Crawford & Company — Q1 2020 Form 10-Q
Business context and reporting period. Crawford provides claims management and outsourcing services globally through Crawford Claims Solutions, Crawford TPA Solutions (Broadspire), and Crawford Specialty Solutions. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019. Results for most international operations are reported on a two-month lag.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue before reimbursements | $237.5 million | $247.1 million |
| Total revenue | $246.0 million | $256.4 million |
| Operating earnings, all segments | $9.6 million | $18.6 million |
| Loss before income taxes | $21.6 million | Income of $8.7 million |
| Net loss attributable to Crawford shareholders | $11.4 million | Income of $6.1 million |
| Class A / Class B diluted loss per share | $(0.21) / $(0.23) | Income of $0.12 / $0.10 |
| Cash from operating activities | $(8.0) million | $0.5 million |
| Cash and cash equivalents, March 31 | $83.1 million | $49.7 million at March 31, 2019 |
Revenue before reimbursements fell 3.9% year over year (3.3% at constant exchange rates). Total segment operating earnings declined to $9.6 million from $18.6 million. Segment operating margins were negative 4.7% for Claims Solutions (2019: negative 0.4%), 6.5% for TPA Solutions (6.9%), and 11.0% for Specialty Solutions (18.5%).
Q1 included a $17.7 million non-cash goodwill impairment in Claims Solutions, reducing that reporting unit’s goodwill to zero, and $5.7 million of restructuring costs, mainly severance and related costs. Excluding these and other corporate-level items, reported segment operating earnings are not equivalent to GAAP earnings.
Balance sheet, debt and liquidity
- Working capital was $111.6 million at March 31, up $32.7 million from year-end 2019.
- Short-term borrowings were $39.8 million; long-term debt and finance leases, net of current installments, were $187.3 million. Total short- and long-term borrowings, including finance leases, were $227.1 million, versus $177.0 million at December 31, 2019.
- Management reported total liquidity of $181.7 million: $83.1 million cash plus $98.6 million of additional borrowing capacity based on trailing-twelve-month EBITDA. Separately, available balance under the credit facility was $204.9 million, including $11.6 million of outstanding letters of credit.
- Financing activities provided $47.2 million, primarily reflecting a $53.3 million net increase in revolving-credit borrowings. Cash used in investing was $7.5 million, including $4.8 million of capitalized software costs. Cash dividends paid were $3.3 million.
Material changes and management commentary
- Management attributed weaker revenue primarily to lower weather-related activity and the initial economic effects of COVID-19 in the U.S. and Canada. Cases received across the company declined 5.3%; Specialty Solutions cases declined 19.5%.
- Management estimated COVID-19 reduced Q1 revenue by $3.5 million and operating earnings by $1.8 million in the U.S. and Canada. It warned that the global slowdown could materially affect future results, financial condition, and cash flows, and that future case referrals could be materially below Q1 levels.
- Operating cash flow turned negative, primarily due to higher pension contributions and lower earnings. The company contributed $3.0 million to its U.S. pension plan and $0.2 million to U.K. plans in Q1; it did not expect further U.S. or U.K. contributions in the rest of 2020.
- To preserve liquidity, the company reduced planned capital expenditures, stopped discretionary U.S. pension contributions for the rest of 2020, ceased share repurchases under its 10b5-1 plan, and adjusted staffing through furloughs and reductions in force. It did not intend to apply for government loans, but was using payroll-tax deferrals available under the CARES Act.
- Management estimated a 2020 effective income tax rate of approximately 49%–51%, after considering impairments, expected operating losses in certain international operations, and known discrete items.
Risks, contingencies and other items
- COVID-19 risks include lower client demand and case volumes, restricted access to claim sites, service delays, client payment difficulties, and disruption to employees, clients, and vendors. Management also cited increased credit risk in receivables and unbilled revenue.
- Goodwill impairment estimates depend on forecasts and valuation assumptions, including a 17.5% discount rate and 2.0% terminal growth rate for Claims Solutions. Management said it would continue monitoring the other reporting units for impairment indicators.
- The company faces ordinary-course litigation, indemnification claims, employment and regulatory matters, and self-insured retention exposure; management stated that adequate provisions had been made for known and foreseeable risks.
- The company had up to approximately $10 million of agreed financial support obligations to consolidated variable-interest entity Lloyd Warwick International. LWI creditors have no recourse to Crawford’s general credit.
- The filing reported no material changes in internal control over financial reporting; management concluded disclosure controls were effective at providing reasonable assurance.
Important facts for investors to verify
- Subsequent case volumes, revenue trends, and the realized financial impact of COVID-19, especially given the international reporting lag.
- Actual borrowing capacity, credit-facility covenant compliance, and liquidity needs as operating cash flow and debt levels evolve.
- Receivable and unbilled-revenue collectability, and any further goodwill or other asset impairments.
- Whether restructuring actions deliver sustained cost savings and how staffing reductions affect service capacity and client retention.
- Future pension funding, dividend decisions, and the effective tax rate compared with management’s 49%–51% estimate.