Crawford & Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Financial statements are unaudited and were reviewed, not audited, by the independent accounting firm.
Business context
Crawford provides claims management, business process outsourcing, and consulting services to insurers and self-insured organizations in more than 70 countries. Its four reported segments were U.S. Services, International, Broadspire, and Garden City Group. Results for some international operations are reported on a two-month delay.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue before reimbursements | $267.3 million | $277.2 million | Down 3.6% |
| Total revenue | $279.5 million | $290.9 million | Down 3.9% |
| Income before taxes | $12.5 million | $13.9 million | Down 10.6% |
| Net income | $7.6 million | $8.6 million | Down 11.7% |
| Net income attributable to Crawford shareholders | $7.7 million | $8.6 million | Down 11.2% |
| Diluted EPS, Class A / Class B | $0.14 / $0.12 | $0.16 / $0.14 | Lower for both classes |
| Operating cash flow | $(20.5) million | $(5.2) million | Greater cash use |
| Cash and cash equivalents, March 31 | $68.8 million | $81.6 million at Dec. 31, 2016 | Down $12.8 million |
| Total short- and long-term debt and capital leases | $244.0 million | $188.0 million at Dec. 31, 2016 | Up $56.0 million |
Working capital was approximately $147.8 million, up $13.3 million from year-end. Cash used in investing was $42.1 million, chiefly reflecting the WeGoLook acquisition; financing provided $49.1 million, including increased borrowings. The company reported $143.5 million of available credit facility capacity, including undrawn letters of credit. Q1 dividends paid were $3.4 million.
Segment operating earnings were: U.S. Services $5.5 million (down 38.8%); International $9.3 million (up 32.0%); Broadspire $7.1 million (down 18.5%); and Garden City Group a loss of $0.9 million, versus earnings of $1.5 million.
Material changes versus Q1 2016
- International revenue fell 5.9% on reported exchange rates; currency movements reduced it by approximately $6.0 million. At constant exchange rates, International revenue was down 0.7%. Cost reductions and improved utilization helped raise segment operating earnings.
- Garden City Group revenue declined 23.1% as the Deepwater Horizon and another large project wound down; the segment moved to an operating loss. Awarded project backlog was $73.5 million, versus $103.0 million a year earlier.
- U.S. Services revenue increased 3.3%, including $1.9 million from WeGoLook. Segment earnings declined amid higher advertising and incentive compensation costs and WeGoLook’s operating loss. Case volumes rose 36.1%, or 7.1% excluding WeGoLook.
- Broadspire revenue rose 1.0%, but operating earnings declined as employee compensation and benefits costs increased.
- SG&A increased 5.6%, mainly due to a $2.4 million increase in U.S. Services advertising expense and higher stock-based compensation. Restructuring and special charges fell to $0.6 million from $2.4 million.
Outlook, commentary, risks, and unusual items
- In April, Crawford initiated a cost-reduction plan affecting about 200 employees and contractors. It expects approximately $8 million of Q2 2017 restructuring charges, at least $10 million of operating savings for the remainder of 2017, and at least $20 million of annual savings in future years. Separately, management expected approximately $13 million of total 2017 restructuring and special charges.
- The company expects additional 2017 pension contributions of approximately $6.0 million to its U.S. plan and $3.8 million to its U.K. plans. It estimated a 2017 effective tax rate of approximately 37%.
- WeGoLook was acquired on January 4, 2017 for $36.1 million, funded primarily with credit-facility borrowings. Crawford acquired 85%; the preliminary purchase-price allocation included $23.6 million of goodwill. Management did not expect the acquisition to materially affect consolidated 2017 results or EPS. The remaining 15% is subject to future option and put provisions and potential additional consideration.
- Management cited risks including case-volume and catastrophe variability, project-based Garden City Group revenue, foreign exchange, client retention and collections, acquisition integration, pension funding, credit-facility availability and covenant compliance, and achieving savings from restructuring and global service centers. The filing states that no material off-balance-sheet arrangements existed other than operating leases; client trust funds are not available for general operations.
- Subsequent to quarter-end, Crawford realigned segment reporting responsibilities, including moving Canada out of International into a newly formed North America segment. The filing also identifies the planned adoption of the new revenue standard on January 1, 2018; its impact was still under evaluation.
Important facts for investors to verify
- Whether weaker Garden City Group project revenue and backlog convert as expected, and how much further the major projects wind down.
- Whether the cost-reduction plan achieves its savings targets, and whether restructuring costs remain near management’s estimates.
- Cash conversion and working-capital trends, particularly receivables and unbilled revenue, alongside the higher debt balance and credit-facility headroom.
- International operating trends excluding currency effects, and the sustainability of margin improvement across segments.
- Future pension contributions and funding exposure; management cited a $103.5 million U.S. plan underfunding at December 31, 2016.
- Final WeGoLook purchase accounting, integration performance, and potential obligations relating to the minority interest.