Crawford & Company — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Crawford provides claims management, business process outsourcing, and consulting services across more than 70 countries, through U.S. Services, International, Broadspire, and Garden City Group. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue before reimbursements | $269.2 | $282.3 | $536.5 | $559.6 |
| Total revenue, including reimbursements | $284.0 | $297.7 | $563.5 | $588.6 |
| Income before taxes | $17.1 | $15.3 | $29.5 | $29.2 |
| Net income attributable to Crawford shareholders | $10.2 | $8.6 | $17.9 | $17.3 |
| Diluted EPS, Class A / Class B | $0.19 / $0.17 | $0.16 / $0.14 | $0.33 / $0.29 | $0.33 / $0.29 |
- Revenue before reimbursements declined 4.6% in Q2 and 4.1% for the first half. Management attributed the decrease mainly to International and Garden City Group, partly offset by growth in U.S. Services and Broadspire. Currency translation reduced International revenue by $5.9 million in Q2 and $11.9 million for the half.
- Q2 income before taxes and shareholder-attributable net income increased year over year despite lower revenue. Six-month pretax income was nearly flat, while shareholder-attributable net income rose about 3.5%. Calculated pretax margins on revenue before reimbursements were approximately 6.3% in Q2 2017 versus 5.4% in Q2 2016, and 5.5% versus 5.2% for the six-month periods.
- Q2 segment results: U.S. Services revenue was $61.3 million and operating earnings $11.1 million; International $110.4 million and $10.3 million; Broadspire $77.9 million and $8.9 million; Garden City Group $19.7 million and an operating loss of $1.7 million. For the first half, Garden City Group also recorded an operating loss ($2.5 million), while U.S. Services, International, and Broadspire reported operating earnings of $16.7 million, $19.5 million, and $16.0 million, respectively.
- Cash and cash equivalents were $60.0 million at June 30, versus $81.6 million at year-end 2016. Working capital was $150.3 million, up $15.9 million. Current assets were $371.8 million and current liabilities $221.5 million.
- Long- and short-term borrowings, including current debt and capital leases, totaled $247.1 million, compared with $188.0 million at December 31, 2016. The company reported $143.5 million of available credit-facility capacity, including $14.5 million of outstanding letters of credit.
- First-half operating cash flow was negative $16.4 million, versus positive $11.5 million in 2016. Investing cash outflow was $51.9 million, including $36.0 million for acquisitions; financing provided $45.3 million, principally reflecting increased borrowings. Cash declined $21.6 million during the period.
Material changes and notable items
- On January 4, 2017, Crawford acquired 85% of WeGoLook for $36.1 million, funded primarily with credit-facility borrowings. The business contributed $2.2 million of Q2 and $4.2 million of first-half revenue before reimbursements. Purchase accounting remains preliminary; the remaining 15% is subject to a future company option and a minority-holder put, with possible additional consideration tied to financial targets. Management did not expect a material impact on 2017 consolidated results or EPS.
- Garden City Group revenue fell 23.5% in Q2 and 22.9% for the first half, mainly as the Deepwater Horizon settlement project wound down and other project work declined. Its awarded-project backlog was $75.5 million at June 30, versus $94.1 million a year earlier; $38.2 million was expected to be recognized in the second half of 2017.
- Broadspire revenue grew 3.7% in Q2 and 2.4% for the first half, with higher case volumes and improved Q2 operating earnings. U.S. Services revenue rose 4.1% in Q2 and 3.7% for the half, including WeGoLook; excluding WeGoLook, case volumes increased 3.3% and 4.3%, respectively. International revenue declined, affected by currency, lower rates and service mix, and reduced weather-related activity.
- Restructuring charges were $6.8 million in Q2 and $7.4 million for the first half, primarily severance and integration costs. Management expected approximately $13.0 million of restructuring and special charges for full-year 2017, including $3.0 million related to the Manila and Pune service centers and $10.0 million for other restructuring activities.
- First-half dividends paid were $6.9 million. The company repurchased $3.4 million of shares during the first half and, effective July 29, 2017, received a new authorization to repurchase up to 2.0 million shares through July 2020.
Outlook, risks, and contingencies
- Management estimated a 2017 effective tax rate of approximately 37% after known discrete items; the reported first-half rate was 39.4%.
- The company expected further 2017 pension contributions of approximately $3.0 million to U.S. plans and $2.7 million to U.K. plans. At year-end 2016, the U.S. qualified plan was underfunded by $103.5 million; the U.K. plans were overfunded by $21.6 million, based on accumulated benefit obligations.
- The service centers were expected to be phased in through 2018 and to support service quality, efficiencies, and growth. Crawford cautioned that completion, ramp-up, savings, and timing were not assured.
- Key risks include fluctuating claim and catastrophe volumes, project-based Garden City Group revenue, client retention and outsourcing decisions, foreign exchange and economic conditions, acquisition integration, pension funding, receivables collection, credit-facility availability and covenant compliance, cybersecurity, and achieving service-center savings. The company also cited potential litigation and regulatory costs; management stated provisions had been made for known foreseeable risks and probable, reasonably estimable matters.
- The interim financial statements received an independent accountant’s review, not an audit. Management reported disclosure controls were effective as of period-end and no material change in internal control over financial reporting.
Investor verification priorities
- Monitor operating cash conversion and collection of receivables and unbilled revenue, which rose $14.5 million and $13.2 million, respectively, from year-end.
- Track borrowing levels, credit-facility availability, and compliance with financing covenants as acquisition and working-capital needs affect liquidity.
- Review WeGoLook’s final purchase-price allocation, performance, and the financial implications of the minority-interest option, put, and potential contingent consideration.
- Assess whether Garden City Group backlog converts to revenue as expected and whether the Deepwater Horizon wind-down and other project timing continue to pressure utilization and margins.
- Compare actual restructuring charges, service-center ramp-up, and savings with management’s 2017 estimate; also monitor pension contributions and funding obligations.