Crawford & Company — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Crawford provides claims management, business process outsourcing, and legal settlement administration services in more than 70 countries. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue before reimbursements | $270.6M | $277.3M | $807.1M | $836.9M |
| Total revenue, including reimbursements | $286.7M | $295.4M | $850.2M | $884.0M |
| Income before income taxes | $16.9M | $20.0M | $46.4M | $49.2M |
| Net income | $12.0M | $11.3M | $29.9M | $29.1M |
| Net income attributable to Crawford shareholders | $11.8M | $10.9M | $29.7M | $28.2M |
| Diluted EPS, Class A / Class B | $0.22 / $0.20 | $0.20 / $0.18 | $0.55 / $0.49 | $0.53 / $0.47 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $13.9M | $50.1M |
For Q3, revenue before reimbursements declined 2.4%, while shareholder-attributable net income increased about 8%. For the first nine months, revenue before reimbursements fell 3.6%, while shareholder-attributable net income rose about 5%. The lower tax provision helped support earnings: the nine-month effective tax rate was 35.7%, versus 40.7% a year earlier.
Segments
| Segment | Q3 2017 revenue before reimbursements | Q3 operating earnings | 9M 2017 revenue before reimbursements | 9M operating earnings |
|---|---|---|---|---|
| U.S. Services | $63.1M | $9.5M; 15.1% margin | $184.8M | $26.2M; 14.2% margin |
| International | $110.8M | $10.2M; 9.2% margin | $331.0M | $29.7M; 9.0% margin |
| Broadspire | $76.7M | $8.2M; 10.7% margin | $231.5M | $24.2M; 10.5% margin |
| Garden City Group | $20.0M | $0.2M; 0.9% margin | $59.7M | $(2.3)M; (3.8)% margin |
Liquidity, debt, and cash flow
- At September 30, cash and cash equivalents were $73.3M, down from $81.6M at year-end 2016; working capital was approximately $158.3M, up $23.9M.
- Total short- and long-term borrowings, including current installments and capital leases, were $250.1M, versus $188.0M at December 31, 2016. The increase mainly reflected WeGoLook financing and higher working-capital needs.
- Available credit facility capacity was $135.3M, including $14.5M of outstanding letters of credit.
- Nine-month operating cash flow fell to $13.9M from $50.1M. Investing used $68.5M, including $36.0M for acquisitions and $19.9M for capitalized software. Financing provided $43.1M, including increased borrowings; cash ended the period at $73.3M.
- Accounts receivable increased $11.1M and unbilled revenue increased $22.0M from year-end, partly reflecting hurricane-related work and higher unbilled balances in International and Garden City Group.
Material changes and notable items
- Revenue mix and segment trends: U.S. Services revenue increased, supported by WeGoLook and Q3 hurricane activity. International revenue declined, including the effect of foreign exchange and a U.K. Contractor Connection shift to an agency model, which reduced reported revenue by $5.9M in Q3 and $10.4M year to date. Garden City Group revenue fell as the Deepwater Horizon settlement project wound down. Broadspire revenue was nearly flat in Q3 and grew 1.6% year to date.
- Profitability: Q3 pretax income declined despite higher net income, principally because of the lower tax provision. International operating earnings declined in Q3; Garden City Group’s nine-month operating loss contrasts with prior-year profit. Broadspire’s year-to-date operating earnings improved modestly.
- Acquisition: Crawford acquired 85% of WeGoLook on January 4, 2017, for $36.1M. WeGoLook contributed $2.2M of Q3 and $6.3M of nine-month revenue before reimbursements. Acquisition accounting remained preliminary; the company did not expect a material effect on 2017 consolidated results or EPS.
- Restructuring: Nine-month restructuring charges were $8.8M, primarily for restructuring and integration, severance, and the Manila and Pune service centers. Management expected approximately $13.0M of 2017 restructuring and special charges in total. The centers are expected to phase in through 2018, but savings and timely implementation are not assured.
- Credit agreement: On October 11, 2017, after quarter-end, the company amended and restated its facility, increasing commitments from $400M to $450M, extending maturity to November 2022, and reducing interest-margin ranges. The amended agreement includes maximum senior secured and total leverage ratios of 3.25:1 and 4.25:1, respectively.
- Pensions and distributions: Crawford contributed $13.0M to U.S. and U.K. defined-benefit plans in the first nine months and expected a further approximately $1.3M U.K. contribution in 2017; no further U.S. contribution was expected for the year. Nine-month dividends paid were $10.3M. A new authorization permits repurchases of up to 2.0M shares through July 2020.
Outlook, risks, and contingencies
- Management estimated a 2017 effective tax rate of approximately 30% after known discrete items, attributing the lower expected rate to nonrecurring benefits and income mix.
- Management noted that hurricane-related cases increased U.S. volumes, but mobilization costs rose and revenue from many cases may benefit later periods. Future claim volumes are uncertain and depend on weather, industry outsourcing decisions, and other factors.
- Key risks include declining or fluctuating claim referrals; project timing and the Deepwater Horizon wind-down; client retention and collections; foreign exchange; acquisition integration; achieving service-center savings; pension funding; cybersecurity; competition; and compliance with credit covenants.
- The company disclosed routine claims-related litigation, indemnification demands, and potential employment, regulatory, and other legal matters. Management stated adequate provisions were made for known and foreseeable risks and for probable, reasonably estimable items.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether hurricane-related case activity converts into billed and collected revenue, particularly given the increase in receivables and unbilled revenue and the sharp decline in operating cash flow.
- Whether International revenue and operating earnings stabilize after the U.K. agency-model change, weaker case volumes, and foreign-exchange effects.
- How quickly Garden City Group replaces declining Deepwater Horizon work; its awarded-project backlog was approximately $66M, versus $94M a year earlier, with an estimated $16M expected to be recognized in the remainder of 2017.
- Whether WeGoLook integration and the global service centers deliver expected efficiencies, and whether restructuring costs remain within management’s approximately $13M full-year estimate.
- Debt levels, borrowing availability, covenant compliance, and the effects of the amended credit agreement; also monitor pension contributions and dividend or repurchase capacity.