Crawford & Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Crawford provides claims management and outsourcing services to insurers and self-insured organizations in more than 70 countries, through Crawford Claims Solutions, TPA Solutions: Broadspire, and Specialty Solutions. Unless noted, financial amounts below are in millions of dollars.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue before reimbursements | $256.9 | $279.0 | $503.9 | $552.1 |
| Total revenue | $267.8 | $293.2 | $524.2 | $583.6 |
| Income (loss) before taxes | $5.5 | $(2.0) | $14.2 | $10.4 |
| Net income (loss) attributable to Crawford shareholders | $2.6 | $(2.4) | $8.8 | $6.1 |
| EPS, Class A / Class B | $0.06 / $0.04 | $(0.04) / $(0.06) | $0.18 / $0.14 | $0.13 / $0.09 |
- Reported revenue before reimbursements declined 7.9% in Q2 and 8.7% for the first half. The Garden City Group (GCG) sale and foreign-exchange movements were significant factors. Excluding both, revenue before reimbursements was down 0.3% for Q2 and 0.8% for the first half.
- Q2 included an $11.4 million arbitration charge; Q2 2018 included a $17.8 million loss on the GCG disposition. These unusual items materially affect the year-over-year earnings comparison.
- Six-month operating cash flow was $8.7 million, versus $18.7 million used in the prior-year period. Investing activities used $8.1 million, and financing activities used $14.9 million. Cash decreased $14.0 million to $39.2 million.
- At June 30, cash was $39.2 million; short-term borrowings were $36.6 million and long-term debt and finance leases were $166.2 million. Total borrowings including current installments and finance leases were $202.8 million. Working capital was $78.6 million, down $16.9 million from year-end; current assets were $323.6 million and current liabilities $245.0 million.
- Six-month dividends were $6.6 million and share repurchases were $19.6 million. The company had $238.6 million available under its credit facility, including the effect of outstanding letters of credit.
Operating performance and material changes
- Claims Solutions: Q2 segment operating earnings were $1.7 million (2.0% margin on revenue before reimbursements), versus $4.1 million (4.4%). Lower weather-related activity and case volumes, including declines in the U.S., Canada, and Europe, pressured results.
- Broadspire: Q2 segment operating earnings were $5.0 million (5.1%), versus $8.1 million (7.9%). Lower case volumes and revenue were not fully offset by expense reductions.
- Specialty Solutions: Q2 segment operating earnings increased to $12.6 million (17.7%), from $10.0 million (12.0%). The improvement primarily reflects the absence of GCG following its 2018 sale. On a constant-currency basis and excluding GCG from the comparison, Q2 segment revenue grew 6.3%.
- Across segments, case volumes fell year over year in Claims Solutions, Broadspire, and Specialty Solutions. Management cited weaker weather-related activity and client/internal handling of claims; product mix and pricing partly offset volume declines.
- Management reported lower service costs and SG&A, partly reflecting GCG’s disposal, foreign exchange, and cost controls. Personnel and labor costs as a share of revenue increased in Claims Solutions and Broadspire.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management estimated a 2019 effective tax rate of approximately 32%, after known discrete items as of June 30.
- Management did not expect additional U.S. or U.K. defined-benefit pension contributions during the remainder of 2019; other international plan funding was expected to be insignificant. The U.S. plan was underfunded by $72.5 million at December 31, 2018, while U.K. plans were overfunded by $32.7 million.
- The $11.4 million arbitration award related to three former GCG executives; $10.6 million was accrued at quarter-end and paid in July 2019. A fourth former executive had not made a claim, which the company said it did not expect to be material.
- Key risks include claim-referral and catastrophe-volume variability, client retention and outsourcing decisions, foreign exchange and economic conditions, competition, pension funding, debt-facility covenant compliance, acquisitions and integration, staffing, technology and cybersecurity, and potential goodwill or intangible-asset impairment. Management said market-risk exposures had not materially changed since year-end and identified no material change in risk factors.
- Adoption of the new lease standard in January 2019 added operating lease right-of-use assets and liabilities; management reported no material impact on earnings, cash flows, or credit-covenant compliance. The interim financial statements were reviewed by the independent auditor, not audited.
Key facts for investors to verify
- Whether case-volume trends and underlying revenue stabilize, particularly after excluding GCG and foreign-exchange effects.
- Whether segment margins recover amid labor-cost pressure and lower utilization, and whether Specialty Solutions’ improvement is sustainable without the GCG comparison effect.
- The cash-flow impact of working-capital needs, repurchases, dividends, and debt; also verify borrowing availability and covenant headroom.
- The final accounting and cash impact of the arbitration award and any further claims related to former GCG executives.
- Progress on pension funding, lease obligations, and the expected tax rate, which management’s estimate may revise as conditions change.