Crawford & Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are unaudited. Crawford provides claims-management services to insurers and self-insured entities in more than 70 countries.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue before reimbursements | $279.0 million | $269.2 million | $552.1 million | $536.5 million |
| Total revenue | $293.2 million | $284.0 million | $583.6 million | $563.5 million |
| Income (loss) before tax | $(2.0) million | $17.1 million | $10.4 million | $29.5 million |
| Net income attributable to Crawford shareholders | $(2.4) million | $10.2 million | $6.1 million | $17.9 million |
| Diluted EPS, Class A / Class B | $(0.04) / $(0.06) | $0.19 / $0.17 | $0.13 / $0.09 | $0.33 / $0.29 |
| Operating cash flow | Not separately presented | Not separately presented | $(18.7) million | $(16.4) million |
Q2 revenue before reimbursements rose 3.6%; first-half revenue rose 2.9%. Q2 included a $17.8 million pretax loss on the Garden City Group (GCG) sale. Excluding that charge, pretax income would have been approximately $15.8 million, versus $17.1 million a year earlier; this is a simple calculation from reported figures, not a company-reported adjusted measure. No restructuring charges were recorded in 2018, compared with $6.8 million in Q2 2017 and $7.4 million in the first half of 2017.
Q2 segment operating earnings and margins were: Claims Solutions $3.8 million (4.0% of segment revenue before reimbursements), Broadspire $8.1 million (7.9%), and Specialty Solutions $10.4 million (12.5%). First-half segment operating earnings were $4.5 million, $16.0 million, and $20.8 million, respectively. The filing does not provide a consolidated operating-margin measure in the figures summarized here.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $46.3 million, down from $54.0 million at December 31, 2017; $30.7 million was held in foreign subsidiaries and management said it was available for general corporate purposes.
- Working capital was approximately $108.5 million, up $5.3 million from year-end. Current assets were $344.5 million and current liabilities were $236.0 million.
- Long- and short-term borrowings, including current installments and capital leases, totaled $225.1 million, compared with $225.7 million at year-end. Credit-facility availability, including $11.7 million of letters of credit, was $214.7 million.
- First-half investing cash flow was positive $23.4 million, principally reflecting business-sale proceeds; financing cash flow was negative $12.9 million. Cash decreased $7.7 million during the period.
- Operating cash use increased to $18.7 million from $16.4 million, primarily due to higher unbilled receivables associated with weather-related revenue growth. Capital expenditures were $9.5 million and capitalized software costs were $8.3 million.
Material changes and unusual items
- GCG sale: Crawford completed the sale on June 15, 2018. Adjusted consideration was $44.6 million, including a preliminary $2.6 million working-capital adjustment; $0.2 million was held in escrow. The company recorded a $17.8 million pretax disposal loss. GCG had generated pretax losses of $3.9 million through the sale date in the first half of 2018. Transition services to the buyer are to continue through December 31, 2018. Management said the disposal was not a strategic shift.
- Segment performance: Claims Solutions revenue increased on weather-related activity, including U.S. and Canadian cases. Broadspire revenue increased, but case volumes fell 3.0% in the first half and higher compensation and support costs reduced segment earnings. Specialty Solutions revenue and Q2 earnings declined, partly due to GCG’s sale and weaker Contractor Connection and GCG activity.
- Reporting structure and accounting: Crawford realigned its operating segments to a global service-line structure. It adopted ASC 606 using the modified retrospective method on January 1, 2018; the opening retained-earnings adjustment was $0.6 million, with no significant effect on reported Q2 or first-half income-statement or balance-sheet line items.
- Tax: The six-month effective tax rate was 42.4%, versus 39.4% in 2017, affected by low or negative taxable income in certain operations, including the GCG disposal. Management estimated a 2018 effective tax rate of approximately 32% after known discrete items, and said Tax Act accounting remained provisional.
Outlook, commentary and risks
The filing provides no revenue or earnings guidance. Management expects approximately $3.0 million of additional U.S. and $1.4 million of additional U.K. pension contributions during the remainder of 2018, although it said no further contributions were required for those plans in 2018. Management described the first-half operating cash outflow as primarily reflecting higher unbilled receivables and expects U.S. operating cash generation and borrowing capacity to fund U.S. operations and obligations for the foreseeable future.
Key disclosed risks include claim-referral volumes and weather or catastrophe activity; client retention, contract renewals and collections; competition and outsourcing decisions; foreign exchange and interest rates; pension funding obligations; financing availability and covenant compliance; acquisitions and integrations; cybersecurity and technology execution; qualified-personnel retention; and litigation, regulatory or labor claims. Crawford reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. The interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Whether underlying segment profitability improves as elevated labor and support costs are absorbed, particularly in Broadspire and Claims Solutions.
- Cash conversion and collection of unbilled revenue, which increased $28.3 million before specified sale and currency effects; first-half operating cash flow remained negative.
- Final GCG sale working-capital adjustments, escrow and transition-service economics, and whether the disposal loss has any further financial effects.
- Debt-facility availability, covenant headroom, interest costs and the timing of short-term borrowing repayments.
- Actual pension contributions and tax rate versus management’s stated expectations, including completion of provisional Tax Act accounting.
- Whether case volumes, weather-related activity, client referrals and foreign-exchange movements sustain or reverse the reported revenue trends.