Crawford & Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015 unless stated otherwise. Crawford provides claims management, business process outsourcing and consulting services in more than 70 countries through U.S. Services, International, Broadspire and Garden City Group. International results are generally reported on a two-month lag. The interim financial statements were reviewed, not audited.
Financial performance and position
- Revenue: Revenue before reimbursements was $277.2 million, down 3.7%; total revenue was $290.9 million, down 5.1%. International foreign exchange reduced revenue by about $11.3 million. Reimbursements offset related costs and did not affect net income.
- Earnings and margins: Net income was $8.6 million, versus $3.3 million; net income attributable to Crawford shareholders was $8.6 million, versus $3.0 million. Diluted EPS was $0.16 for Class A and $0.14 for Class B, compared with $0.06 and $0.04. Segment operating earnings rose to $26.3 million from $15.0 million; aggregate segment operating margin on revenue before reimbursements was approximately 9.5%, versus 5.2%. Income before taxes was $13.9 million; the income tax provision was $5.3 million.
- Cash flow: Operating activities used $5.2 million, improved from $15.6 million used. Investing activities used $9.7 million, versus $73.8 million, reflecting the prior-year GAB Robins acquisition. Financing activities used $5.9 million. Cash declined $22.4 million to $53.6 million.
- Liquidity and debt: Working capital was $108.7 million, down $3.1 million from year-end 2015. Long- and short-term borrowings, including current installments and capital leases, totaled $239.1 million, down from $247.3 million. The company reported $128.8 million of available credit facility balance, including the effect of $17.2 million in letters of credit.
- Balance sheet and other metrics: Total assets were $755.2 million and shareholders’ investment was $126.1 million at March 31. Accrued pension liabilities were $118.1 million. The board declared quarterly dividends of $0.07 per Class A share and $0.05 per Class B share.
Material changes and segment results
- U.S. Services: Revenue rose 3.2% to $58.5 million and operating earnings increased to $9.1 million from $4.2 million. Contractor Connection revenue grew 31.9%; U.S. claims services were affected by lower weather-related case volumes.
- International: Revenue fell 5.2% to $117.5 million at actual exchange rates, while constant-currency revenue increased 3.9%. Case volumes declined 12.7%; operating earnings rose to $7.0 million from $2.3 million, reflecting U.K. improvement and cost reductions.
- Broadspire: Revenue increased 9.4% to $76.2 million and operating earnings rose to $8.7 million from $3.5 million, supported by medical management utilization, higher average case values and expense control. Case volumes were nearly flat.
- Garden City Group: Revenue decreased 33.1% to $25.0 million and operating earnings fell to $1.5 million from $5.0 million, mainly as Deepwater Horizon and another project wound down. Backlog was approximately $103 million, of which management expected $68 million to be recognized during the rest of 2016.
- Consolidated costs of services before reimbursements fell 8.2%, and SG&A fell 5.9%. Net corporate interest expense increased to $2.8 million from $1.9 million, with the filing citing higher borrowings, average rates and loan-cost amortization. Restructuring and special charges rose to $2.4 million from $1.1 million.
Outlook, risks and unusual items
- Management estimated a 2016 effective tax rate of approximately 38%. It expected about $8.4 million of restructuring charges for 2016, partially offset by approximately $8.0 million in savings, and approximately $15.6 million in total 2016 charges associated with the Centers and other restructuring and special items. The Centers are expected to phase in through 2018; cost savings and timely implementation are not assured.
- Management expected to contribute approximately $6.0 million to the U.S. and $4.7 million to U.K. defined benefit plans during the remainder of 2016. The company reported no further required contributions for the rest of the year, but planned these voluntary contributions.
- The company voluntarily reported potential Foreign Corrupt Practices Act violations to the SEC and Department of Justice and said it was cooperating. It could not predict whether government action would follow or the effect on results, cash flows or financial position; $0.3 million of Q1 special charges related to the investigation.
- Other stated risks include fluctuating claims and catastrophe volumes, project-based Garden City Group revenue, foreign exchange and interest-rate exposure, customer retention, acquisition integration, pension funding, financing covenants, collections, cybersecurity, and the ability to realize cost savings. The company noted that short-term borrowing needs typically peak in the first half of the year and that dividend payments are subject to credit-facility restrictions.
- Management said disclosure controls were effective at providing reasonable assurance and reported no material change in internal control over financial reporting. The filing reported no material change in market-risk exposures since year-end 2015.
Important facts for investors to verify
- Whether operating improvements in U.S. Services, International and Broadspire persist, and whether they offset lower Garden City Group activity and International case volumes.
- Progress on the Manila and Pune Centers, including actual restructuring costs, realized savings and implementation timing.
- Developments and potential financial consequences of the SEC/DOJ investigation into potential FCPA violations.
- Cash conversion, working-capital movements and borrowing needs, including the effect of pension funding, interest rates and credit-facility covenants.
- Garden City Group backlog conversion and the remaining revenue and earnings contribution from Deepwater Horizon and other large projects.
- The filing’s estimates are forward-looking; Q1 results are not necessarily indicative of full-year 2016 results.