Crawford & Company — Q2 2016 Form 10-Q
Business context and reporting period. Crawford provides claims management, business-process outsourcing, consulting, and legal settlement administration in more than 70 countries. This unaudited report covers the quarter and six months ended June 30, 2016; certain international results are reported on a two-month lag. Dollar amounts below are in millions unless noted.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue before reimbursements | $282.3 | $304.4 | $559.6 | $592.2 |
| Total revenue | $297.7 | $324.4 | $588.6 | $631.0 |
| Income before taxes | $15.3 | $8.9 | $29.2 | $14.4 |
| Net income | $9.2 | $4.2 | $17.8 | $7.5 |
| Net income attributable to Crawford shareholders | $8.6 | $4.1 | $17.3 | $7.0 |
| Diluted EPS, Class A / Class B | $0.16 / $0.14 | $0.08 / $0.06 | $0.33 / $0.29 | $0.14 / $0.11 |
- Revenue before reimbursements fell 7.2% in Q2 and 5.5% in the first half. Lower U.S. Services, International, and Garden City Group revenue outweighed Broadspire growth. Reimbursements offset corresponding costs and did not affect operating earnings.
- Q2 net margin on total revenue was approximately 3.1% (2015: 1.3%); first-half net margin was approximately 3.0% (2015: 1.2%). The filing attributes the stronger earnings primarily to lower service costs and improved segment results.
- Segment operating earnings, Q2 / first half: U.S. Services $9.6 / $18.6; International $11.0 / $18.0; Broadspire $6.5 / $15.2; Garden City Group $2.7 / $4.2. International’s profitability improved substantially, while Garden City Group earnings declined.
- Cash from operations was $11.5 for the first half, versus $10.2 in 2015. Investing used $17.1, compared with $82.3 in 2015, which included the GAB Robins acquisition. Financing used $11.0; cash decreased $16.7 to $59.4.
- At June 30, cash was $59.4; working capital was approximately $122.9. Total borrowings and capital leases were $238.1, down from $247.3 at year-end. Available credit, after outstanding letters of credit, was $138.7. Foreign subsidiaries held $43.6 of cash, which management said was available for general corporate purposes.
- At June 30, total assets were $781.9, total liabilities $640.4, and shareholders’ investment $141.5. Current assets were $378.9 and current liabilities $256.0.
Material changes and management commentary
- U.S. Services revenue fell 12.0% in Q2, mainly from lower weather-related and catastrophe claims; Contractor Connection revenue rose 24.4%. First-half segment earnings rose to $18.6 from $14.0, aided by Contractor Connection growth and prior cost reductions.
- International revenue declined 4.8% in Q2 and 5.0% in the first half at reported exchange rates. Currency reduced first-half revenue by $17.3; at constant exchange rates, first-half revenue increased 1.8%. Case volumes fell 17.4% in Q2 and 15.0% for the half. Cost reductions and improved U.K. results lifted operating earnings.
- Broadspire revenue increased 1.9% in Q2 and 5.5% for the first half; first-half operating earnings rose to $15.2 from $9.5, reflecting revenue growth and expense control.
- Garden City Group revenue declined 26.7% in Q2 and 30.0% for the first half, mainly as Deepwater Horizon and other project work wound down. Awarded-project backlog was $94.1 at June 30; management estimated $46.5 would be recognized in the remainder of 2016. The filing cautions that this business is project-based and can fluctuate significantly.
- Management estimated 2016 restructuring and special charges of $15.6 pretax, including approximately $5.1 related to the Manila and Pune Centers. It expected $10.7 of savings in 2016 from Center-related restructuring incurred in 2015 and 2016, while cautioning that timing and realization are not assured. The Centers are expected to phase in through 2018.
- The estimated 2016 effective tax rate was approximately 38%. The company expected further 2016 pension contributions of approximately $3.0 to the U.S. plan and $3.2 to U.K. plans.
Risks, contingencies, and unusual items
- The company voluntarily reported potential Foreign Corrupt Practices Act violations to the SEC and Department of Justice and said it was cooperating with their investigation. It could not predict whether or when authorities would act or the financial effect.
- Q2 included $3.5 of restructuring and special charges; the first half included $5.9. Special charges included legal and professional fees related to the investigation. Restructuring included Center implementation, GAB Robins integration, and other restructuring costs.
- Other identified risks include claim-volume and catastrophe variability, client outsourcing decisions and retention, Garden City Group project timing, foreign exchange, receivable collection, pension funding, acquisition integration, credit-facility covenant compliance, and achieving planned Center efficiencies. The company reported no material change in market-risk exposure since year-end.
- The filing reported no material changes to internal control over financial reporting and concluded disclosure controls were effective. The interim financial statements were reviewed by Ernst & Young; the review was not an audit.
Key facts for investors to verify
- Whether the SEC or DOJ investigation leads to action, penalties, or other material costs.
- Whether revenue and case volumes stabilize, especially in International and U.S. catastrophe-related services, and whether Garden City Group converts its backlog as expected.
- Whether the company realizes the projected Center savings and stays within its 2016 restructuring-charge estimate.
- Cash conversion and receivable aging: accounts receivable and unbilled revenue increased from year-end, while the allowance for doubtful accounts also rose.
- Debt, credit availability, variable-rate interest expense, pension contributions, and compliance with credit-facility covenants.