Crawford & Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 7, 2018. Crawford provides claims management, third-party administration, medical management, and legal settlement services in more than 70 countries through U.S. Services, International, Broadspire, and Garden City Group. Unless noted, revenue figures below exclude reimbursed client expenses.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue before reimbursements | $1,105.8 million | $1,109.3 million |
| GAAP total revenue, including reimbursements | $1,163.7 million | $1,177.6 million |
| Income before taxes | $42.3 million | $63.2 million |
| Net income attributable to Crawford shareholders | $27.7 million | $36.0 million |
| Diluted EPS, Class A / Class B | $0.52 / $0.45 | $0.67 / $0.60 |
| Cash from operating activities | $40.8 million | $98.9 million |
| Cash and cash equivalents at year-end | $54.0 million | $81.6 million |
| Total debt | $225.7 million | $188.0 million |
| Working capital / current ratio | $113.8 million / 1.4:1 | $134.4 million / 1.6:1 |
Revenue before reimbursements declined 0.3%; net income attributable to shareholders fell 23.1%. Operating cash flow decreased $58.1 million, principally due to lower accrued incentive compensation, accounts payable and pension liabilities, and higher receivables and prepaid expenses. Investing cash use was $81.9 million, including $36.0 million for WeGoLook and $44.9 million of property, equipment, and software spending. The company reported a 2.5% net margin on revenue before reimbursements, calculated from shareholder-attributable net income.
Segment operating earnings were $111.3 million, down from $116.1 million. U.S. Services earned $35.7 million (13.2% margin), International $47.2 million (10.5%), and Broadspire $32.7 million (10.6%); Garden City Group recorded a $4.4 million loss (negative 5.7% margin). These are management’s segment measures and exclude certain corporate costs, interest, taxes, impairment, and other items.
Material changes and fourth-quarter performance
- U.S. Services revenue rose 16.5%, aided by Hurricanes Harvey, Irma, and Maria and the WeGoLook acquisition. Segment earnings were nearly flat as catastrophe mobilization costs, WeGoLook start-up losses, and a Contractor Connection branding campaign offset growth.
- International revenue fell 5.7%, including an $8.5 million foreign-exchange impact and a U.K. contractor-repair shift to an agency model that reduced reported revenue by $16.0 million without affecting operating earnings. Cost reductions lifted segment earnings 9.2%.
- Broadspire revenue increased 2.7% and segment earnings rose 9.1%, supported by new and existing clients and expense control.
- Garden City Group revenue fell 22.8% as the Deepwater Horizon settlement project wound down and other project volumes declined; the segment moved from $7.2 million of earnings to a $4.4 million loss. Awarded-project backlog was $66 million at year-end, with about $40 million expected to be recognized within 12 months, versus $81 million of backlog a year earlier.
- Fourth-quarter revenue before reimbursements was $298.8 million versus $272.4 million in 2016. Crawford reported a $2.0 million shareholder-attributable net loss versus $7.8 million of income. The quarter included a $19.6 million non-cash Garden City Group goodwill impairment; the impairment did not affect liquidity or debt-covenant compliance.
Outlook, risks, and notable items
- Management expected 2018 effective tax rate of 31%–33%, before discrete items and assuming no change in tax law or policy. The 2017 Tax Act accounting was provisional: the company recorded $3.8 million of net tax expense and said it had not completed its assessment of certain provisions, including GILTI.
- Management forecast approximately $45 million of 2018 property, equipment, and software additions; expected the global business and technology centers in the Philippines and India to continue phasing in through 2018; and did not anticipate significant 2018 center costs or restructuring and special charges.
- The company expected available resources, operating cash generation, and borrowing capacity to fund operations for the next 12 months and expected to remain in covenant compliance during 2018. At year-end it had $241.3 million of available borrowing capacity and was compliant with its credit-facility covenants.
- The amended $450 million revolving credit facility matures November 23, 2022. Debt was variable-rate; a 100-basis-point rate change would alter estimated 2017 pretax interest expense by about $2.3 million. The facility requires a maximum leverage ratio of 3.25:1 and minimum fixed-charge coverage of 1.10:1.
- Defined-benefit plans had an $87.0 million underfunded position for the U.S. Qualified Plan and certain international plans. Crawford planned $9.0 million annual U.S. plan contributions for five years and estimated 2018 U.K. contributions of $5.6 million.
- Key risks include unpredictable claim and catastrophe volumes, customer and project concentration, international currency and regulatory exposure, data security and privacy, competition, pension funding, covenant headroom, and Garden City Group project volatility. The company identified $19.4 million of U.S. Services goodwill as exposed to possible impairment under adverse assumptions.
- WeGoLook was acquired for $36.1 million in January 2017 for an 85% interest. Its 2017 revenue was $8.7 million; Crawford’s internal-control assessment and auditor’s internal-control audit excluded WeGoLook.
- After year-end, Crawford reorganized its segments into global service-line reporting; subsequent periods were to present prior periods restated on the new basis.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of December 31, 2017.
Important facts for investors to verify
- Whether operating cash flow recovers and receivables are collected, particularly those associated with 2017 hurricane work.
- Garden City Group’s replacement project wins, backlog conversion, and profitability after the Deepwater Horizon work declines.
- Progress and realized savings from the Philippines and India centers, and WeGoLook’s performance and potential future purchase of its remaining 15% interest.
- Debt, variable-rate exposure, covenant compliance, and the capacity to fund pension contributions, capital spending, dividends, and repurchases.
- Final Tax Act accounting and the assumptions underlying goodwill valuations, especially the remaining U.S. Services goodwill at risk.
- How the new segment structure affects comparability and interpretation of reported segment results.