Crawford & Company — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 5, 2020. Crawford provides claims management and outsourcing services in more than 70 countries through Crawford Claims Solutions, Crawford TPA Solutions (Broadspire), and Crawford Specialty Solutions. Some international results are reported on a two-month lag.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue before reimbursements | $1,005.8 million | $1,071.0 million |
| Total revenue | $1,047.6 million | $1,123.0 million |
| Income before taxes | $23.6 million | $44.1 million |
| Net income attributable to Crawford shareholders | $12.5 million | $26.0 million |
| Diluted EPS, Class A / Class B | $0.26 / $0.19 | $0.50 / $0.42 |
| Operating cash flow | $75.2 million | $52.4 million |
| Cash and cash equivalents | $51.8 million | $53.1 million |
| Total debt | $176.9 million | $190.4 million |
| Current ratio | 1.3:1 | 1.4:1 |
| Debt to total capital | 52.6% | 52.6% |
Revenue before reimbursements declined 6.1%; management attributed about $21.6 million of the decline to foreign exchange. Excluding currency effects and the sold Garden City Group business, revenue fell 1.3%. Shareholder net income decreased 51.9%; reported results included significant impairment and settlement charges. Operating cash flow rose by $22.8 million, mainly reflecting lower pension contributions, improved receivables management, and lower working-capital needs.
Segments
- Claims Solutions: Revenue $339.8 million, down 5.9%; operating earnings $7.6 million, down 32.5%. Lower weather-related activity and case volumes were key factors; cases received declined 9.0%.
- TPA Solutions: Revenue $393.9 million, down 2.8%; operating earnings $27.2 million, down 26.4%. Case volumes fell 2.6%, and direct costs grew faster than revenue.
- Specialty Solutions: Revenue $272.1 million, down 10.7%; operating earnings $49.3 million, nearly flat. The comparison was affected by the 2018 Garden City Group sale; excluding that business and currency effects, segment revenue increased 1.7%.
Segment operating earnings totaled $84.1 million, versus $97.8 million in 2018. These are segment measures and exclude specified corporate items and unusual charges; they are not GAAP net income.
Material changes and unusual items
- 2019 included a $17.5 million non-cash goodwill impairment in Claims Solutions, attributed to lower forecasts.
- 2019 included $12.6 million in arbitration and claim settlement charges relating to four former Garden City Group executives.
- 2018 included a $20.3 million pretax loss on the Garden City Group sale, completed for $42.6 million in cash proceeds in June 2018.
- The effective tax rate was 59.7% in 2019, versus 42.0% in 2018, influenced by impairment and settlement charges and valuation allowances.
- 2019 fourth-quarter revenue before reimbursements was $247.2 million; the company reported a $7.3 million shareholder net loss, including the fourth-quarter goodwill impairment.
- Adoption of the new lease standard recorded operating lease right-of-use assets and liabilities; the company said adoption had no material effect on results or cash flows.
Liquidity, debt, and capital
At year-end, working capital was approximately $78.9 million, down from $95.5 million, primarily due to lease accounting adoption. The $450 million revolving credit facility matures November 23, 2022; reported available borrowing capacity, including the letter-of-credit subcommitment, was $265.3 million. The company was in covenant compliance, with leverage ratio of 1.53 and fixed-charge coverage ratio of 1.46. It stated that existing resources, operating cash flow, and borrowing capacity should support operations for the next 12 months.
Operating cash flow was $75.2 million; investing cash use was $23.4 million and financing cash use was $53.4 million. The company spent $26.2 million on share repurchases and paid $13.2 million in dividends. It forecast 2020 property, equipment, and capitalized software additions of approximately $33 million.
The U.S. qualified defined-benefit plan was underfunded by $63.5 million. Crawford expects discretionary contributions of $9 million annually for 2020–2024. Total reported unfunded pension status across plans was $34.2 million after including funded U.K. plan assets.
Outlook, commentary, and risks
Management expected a 2020 effective tax rate of 31%–33% before discrete items and forecast approximately $33 million of 2020 capital additions. It expected to remain within credit covenants during 2020, while noting that covenant headroom is sensitive to EBITDA, borrowing levels, capital spending, interest, taxes, and restricted payments. No revenue or earnings guidance was provided.
- Revenue depends on unpredictable claim referrals, weather and catastrophe activity, client outsourcing decisions, insurance cycles, and employment levels.
- Competition, client concentration within Specialty Solutions, and the ability to retain major contracts may affect revenue and earnings.
- International operations expose the company to foreign exchange, regulatory, political, and cross-border data risks; the company reported no currency hedging.
- Cybersecurity, privacy, technology-platform continuity, and recruiting and retaining adjusters, nurses, and other skilled staff are material risks.
- Pension funding needs, variable-rate debt, and covenant requirements could constrain liquidity. A 100-basis-point interest-rate change was estimated to affect pretax interest expense by about $1.8 million.
- Claims-related litigation and regulatory matters occur in the ordinary course; management said reserves were adequate for known risks. The 2019 executive arbitration and settlement charge is a separately identified unusual item.
Key facts for investors to verify
- Whether claim volumes and segment margins stabilize, particularly in Claims and TPA Solutions.
- Whether the underlying Specialty Solutions growth persists after adjusting for the Garden City Group disposal and currency movements.
- Progress against the $9 million annual U.S. pension contributions and the plan’s funded status.
- Available credit, covenant headroom, and the effect of earnings or borrowing changes on compliance.
- Whether the $17.5 million goodwill impairment signals further deterioration in Claims Solutions forecasts.
- Whether the high 2019 tax rate and tax-credit valuation allowances normalize as management anticipated.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at year-end.