Crawford & Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. Crawford provides claims management and related services to insurers, self-insured organizations, and legal-settlement clients in more than 70 countries. The interim financial statements are unaudited and were reviewed by Ernst & Young, not audited. Financial results for certain international operations are reported on a two-month lag.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue before reimbursements | $273.1 million | $267.3 million; up 2.2% |
| Total revenue, including reimbursements | $290.4 million | $279.5 million; up 3.9% |
| Income before taxes | $12.4 million | $12.5 million; down 0.5% |
| Net income attributable to Crawford shareholders | $8.6 million | $7.7 million; up 11.8% |
| Diluted EPS | Class A $0.16; Class B $0.14 | Class A $0.14; Class B $0.12 |
| Operating cash flow | $(13.6) million | $(20.5) million |
- Cash and equivalents were $64.0 million at March 31, versus $54.0 million at December 31, 2017. Working capital was approximately $155.5 million, up $41.7 million from year-end.
- Long- and short-term borrowings, including current installments and capital leases, totaled $267.3 million, versus $225.7 million at year-end. The credit facility had $166.0 million available, including $14.2 million of outstanding letters of credit.
- Cash used in investing was $10.9 million, compared with $42.1 million in Q1 2017, which included the $36.0 million WeGoLook acquisition. Financing provided $33.0 million; dividends paid were $3.4 million.
- Segment operating earnings and margins: Claims Solutions $0.7 million (0.8% of segment revenue), down from $2.4 million (2.9%); TPA Solutions: Broadspire $7.8 million (7.8%), versus $8.0 million (8.3%); Specialty Solutions $10.5 million (12.7%), versus $8.4 million (9.5%).
Material changes and management commentary
- Claims Solutions revenue rose 8.8% to $90.4 million, aided by weather-related activity and a 2.4% increase in cases received; segment earnings fell due to higher weather-related labor and administrative support costs.
- Broadspire revenue increased 4.1% to $100.2 million despite 5.6% fewer cases, reflecting pricing and service mix. Earnings declined slightly as compensation and administrative support costs increased.
- Specialty Solutions revenue fell 6.1% to $82.4 million, while earnings increased. A shift to an agency model in certain U.K. Contractor Connection relationships reduced reported revenue by $6.0 million but, according to management, did not affect operating earnings. Garden City Group revenue also declined, principally on lower Deepwater Horizon settlement-project activity.
- Foreign exchange increased consolidated revenue by approximately $7.0 million year over year. The company reorganized reporting into three global service-line segments; prior-period segment figures were reclassified to the new presentation.
- The effective tax rate fell to 32.0% from 38.8%, primarily due to the U.S. Tax Cuts and Jobs Act. Management estimated a roughly 32% effective rate for full-year 2018 and expected to complete provisional tax accounting within the permitted measurement period.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. The filing reports no significant impact on Q1 statement-of-operations or balance-sheet line items; opening retained earnings received a $0.6 million cumulative-effect adjustment.
Outlook, risks, and contingencies
- No formal revenue or earnings guidance is provided. Management expected approximately $6.0 million of additional U.S. and $4.2 million of U.K. pension contributions during the remainder of 2018; these were expected contributions, not required contributions.
- Management expected Deepwater Horizon project activity to continue through 2018 at lower levels than in 2017. Garden City Group work is project-based and can fluctuate with project timing and awards.
- Key risks include case-referral volumes and outsourcing trends, weather and catastrophe activity, client retention and collection of receivables, project volatility, competition, foreign exchange and interest rates, acquisition integration, staffing, cybersecurity, and compliance with financing covenants.
- The company reported $14.2 million in letters of credit outstanding and potential exposure to claims, indemnification demands, and regulatory or other investigations in the ordinary course of business. Management said adequate provisions had been made for known and foreseeable risks. Crawford also agreed to provide LWI financial support of up to approximately $10 million.
- Defined benefit plans and financing needs remain relevant to liquidity. The company noted that credit-facility covenants limit dividends and that short-term borrowings typically peak in the first half of the year.
Important facts for investors to verify
- Whether revenue growth and case trends persist, particularly given lower Broadspire case volumes and weaker Specialty Solutions revenue.
- Whether Claims Solutions can recover margins as weather-related labor and support costs normalize, and whether Specialty Solutions’ improvement is sustainable.
- Collection and billing of unbilled revenue, which increased $24.2 million from year-end to $132.9 million.
- Debt levels, facility availability, covenant compliance, and capacity to fund pension contributions, dividends, and operations.
- The final Tax Act accounting and effective tax rate, and actual progress on the expected pension funding and Deepwater Horizon project activity.