Business context and reporting period
Crawford & Company filed this Form 10-K for the fiscal year ended December 31, 2018. It provides global claims-management and outsourcing services in more than 70 countries through Crawford Claims Solutions, TPA Solutions: Broadspire, and Specialty Solutions. The filing also reports fourth-quarter results. Some international results are consolidated on a two-month delay.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue before reimbursements | $1,071.0 million | $1,105.8 million | Down 3.2% |
| Total revenue, including reimbursements | $1,123.0 million | $1,163.7 million | Down 3.5% |
| Net income attributable to Crawford shareholders | $26.0 million | $27.7 million | Down 6.1% |
| Diluted EPS, Class A / Class B | $0.50 / $0.42 | $0.52 / $0.45 | Lower for both classes |
| Cash from operating activities | $52.4 million | $40.8 million | Up $11.7 million |
| Cash and cash equivalents at year-end | $53.1 million | $54.0 million | Down $0.9 million |
| Total debt | $190.4 million | $225.7 million | Down $35.3 million |
Current assets were $320.8 million and current liabilities $225.3 million; the current ratio was 1.4:1 and working capital was approximately $95.5 million. Total debt to total capital was 52.6%, versus 55.3% in 2017. Income before taxes was $44.1 million; the effective tax rate was 42.0%. Net income margin was approximately 2.3% of total revenue.
Segment operating earnings, the company’s segment performance measure, totaled $97.8 million, down from $109.2 million. Segment operating margins were 2.7% for Claims Solutions (4.8% in 2017), 9.1% for Broadspire (9.8%), and 16.8% for Specialty Solutions (15.3%). Total segment gross profit was $293.0 million, or 27.4% of revenue before reimbursements, compared with $297.6 million, or 26.9%, in 2017.
Fourth-quarter revenue before reimbursements was $263.8 million, versus $298.8 million in fourth-quarter 2017. Fourth-quarter net income attributable to shareholders was $11.9 million, compared with a $2.0 million loss a year earlier. The 2017 quarter included a $19.6 million non-cash goodwill impairment; 2018’s fourth quarter included a $1.3 million remaining portion of the Garden City Group disposal loss.
Material changes versus prior period
- Claims Solutions revenue declined 1.1%, principally reflecting the absence of 2017 U.S. hurricane activity; cases received fell 3.1%.
- Broadspire revenue increased 3.8%, with cases received up 0.9%, but operating earnings declined 3.4% as compensation and central support costs rose.
- Specialty Solutions revenue fell 13.0%, largely because Garden City Group (GCG) was sold in June 2018, reducing reported revenue by $46.3 million, and a U.K. Contractor Connection agency-model change reduced revenue by $11.0 million. The latter change had no operating-earnings impact.
- Operating earnings declined in all three segments, with management citing higher centralized administrative costs, including technology and sales investments. Gross profit improved in Claims and Broadspire but declined in Specialty.
- Cash from operations improved partly through lower accounts receivable and working-capital needs, offset by increased unbilled receivables and $10.0 million in additional U.S. pension contributions.
Outlook, risks, contingencies, and unusual items
- Management expects a 2019 effective tax rate of 31%–33%, before discrete items and assuming no material tax-law changes. It forecasts approximately $28 million of 2019 property, equipment, and capitalized-software additions.
- The company expects no discretionary U.S. pension contribution in 2019, followed by $9 million annually in 2020–2023. The disclosed underfunded deficit for specified U.S. and international plans was $74.3 million at the latest measurement date.
- Management believes resources, operating cash flow, and borrowing capacity should fund operations for the next 12 months and expects covenant compliance through 2019. At year-end, the company reported $248.0 million of available capacity under its $450 million revolving facility and was in compliance with covenants.
- GCG was sold for adjusted proceeds of $42.6 million; the company recorded a pretax disposal loss of $20.3 million. It also recorded a $1.1 million non-cash trade-name impairment. There were no 2018 restructuring charges.
- On January 22, 2019, Crawford agreed to repurchase shares for $16.4 million, a post-year-end capital use. Management estimated that, adjusted for the transaction, year-end leverage and fixed-charge-coverage ratios would have been 1.61 and 1.71, respectively.
- Key risks include unpredictable claim volumes and catastrophe activity, dependence on client referrals and outsourcing decisions, competition and labor availability, data security and privacy regulation, foreign exchange and international exposure, pension funding, and covenant sensitivity to earnings, borrowing, capital spending, and distributions. Brexit-related uncertainty is also identified.
- The company is in arbitration with three former GCG executives seeking additional departure payments. Crawford disputes the claims and recorded no provision. The filing states that reserves are provided for other known litigation risks, but outcomes could still adversely affect results.
- A principal shareholder beneficially owned approximately 52% of voting Class B shares at year-end, giving him substantial influence over shareholder matters.
Important facts for investors to verify
- Whether underlying revenue trends and segment profitability improve after separating GCG’s disposal, the U.K. agency-model change, foreign exchange, and catastrophe-related comparisons.
- Whether Broadspire can manage rising compensation and staffing costs while sustaining revenue growth, and whether central technology and sales investments produce returns.
- Cash conversion and receivables quality, particularly the increase in unbilled revenues, and the assumptions used to recognize revenue on fixed-fee and lifetime claims.
- Debt capacity and covenant headroom under weaker earnings or higher interest rates; the facility bears variable rates and matures in November 2022.
- Pension funding requirements, actuarial assumptions, and potential effects on liquidity; also confirm the timing and tax implications of planned contributions.
- The resolution and potential financial exposure of the former GCG executives’ arbitration and other legal, regulatory, privacy, and cybersecurity matters.
- The effect of the January 2019 share repurchase on liquidity, leverage, and capital allocation.