Crawford & Company — Q1 2019 Form 10-Q
Business context and period. Crawford provides claims management and outsourcing services to insurers and self-insured organizations in more than 70 countries. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018. The company reports three segments: Crawford Claims Solutions, TPA Solutions: Broadspire, and Specialty Solutions.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue before reimbursements | $247.1 million | $273.1 million; down 9.5% |
| Total revenue | $256.4 million | $290.4 million; down 11.7% |
| Income before taxes | $8.7 million | $12.4 million; down 29.8% |
| Net income | $5.8 million | $8.4 million; down 31.6% |
| Net income attributable to Crawford shareholders | $6.1 million | $8.6 million; down 28.7% |
| Diluted EPS | Class A $0.12; Class B $0.10 | Class A $0.16; Class B $0.14 |
| Cash from operations | $0.5 million provided | $13.6 million used |
| Cash and cash equivalents | $49.7 million at March 31 | $53.1 million at December 31, 2018 |
| Working capital | $82.3 million | Down $13.3 million from December 31, 2018 |
| Short-term borrowings | $31.6 million | $23.2 million at December 31, 2018 |
| Long- and short-term borrowings, including finance leases | $210.1 million | $190.4 million at December 31, 2018 |
Segment operating earnings were $18.6 million, versus $19.0 million. Segment results: Claims Solutions recorded a $0.3 million operating loss (prior-year earnings $1.1 million); Broadspire earned $6.7 million (down from $7.8 million); Specialty Solutions earned $12.2 million (up from $10.0 million). Segment operating margins were -0.4%, 6.9%, and 18.5%, respectively. Consolidated operating margin is not stated as a comparable GAAP measure; net income was approximately 2.3% of revenue before reimbursements.
Investing activities used $3.3 million, principally for property, equipment, and software. Financing activities used $1.1 million; the company paid $3.3 million in dividends and repurchased $16.4 million of shares, while net short-term/revolving facility borrowing increased. Available credit facility balance was $225.5 million at quarter-end, including $11.6 million of outstanding letters of credit.
Material changes versus Q1 2018
- Revenue before reimbursements fell 9.5%. Excluding foreign-exchange effects and the Garden City Group (GCG) business sold in June 2018, it declined 2.0%; management attributed the underlying weakness chiefly to lower claim volumes.
- Reported Specialty Solutions revenue declined 20.0%, largely reflecting the $16.0 million GCG revenue no longer present. Excluding GCG and currency effects, segment revenue increased 1.6%.
- Claims Solutions revenue declined 7.9%, including lower U.S. weather-related activity and reduced cases in Europe and Asia. Total cases received fell 5.9%; the prior-year quarter included runoff of 2017 hurricane claims, which management said contributed $7.1 million of revenue.
- Broadspire revenue declined 2.4%; cases received fell 4.1%, and operating earnings declined 14.0% as lower revenue was not fully offset by lower costs.
- Operating cash flow improved from a $13.6 million use to $0.5 million provided, which management attributed to improved receivables management, lower working-capital needs, the GCG disposition, and lower pension contributions.
- Unallocated corporate and shared costs rose to $3.9 million from $0.8 million, reflecting higher self-insurance expense, professional fees, and pension expense.
Outlook, risks, and unusual items
- Management estimated a 2019 effective income tax rate of approximately 32%, after known discrete items; the Q1 effective rate was 33.7%.
- The company expected no further 2019 contributions to its U.S. and U.K. defined-benefit plans; other international plan funding was expected to be immaterial. Q1 contributions were nil to the U.S. plan and $0.2 million to U.K. plans.
- No formal revenue or earnings guidance is provided. Management cautioned that Q1 results are not necessarily indicative of full-year results and said claims volumes are difficult to forecast.
- Key stated risks include claim-referral and catastrophe-volume variability, outsourcing decisions by clients, customer retention and collections, competition, foreign exchange, pension funding, financing covenants and availability, acquisitions, technology integration, cybersecurity, and the ability to attract and retain staff.
- The company is in arbitration with three former GCG executives seeking additional departure-related payments. Crawford disputes the claims and has made no provision. Management stated that adequate provisions had been made for other known and foreseeable business risks.
- Effective January 1, 2019, adoption of lease accounting Topic 842 added operating lease right-of-use assets and liabilities; it had no material effect on earnings, cash flows, or credit-covenant compliance. March 31 operating lease liabilities totaled $118.7 million.
- No restructuring or special charges were recorded in either comparison period. The interim financial statements received an accountant’s review, not an audit.
Most important facts for investors to verify
- Whether underlying revenue and case-volume trends stabilize, particularly in Claims Solutions and Broadspire, and whether Specialty Solutions’ improvement persists after excluding GCG.
- Whether operating cash generation can support debt service, dividends, pension obligations, and any further repurchases; borrowings increased while cash declined during the quarter.
- The drivers and sustainability of the increase in unallocated costs, and the extent to which lease obligations and pension liabilities affect future liquidity.
- Developments in the former GCG executives’ arbitration and any other material claims, contingencies, or changes in required provisions.
- How actual tax rates compare with management’s approximately 32% full-year estimate and whether client, currency, weather, or credit-facility risks materially change.