Crawford & Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Crawford provides claims management and related outsourcing services through Crawford Claims Solutions, Crawford TPA Solutions, and Crawford Specialty Solutions. Figures below are in millions of dollars unless otherwise stated.
Financial performance
- Q3 revenue: $261.7, down 1.6% year over year. Revenue before reimbursements was $253.1, down 0.6% reported but up 0.2% at constant currency.
- Q3 earnings: Income before taxes was $36.4 versus $16.0; net income attributable to Crawford shareholders was $24.4 versus $11.0. Diluted EPS was $0.46 for both share classes, compared with $0.21 for Class A and $0.19 for Class B in Q3 2019. The increase was substantially affected by a $14.1 net gain on business dispositions.
- Nine-month revenue and earnings: Revenue was $750.6, down 5.0%; revenue before reimbursements was $725.1, down 4.4% (down 3.2% at constant currency). Income before taxes was $27.2 versus $30.2; net income attributable to shareholders was $18.9 versus $19.8. Diluted EPS was $0.36 for Class A and $0.34 for Class B, versus $0.39 and $0.33, respectively.
- Segment operating earnings and margins: In Q3, Claims Solutions earned $7.2 (7.3% margin), TPA Solutions $4.4 (5.1%), and Specialty Solutions $17.4 (25.7%). For the nine months, the segments earned $6.3 (2.5%), $13.9 (5.1%), and $38.3 (19.5%), respectively. Segment measures exclude specified corporate and other items and are not consolidated GAAP operating income.
- Cash flow: Nine-month operating cash flow was $57.3, up from $42.3. Investing used $4.4 versus $15.2; financing used $57.3 versus $33.7. Cash declined $3.1 from year-end to $48.7.
- Liquidity and debt: Working capital was $91.9, up $13.0 from December 31, 2019. The company reported total liquidity of $249.8, comprising $48.7 cash and $201.1 borrowing capacity. Short- and long-term borrowings plus finance leases totaled $127.8, down from $177.0 at year-end. The credit facility had $311.0 available, including the effect of $11.5 in outstanding letters of credit.
- Other balance-sheet items: Total assets were $739.6; shareholders’ investment was $182.3. Operating lease liabilities were $123.9. Goodwill was $61.2, after the first-quarter impairment.
Changes versus prior period
- Q3 revenue before reimbursements was nearly flat at constant currency, as hurricane-related activity and new clients lifted Claims Solutions while COVID-19 pressures weighed on TPA and Specialty Solutions. Overall cases received rose 1.3% in Q3 but fell 4.1% year to date.
- For the first nine months, TPA revenue before reimbursements declined 8.7% and Specialty declined 4.6%; Claims increased 0.7% reported, supported by weather activity and client growth. Management estimated COVID-19 reduced revenue by $21–$25 in Q3 and $46–$54 year to date.
- Q3 segment operating earnings improved in Claims and Specialty but declined in TPA. Year-to-date earnings declined in TPA and were modestly higher in Specialty and Claims.
- Year-to-date results included a $17.7 noncash goodwill impairment and $5.7 restructuring charge, partly offset by a $13.8 net gain on business dispositions. The 2019 comparison included $12.6 of arbitration and claim-settlement expense.
- Interest expense decreased year over year. Cash flow benefited from deferred U.S. payroll taxes and Canadian wage subsidies; the company said it deferred $8.1 of payroll taxes and received $9.2 in Canadian subsidy cash during the period.
Outlook, commentary and risks
- The company gave no specific full-year revenue or earnings guidance in the supplied filing. It estimated a 2020 effective tax rate of approximately 33%–35%, after known discrete items.
- Management warned that COVID-19-driven economic contraction could materially reduce future claim referrals and affect results, cash flows, and financial condition. Exposure includes client demand and payment capacity, service access, and credit risk in receivables and unbilled revenue.
- Management cited weather activity and new-client programs as potential offsets to weaker underlying volumes, but noted that weather-related claims are difficult to forecast. Foreign exchange movements also affect reported results.
- The company took liquidity measures including reduced planned capital spending, paused discretionary U.S. pension contributions, suspended share repurchases under its 10b5-1 plan, and workforce reductions or furloughs. It made a further $6.0 contribution to its U.S. pension plan in Q4 2020.
- After quarter-end, Crawford acquired the remaining 85% of Crawford Carvallo in Chile for an initial $11.6, with up to $11.7 in contingent payments, and acquired HBA Group in Australia for an initial $5.0, with up to $3.2 in contingent payments. These transactions were funded primarily through additional credit-facility borrowing in the case of Crawford Carvallo; acquisition accounting was incomplete.
- Other considerations include pension funding obligations, potential further goodwill impairment, foreign currency and interest-rate exposure, litigation and indemnification claims, and the ability to comply with credit-facility covenants. Management stated that known and foreseeable claims had been adequately provided for.
Most important facts for investors to verify
- How much of Q3’s reported earnings increase reflects the one-time disposition gain, and what underlying earnings power remains after adjusting for unusual items?
- Whether COVID-19-related case volumes, revenue, collections, and unbilled-revenue credit quality recover or deteriorate.
- Whether TPA Solutions can restore margins amid lower revenue and higher labor costs as a percentage of revenue.
- Post-acquisition borrowing, contingent consideration, integration costs, and effects on liquidity and covenant headroom.
- Future pension contributions, dividend capacity, and the timing of repayment of deferred payroll taxes.
- The assumptions supporting the goodwill impairment test and the risk of additional impairment in other reporting units.