Crawford & Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; compared with the same periods in 2017. Crawford provides claims management and related services to insurers and self-insured entities in more than 70 countries. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance
Amounts are in millions of dollars, except per-share data. Revenue before reimbursements excludes pass-through expenses.
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue before reimbursements | $255.0 | $270.6 | $807.2 | $807.1 |
| Total revenue | $264.9 | $286.7 | $848.5 | $850.2 |
| Income before taxes | $9.7 | $16.9 | $20.1 | $46.4 |
| Net income attributable to Crawford shareholders | $7.9 | $11.8 | $14.0 | $29.7 |
| Diluted EPS, Class A / Class B | $0.15 / $0.13 | $0.22 / $0.20 | $0.28 / $0.22 | $0.55 / $0.49 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $16.0 | $13.9 |
- Revenue before reimbursements declined 5.7% in Q3 and was essentially unchanged for the first nine months. Excluding the disposed Garden City Group (GCG) business, management reported growth of 1.8% in Q3 and 4.0% year to date.
- Q3 net income attributable to shareholders fell 33%; nine-month net income fell 53%. Net margin on revenue before reimbursements was approximately 3.1% in Q3 and 1.7% year to date, versus 4.4% and 3.7% in 2017.
- Segment operating earnings in Q3 were $14.9 million for Specialty Solutions, $8.1 million for TPA Solutions: Broadspire, and a $0.7 million loss for Claims Solutions. Year-to-date amounts were $35.7 million, $24.0 million, and $3.8 million, respectively.
- Operating cash flow improved to $16.0 million for the nine months, while cash decreased by $0.7 million to $53.3 million. Investing activities provided $12.1 million, largely reflecting $40.3 million of cash proceeds from GCG’s sale; financing used $28.6 million.
Balance sheet and liquidity
- At September 30, cash was $53.3 million; working capital was approximately $90.3 million, down $23.5 million from year-end 2017.
- Short-term borrowings were $32.1 million and long-term debt and capital leases, including current installments, totaled approximately $180.9 million. Total debt and capital leases were $212.9 million, compared with $225.7 million at December 31, 2017. The company reported $221.4 million of available credit-facility capacity, including the effect of $11.7 million in letters of credit.
- Total assets were $731.5 million, down from $787.9 million at year-end. The company cited the GCG disposal and related balance-sheet changes. Accounts receivable declined while unbilled revenues increased.
- For the first nine months, pension contributions were $19.0 million to U.S. plans and $4.2 million to U.K. plans, including a voluntary $10.0 million U.S. contribution in Q3. No further U.S. or U.K. contributions were expected during the remainder of 2018.
Material changes and unusual items
- GCG was sold on June 15, 2018. The disposal generated a $19.0 million pretax loss for the nine months, including a $1.2 million working-capital adjustment recorded in Q3. Sale proceeds were $42.0 million before adjustments; adjusted consideration was $43.7 million. GCG contributed $29.9 million of revenue and a $3.9 million pretax loss before sale in 2018.
- Claims Solutions revenue weakened in Q3 as case referrals fell 8.1%, reflecting the absence of 2017 hurricane-related activity, especially in the U.S. Broadspire revenue grew, but higher compensation and support costs reduced segment earnings. Specialty revenue was lower in part because of the GCG sale and a U.K. Contractor Connection shift to an agent model; management said the latter reduced reported revenue but did not affect operating earnings.
- SG&A rose 9.3% in Q3 and 7.8% year to date, with management citing bad-debt allowance, software amortization and professional-fee costs. No restructuring charges were recorded in 2018, versus $8.8 million in the first nine months of 2017.
- The company adopted ASC 606 in 2018 using the modified retrospective method; it reported no significant effect on 2018 operating results or balance sheet. The nine-month effective tax rate was 31.1%, versus 35.7% in 2017. Management estimated a roughly 32% full-year 2018 effective tax rate after known discrete items.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or cash-flow guidance. Management said available U.S. operating funds and borrowing capacity were expected to fund U.S. operations and obligations for the foreseeable future.
- Results depend on claim referrals and volumes, which can vary with weather and catastrophe activity, outsourcing decisions, case mix, and the insurance cycle. Other stated risks include client retention and collections, competition, foreign exchange, interest rates, pension funding, acquisitions and integration, technology and cybersecurity, staffing, and credit-facility covenant compliance.
- The company has ongoing legal and regulatory exposures in the ordinary course, including claims related to claims-handling decisions and alleged client indemnification; management said adequate provisions had been made for known and foreseeable risks. No material off-balance-sheet arrangements were reported other than operating leases and client trust funds.
- Management concluded disclosure controls were effective at providing reasonable assurance; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess whether growth excluding GCG is sustainable and how the disposal affects ongoing revenue, earnings and cash generation.
- Track Claims Solutions referrals and segment margins, as well as Broadspire compensation costs and staffing growth.
- Review cash conversion, unbilled revenue growth, working capital, borrowing capacity and compliance with credit covenants.
- Verify pension funding needs, future dividend capacity and the final tax effects of the Tax Act.
- Monitor collection allowances, legal contingencies, operating-lease obligations and execution of the announced transition services for GCG.