Crawford & Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods unless noted. Crawford provides claims management and outsourcing services to insurers and self-insured entities in more than 70 countries. Financial statements are unaudited and were reviewed by Ernst & Young; a review is not an audit.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue before reimbursements | $254.7m | $255.0m | $758.6m | $807.2m |
| Total revenue, including reimbursements | $265.8m | $264.9m | $790.1m | $848.5m |
| Income before taxes | $16.0m | $9.7m | $30.2m | $20.1m |
| Net income attributable to Crawford shareholders | $11.0m | $7.9m | $19.8m | $14.0m |
| Diluted EPS, Class A / Class B | $0.21 / $0.19 | $0.15 / $0.13 | $0.39 / $0.33 | $0.28 / $0.22 |
| Operating cash flow | — | $42.3m | $16.0m |
- Q3: Revenue before reimbursements was nearly flat, while shareholder-attributable net income rose about 40%. Total segment operating earnings were $25.3m versus $22.3m. Lower SG&A and lower unallocated corporate costs helped results; the quarter also included a $1.2m settlement charge.
- Nine months: Revenue before reimbursements fell 6.0%; reported total revenue fell 6.9%. Net income attributable to shareholders increased to $19.8m from $14.0m, notwithstanding $12.6m of arbitration and claim settlement expense in 2019. The 2018 comparison included a $19.0m loss on the Garden City Group business disposal.
- Revenue comparability: The Garden City Group disposal reduced the year-to-date comparison by $29.9m, and foreign exchange reduced reported revenue by $19.5m. Excluding those factors, revenue before reimbursements increased 0.1% year to date and 2.7% in Q3.
- Segment operating earnings: Q3 results were $2.7m for Claims Solutions (versus a $0.1m loss), $9.3m for TPA Solutions (versus $8.1m), and $13.3m for Specialty Solutions (versus $14.4m). Nine-month results were $4.1m, $21.1m, and $38.1m, respectively; Specialty benefited from the absence of the disposed business, while Claims and TPA were lower year to date.
- Margins: Q3 segment operating margins were 3.1% for Claims, 9.4% for TPA, and 19.3% for Specialty. Nine-month margins were 1.6%, 7.1%, and 18.5%, respectively. These are segment measures, not consolidated GAAP operating margins.
Cash, debt, and liquidity
- Cash and equivalents were $46.1m at September 30, down from $53.1m at December 31, 2018. Working capital was approximately $76.7m, down $18.9m.
- Nine-month cash flows: operating activities provided $42.3m; investing activities used $15.2m; financing activities used $33.7m. Operating cash flow improved from 2018 partly because pension contributions were lower, receivables management improved, and working-capital needs declined.
- Short- and long-term borrowings, including current installments and finance leases, totaled $189.4m, compared with $190.4m at year-end 2018. Credit facility availability was $247.5m, including $11.6m of outstanding letters of credit.
- Operating lease liabilities were $108.4m following adoption of the new lease accounting standard; corresponding right-of-use assets were $93.6m. The adoption did not materially affect results, cash flows, or credit covenant compliance.
- Share repurchases used $25.7m and dividends used $9.9m in the first nine months. The company had authorization remaining to repurchase 1,014,541 shares at September 30.
Outlook, risks, and unusual items
- Management estimated a 2019 effective tax rate of approximately 32%, after known discrete items as of September 30. The nine-month effective rate was 36.8%, versus 31.1% in 2018; management cited the prior-year pension tax-planning benefit, the GCG sale, and 2019 arbitration settlements.
- The filing provides no specific revenue or earnings guidance. Management said it did not expect additional U.S. or U.K. pension contributions in the remainder of 2019; funding for other international plans was expected to be insignificant.
- Claim referrals and case volumes are key revenue drivers and vary with weather events, catastrophe frequency and severity, insurance outsourcing decisions, and economic conditions. Claims Solutions case volumes declined 8.9% in Q3 and 7.7% year to date; Specialty volumes declined 8.8% and 6.9%, respectively. TPA volumes increased 3.8% in Q3 but declined 2.8% year to date.
- Other disclosed risks include foreign exchange and interest-rate changes, client losses or reduced referrals, competition, pension funding requirements, collections, acquisitions and integration, staffing, technology and cybersecurity, financing availability and covenant compliance, and potential goodwill or intangible-asset impairment.
- Arbitration awards to former GCG executives resulted in $11.4m expense in Q2; a fourth executive’s claim was settled for $1.2m in October and recorded in Q3. The filing states there are no other potential claimants. An October 30 credit agreement amendment excludes the specified arbitration expenses from Consolidated EBITDA for financial covenant calculations.
- Management reported disclosure controls were effective at providing reasonable assurance and reported no material change in internal control over financial reporting during the quarter. The filing says market-risk exposures had not changed materially since year-end.
Key facts for investors to verify
- Whether underlying revenue and case-volume trends improve after excluding foreign exchange and the GCG disposal.
- Whether lower claims activity, especially in Claims and Specialty, affects utilization, margins, and operating cash flow.
- The amount, timing, and covenant treatment of arbitration-related costs, and the effect of the October credit amendment.
- Debt, credit-facility availability, cash generation, and the capacity to sustain dividends and repurchases alongside pension and lease obligations.
- Whether the estimated 32% full-year tax rate and management’s pension contribution expectations remain consistent with subsequent disclosures.