Crawford & Company — Q3 2016 Form 10-Q
Period: Quarter and nine months ended September 30, 2016; comparisons are with 2015. The interim financial statements are unaudited. Crawford provides claims management, business process outsourcing and consulting services across four segments: U.S. Services, International, Broadspire and Garden City Group.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue before reimbursements | $277.3m | $293.3m | $836.9m | $885.5m |
| Total revenue | $295.4m | $310.0m | $884.0m | $941.0m |
| Income before income taxes | $20.0m | $7.3m | $49.2m | $21.7m |
| Net income attributable to Crawford shareholders | $10.9m | $(0.9)m | $28.2m | $6.2m |
| Diluted EPS, Class A / Class B | $0.20 / $0.18 | $(0.01) / $(0.03) | $0.53 / $0.47 | $0.14 / $0.08 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $50.1m | $21.1m |
Revenue before reimbursements fell 5.5% in both the quarter and year-to-date periods. Q3 pretax margin on revenue before reimbursements was approximately 7.2%, versus 2.5% a year earlier; the nine-month margin was approximately 5.9%, versus 2.5%. These are calculated ratios. Restructuring and special charges were $1.5m in Q3 and $7.4m year to date, compared with $11.1m and $16.4m in 2015.
Segment results
- U.S. Services: Q3 revenue before reimbursements fell 9.0% to $56.5m and operating earnings declined to $9.4m from $10.8m. Lower catastrophe-project revenue was partly offset by Contractor Connection growth. Nine-month operating earnings rose to $28.0m from $24.8m.
- International: Q3 revenue fell 5.1% to $121.6m, including a $6.1m foreign-exchange impact; operating earnings increased to $13.2m from $8.0m. Nine-month operating earnings rose to $31.2m from $11.5m, while foreign exchange reduced revenue by $23.4m.
- Broadspire: Revenue increased 3.3% in Q3 and 4.8% year to date. Operating earnings rose to $8.3m from $7.4m in Q3 and to $23.5m from $17.0m for nine months.
- Garden City Group: Revenue fell 22.0% in Q3 and 27.7% year to date, primarily as Deepwater Horizon and another large project wound down. Operating earnings improved in Q3 to $2.4m from $1.1m, but declined to $6.5m from $9.8m year to date.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $71.7m, down from $76.1m at year-end 2015; $52.7m was held by foreign subsidiaries and management said it was available for general corporate purposes.
- Working capital was $132.3m, up $20.4m from year-end. Current assets were $381.0m and current liabilities $248.7m.
- Total long- and short-term borrowings, including current installments and capital leases, were $214.6m, down from $247.3m at year-end. The company reported $171.1m available under its credit facility and $13.8m of letters of credit outstanding.
- Nine-month investing cash use was $23.2m, versus $94.7m in 2015, principally reflecting the prior-year GAB Robins acquisition. Financing used $28.9m, compared with $83.5m provided in 2015; Crawford paid $10.2m in dividends in each nine-month period.
- Accounts receivable and unbilled revenues were $167.0m and $112.8m, respectively. Unbilled revenue rose $14.1m from year-end, mainly in the U.K., Canada and Garden City Group.
Outlook, risks and notable items
- Management expected approximately $11.0m of 2016 restructuring and special charges, including $4.4m for the Manila and Pune centers and $6.6m for previously announced plans and other special charges. It expected $10.3m of 2016 savings from center-related restructuring; the centers are expected to phase in through 2018, but savings and execution are not assured.
- Garden City Group had awarded-project backlog of approximately $94m at September 30, 2016, of which an estimated $25m was expected to be recognized in the remainder of 2016. Management expected Deepwater Horizon activity to continue through year-end at a reduced rate.
- Management estimated a 2016 effective tax rate of approximately 40%. It expected about $1.4m of additional U.K. pension contributions in the remainder of 2016 and no further U.S. plan contributions. The U.S. defined benefit plan was materially underfunded at year-end 2015.
- Crawford reported that it had self-reported potential Foreign Corrupt Practices Act violations to the SEC and DOJ and was cooperating with their inquiries. It could not predict whether or when action would be taken or the financial impact. Q3 included $0.1m of special charges for investigation-related and other professional fees. The company also received $4.1m from terminating a currency swap and recorded a net $0.6m loss related to the swap, note and settlement.
- After quarter-end, Crawford entered a 13-year Atlanta office lease with approximately $31m in future total payments; the replacement space was expected to begin use in late 2017.
- Key operating risks include fluctuations in claims and catastrophe volumes, project-based Garden City Group revenue, foreign exchange, client retention and collections, pension funding, debt covenant compliance, acquisition integration, achieving center savings, and cybersecurity. Management said market-risk exposures had not changed materially since year-end.
Most important facts for investors to verify
- Whether revenue and case-volume trends stabilize, particularly in U.S. catastrophe services, International markets and Garden City Group projects.
- Whether the centers deliver the expected savings on schedule and whether 2016 restructuring and special charges remain within management’s estimate.
- Developments in the SEC/DOJ investigation, including any potential financial, legal or operational consequences.
- Cash conversion and collections as unbilled revenue and receivables rise, alongside debt reduction and credit-facility availability.
- Future pension funding needs, the effective tax rate, and the impact of the new Atlanta lease and dividend constraints.