Crawford & Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. Crawford provides claims management and outsourcing services globally. In 2021, it reorganized reporting into Crawford Loss Adjusting, Crawford TPA Solutions, and Crawford Platform Solutions; prior segment figures were reclassified to match.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue before reimbursements | $267.5 | $234.4 | $520.6 | $471.9 |
| Total revenue | $276.5 | $242.9 | $538.7 | $488.9 |
| Income before income taxes | $15.4 | $12.4 | $23.9 | $(9.2) |
| Net income attributable to Crawford shareholders | $11.8 | $5.9 | $17.8 | $(5.5) |
| Diluted EPS, Class A and Class B | $0.22 | $0.11 | $0.33 | Class A $(0.10); Class B $(0.12) |
| Cash provided by operating activities | Not presented quarterly | $10.5 | $12.0 |
- Q2 revenue before reimbursements increased 14.1%; on a constant-currency basis, it increased 8.9%. The six-month increases were 10.3% reported and 6.6% at constant currency. Foreign exchange added $12.2 million to Q2 and $17.5 million to first-half revenue growth.
- Q2 shareholder net income approximately doubled year over year. First-half results turned positive from a loss in 2020, when the company recorded $17.7 million of goodwill impairment and $5.7 million of restructuring costs; neither was recorded in first-half 2021.
- Q2 operating earnings by segment: Loss Adjusting $6.2 million (down from $10.0 million); TPA Solutions $4.7 million (up from $3.1 million); Platform Solutions $10.4 million (up from $7.1 million). Operating margins were 5.3%, 4.7%, and 20.3%, respectively, versus 9.2%, 3.5%, and 19.5% a year earlier.
- For the first half, segment operating earnings were $11.1 million for Loss Adjusting, $9.4 million for TPA Solutions, and $15.0 million for Platform Solutions. Loss Adjusting and TPA margins were 4.8% and 4.7%; Platform Solutions was 16.0%.
- Q2 service costs before reimbursements rose 18.1%, faster than revenue growth; SG&A rose 5.7%. Management attributed expense increases mainly to compensation, incentive pay, foreign exchange, and acquisitions. Q2 consolidated net income margin was approximately 4.3% of total revenue, compared with 2.5% in Q2 2020.
Financial position and liquidity
- At June 30, cash and cash equivalents were $44.7 million, essentially unchanged from year-end 2020. Working capital was $87.1 million, up $27.9 million.
- Total borrowings, including current installments and finance leases, were $125.0 million, versus $113.6 million at December 31, 2020. This included $7.1 million of short-term borrowings and $117.9 million of long-term debt and finance leases.
- Management reported total liquidity of $288.2 million: $44.7 million cash plus $243.5 million of additional borrowing capacity. The credit facility had $317.1 million of available balance including $11.3 million of outstanding letters of credit.
- First-half operating cash flow was $10.5 million; investing cash outflow was $11.8 million and financing cash outflow was $0.4 million. Investing included $2.1 million of property and equipment purchases, $10.1 million of capitalized software costs, and $3.8 million net cash paid for acquisitions, partly offset by $4.2 million of life-insurance proceeds.
- First-half dividends paid were $6.4 million and share repurchases were $3.0 million. The company made $4.5 million in U.S. pension contributions and $0.4 million in U.K. contributions, and expects another $4.5 million U.S. contribution in 2021.
Outlook, commentary, and risks
- Management gave no specific revenue or earnings guidance. It estimated a 2021 effective income tax rate of approximately 27%–29%, after known discrete items as of June 30.
- Management reported recovery from COVID-19-related weakness, particularly in the U.S., but said the recovery may not be sustained. It warned that COVID-19 could materially affect future results, financial condition, and cash flows; future case referrals could decline unless offset by new clients or weather-related activity.
- Overall cases received increased 12.9% in Q2 and 6.6% in the first half. Platform Solutions growth reflected weather activity, new clients, and high-frequency, low-severity WeGoLook cases. TPA case volume declined 2.3% year to date, including significant declines in Canada and Europe.
- Weather and catastrophe activity, claim outsourcing levels, economic and employment conditions, customer retention and collections, foreign exchange, compensation and staffing, acquisition integration, pension funding, cybersecurity, and credit-facility covenant compliance are among the disclosed risks.
- The company received Canadian Emergency Wage Subsidy benefits of $2.2 million in Q2 and $4.1 million in the first half; it does not expect to qualify in future quarters. It also deferred $13.0 million of 2020 U.S. payroll taxes, payable in equal installments at the ends of 2021 and 2022.
- HBA Group, acquired in November 2020, was included in the consolidated results from January 1, 2021 due to the reporting lag for certain international subsidiaries. The purchase accounting remained preliminary. The company reported $91.3 million of remaining performance obligations, expecting approximately 70% to be recognized as revenue within one year.
- Management stated that adequate provisions had been made for known and foreseeable litigation and other claims. The company disclosed $11.3 million of letters of credit and ordinary-course claims, employment, regulatory, and other contingencies. Ernst & Young performed an interim review, not an audit, and reported no material modifications were needed for GAAP conformity.
Important facts for investors to verify
- Whether revenue growth and case volumes persist after separating foreign-exchange effects, acquisitions, weather-related work, and WeGoLook’s high-frequency cases.
- Whether Loss Adjusting’s lower Q2 operating margin improves, and whether TPA and Platform Solutions can sustain recent margin performance.
- Cash conversion, receivables and unbilled-revenue growth, seasonal borrowing needs, and compliance with credit-facility covenants.
- Actual pension contributions and the timing of deferred payroll-tax payments, alongside the company’s dividend and repurchase capacity.
- The continuing effects of COVID-19, the end of Canadian wage subsidies, and the final acquisition accounting for HBA Group.