve.
- Whether the stated $150.0 million borrowing capacity, credit covenants, and liquidity remain available under future operating results.
- The final accounting and realized gain from the Lloyd Warwick sale, including the Q3 recognition and proceeds.
- Whether the estimated 35%–37% tax rate, Canadian wage-subsidy benefit, and potential additional U.S. pension contributions change.
- Whether lower volumes, receivable collectability, or market conditions prompt further goodwill impairment, restructuring, or other material charges.