Crawford & Company — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; fourth-quarter figures are noted separately. Crawford provides claims management, third-party administration, medical management and legal settlement administration services in more than 70 countries through U.S. Services, International, Broadspire and Garden City Group. Unless stated otherwise, revenue figures below exclude reimbursed client expenses.
Key financial results
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Revenue before reimbursements | $1,109.3 million | $1,170.4 million | Down 5.2% |
| GAAP total revenue | $1,177.6 million | $1,241.5 million | Down 5.1%; includes pass-through reimbursements |
| Income (loss) before income taxes | $63.2 million | $(31.8) million | Turned profitable |
| Net income (loss) attributable to Crawford shareholders | $36.0 million | $(45.5) million | 2015 included $49.3 million goodwill impairment and higher restructuring charges |
| Diluted EPS, Class A / Class B | $0.67 / $0.60 | $(0.79) / $(0.87) | Returned to positive earnings |
| Cash from operating activities | $98.9 million | $61.7 million | Improved with higher earnings and lower working-capital needs |
| Cash and cash equivalents | $81.6 million | $76.1 million | $63.2 million held by foreign subsidiaries |
| Total debt, including capital leases | $188.0 million | $247.3 million | Down; Credit Facility borrowings were $186.2 million |
| Current ratio | 1.6:1 | 1.4:1 | Working capital was $134.4 million, versus $111.8 million |
| Debt to total capital | 55.0% | 68.5% | Lower year over year |
Segment operating earnings, a non-GAAP segment measure excluding corporate costs and other items, totaled $116.1 million, compared with $87.0 million in 2015. Segment margins were U.S. Services 15.4% (13.5% in 2015), International 8.9% (3.7%), Broadspire 9.9% (8.2%) and Garden City Group 8.2% (9.0%).
Fourth-quarter 2016 revenue before reimbursements was $272.4 million, compared with $284.9 million in fourth-quarter 2015. Fourth-quarter net income attributable to shareholders was $7.8 million, versus a loss of $51.7 million a year earlier; the prior-year quarter included the goodwill impairment charge.
Material changes versus 2015
- Revenue before reimbursements declined mainly because of lower Garden City Group, U.S. Services and International revenue. International revenue was reduced by an estimated $29.6 million from foreign-exchange movements; at prior-year exchange rates, International revenue would have increased approximately 0.6%.
- Garden City Group revenue fell 24.9% to $96.2 million as activity on the Deepwater Horizon settlement project continued to wind down. Segment operating earnings declined 31.8% to $7.8 million.
- U.S. Services revenue fell 4.7% to $231.2 million. Catastrophe Services revenue declined 27.0%, while Contractor Connection revenue grew 19.2%.
- International operating earnings more than doubled to $42.5 million, reflecting cost reductions and improved margins, despite lower reported revenue and 12.4% fewer cases.
- Broadspire revenue grew 3.1% to $302.0 million and operating earnings rose 24.9% to $30.0 million, supported by client growth and expense control.
- Restructuring and special charges fell to $9.5 million from $34.4 million. No goodwill impairment was recorded in 2016; 2015 included $49.3 million.
Liquidity, capital and outlook
- The $400 million revolving Credit Facility matures November 25, 2018. At year-end, available borrowing capacity, including the letter-of-credit subfacility, was approximately $198.5 million. The company reported compliance with financial covenants and expected to remain compliant through 2017; covenant compliance is sensitive to EBITDA and debt levels.
- Management said current financial resources, operating cash flow and borrowing capacity should fund operations for the next 12 months. Credit-facility leverage limits step down from 3.50:1 to 3.25:1 for quarters after September 30, 2017; the minimum fixed-charge coverage ratio is 1.25:1.
- Defined-benefit plans remain a significant cash commitment. The company expects to contribute $9.0 million annually to its U.S. qualified plan in 2017–2019, and approximately $5.1 million to U.K. plans in 2017. Reported pension liabilities were $105.2 million; the aggregate funded-status deficit across plans, after overfunded plan assets, was $87.1 million.
- Management forecast 2017 capital expenditures, including capitalized software, of approximately $50–60 million. It expected $3.0 million in 2017 costs for the Manila and Pune service centers and $13.2 million in restructuring and special charges related to ongoing plans.
- Management expected a 2017 effective tax rate of 36%–38% before discrete items and assuming no change in U.S. tax law. This is an estimate, not earnings or revenue guidance.
- Garden City Group backlog was approximately $81 million at year-end, unchanged from 2015; about $73.3 million was expected to be recognized within 12 months. Deepwater Horizon project activity was expected to continue in 2017 at a further reduced rate.
- After year-end, Crawford acquired 85% of WeGoLook for $36.1 million, primarily funded by additional Credit Facility borrowings. The company did not expect the acquisition to materially affect 2017 consolidated results or EPS.
Risks, contingencies and unusual items
- Revenue depends on unpredictable claim referrals, weather and catastrophe activity, insurance-market conditions, and clients’ decisions about outsourcing. Major customer and project losses could materially affect results; no customer represented 10% or more of consolidated revenue, but certain projects and U.S. Services customers were significant to their segments.
- Foreign-exchange changes affect International results; a hypothetical 10% currency move was estimated to change 2016 pretax income by approximately $2.8 million. Variable-rate debt also exposes the company to interest-rate increases.
- Underfunded pension plans, debt covenants, client receivable collection, cybersecurity and sensitive-data protection, and successful completion of the Manila and Pune center ramp-up are material risks.
- Claims-related litigation and indemnification demands arise in the ordinary course; management said reserves were adequate for known and foreseeable matters, while noting outcomes cannot be assured.
- Crawford had voluntarily reported potential Foreign Corrupt Practices Act violations to the SEC and Department of Justice in 2015. In the first quarter of 2017, the SEC informed the company it had concluded its investigation and did not intend to recommend enforcement action.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2016.
Important facts for investors to verify
- Whether the revenue decline stabilizes, particularly as the Deepwater Horizon project winds down, and how much of the $81 million Garden City Group backlog converts to revenue.
- Whether Broadspire and Contractor Connection growth and International cost improvements persist, and whether they offset lower claims volumes and currency pressure.
- Whether operating cash flow remains strong after working-capital effects, planned $50–60 million capital spending, dividends and pension contributions.
- Debt balances, borrowing availability and covenant headroom as the facility’s leverage limit tightens; also monitor the 2018 maturity and variable-rate exposure.
- Actual restructuring and service-center costs against 2017 expectations, and the eventual integration and financial contribution of WeGoLook.
- Pension funding requirements, key customer and project renewals, and any material developments in litigation, data security or other contingencies.