Crawford & Company, the world’s largest publicly listed independent provider of claims management and outsourcing solutions to insurance companies and self-insured entities, announced its financial results for the first quarter ended March 31, 2019.

The Company’s two classes of stock are substantially identical, except with respect to voting rights and the Company’s ability to pay greater cash dividends on the non-voting Class A Common Stock (CRD-A) than on the voting Class B Common Stock (CRD-B), subject to certain limitations. In addition, with respect to mergers or similar transactions, holders of CRD-A must receive the same type and amount of consideration as holders of CRD-B, unless different consideration is approved by the holders of 75% of CRD-A, voting as a class.

GAAP Results
First Quarter 2019

Revenues before reimbursements of $247.1 million, compared with $273.1 million for the 2018 first quarter which included $16.0 million of revenues from the disposed of Garden City Group business line

Net income attributable to shareholders of $6.1 million, compared to $8.6 million in the same period last year

Diluted earnings per share of $0.12 for CRD-A and $0.10 for CRD-B, compared with $0.16 for CRD-A and $0.14 for CRD-B in the prior year first quarter

Non-GAAP Results
First Quarter 2019

Non-GAAP consolidated results for the 2018 quarter have been calculated excluding the net operating results of the Garden City Group business, the “GCG business”, disposed of on June 15, 2018. In addition, 2019 non-GAAP results have been presented on a constant dollar basis compared to 2018. See the following non-GAAP reconciliations on page 7.

Revenues before reimbursements, on a non-GAAP basis, of $252.0 million, down 2% compared with $257.2 million for the 2018 first quarter
 

Net income attributable to shareholders, on a non-GAAP basis, totaled $6.2 million in the 2019 first quarter, compared to $9.2 million in the same period last year
 

Diluted earnings per share, on a non-GAAP basis, of $0.12 for CRD-A and $0.10 for CRD-B in the 2019 first quarter compared to $0.17 for CRD-A and $0.15 for CRD-B in the prior year first quarter
 

Consolidated adjusted operating earnings, on a non-GAAP basis, were $14.8 million, or 5.9% of revenues, in the 2019 first quarter, compared with $19.1 million, or 7.4% of revenues, in the 2018 first quarter
 

Consolidated adjusted EBITDA, a non-GAAP financial measure, was $21.2 million or 8.4% of non-GAAP revenues in the 2019 first quarter, compared with $29.0 million or 11.3% of revenues in the 2018 period

Management Comments

Mr. Harsha V. Agadi, president and chief executive officer of Crawford & Company, stated, “Our first quarter revenues were impacted by a more benign weather environment globally as well as a strong U.S. dollar. While overall our segment operating results were in line with the prior year, our consolidated operating earnings were negatively impacted by an increase in self-insurance costs and higher professional fees, both of which, we expect to subside looking to the balance of the year. These largely transitory costs obscure the building momentum in our business driven by the purposeful strategic investments that we have made in our operations and sales functions to drive market share and in new product development to access large untapped market opportunities. It is this momentum combined with our growing sales pipelines which provides our management team with real confidence in our ability to deliver our full year 2019 guidance, which we are reiterating today.

Technology is disrupting our industry and we are meeting this disruption head on as we strive to be a leader in the outsourced claims market. Over the last year, we have shifted our investment in technology towards transformational efforts versus maintenance spending as we work to create solutions designed to solve our clients’ most complex challenges. Central to this is our introduction of industry verticals and integrated solutions which we have launched for the construction, hospitality, and transportation industries.  Client adoption has been strong and we have started to expand these solutions and their capabilities.

Importantly, our recently introduced solutions provide Crawford a market leading position as well as critical differentiation where we can demonstrate our expertise and drive distinctive business value for our customers. Our innovation is also increasing our dialogue and engagement with our clients as we work to solve long-standing industry challenges. This is evident in our Broadspire business where our new verticals and solutions are driving active discussions resulting in a strong new business pipeline. While we experienced lower claim volumes at Broadspire in the first quarter, new business wins provide visibility to sequential growth as our new clients’ business ramps through the second quarter.

Our management team has also been focused on improving the Company’s cash generation while delivering value to shareholders through a disciplined capital allocation strategy. Of note, we delivered a $21.7 million improvement in free cash flow in the 2019 first quarter, which is a significant upswing. Our focus on expenses and our efforts to reduce our working capital needs contributed to the overall improvement. Moving forward throughout this year, we will remain focused on cash generation and maintaining our strong balance sheet which provides us a significant competitive advantage. As previously communicated, given our confidence in our outlook, combined with our current share price, which we believe is trading meaningfully below intrinsic value, we opportunistically repurchased approximately 1.8 million shares of CRD-A and CRD-B during the 2019 first quarter."

Mr Agadi concluded, “We have made strong progress positioning Crawford not only for growth but also for continued leadership in the outsourced claims industry. Our innovative solutions are driving increased client engagement which is leading to strong new business pipelines across our company which provides confidence in our outlook. Importantly, we remain firmly on track to deliver our longer term goal of achieving 5% revenue growth and 15% earnings growth, annually.”

Segment Results for the First Quarter

Crawford Claims Solutions

Crawford Claims Solutions revenues before reimbursements were $83.3 million in the first quarter of 2019, decreasing 8% from $90.4 million in the first quarter of 2018 primarily due to a decrease in weather related activity in the U.S., as 2018 revenues included $7.1 million from the runoff of 2017 hurricane claims. On a constant dollar basis, first quarter 2019 revenues were $85.6 million.

Excluding centralized indirect support costs, gross profit decreased to $17.1 million, or a gross margin of 20.5% in 2019 from $17.9 million, or a gross margin of 19.8% in 2018, due primarily to lower earnings in Europe and Asia compared to the prior year. After the allocation of indirect costs, operating earnings were a loss of $(0.3) million in the 2019 first quarter compared with operating earnings of $1.1 million in the first quarter of 2018, representing an operating margin of (0.4)% in the 2019 quarter and 1.3% in the 2018 quarter.

Crawford TPA Solutions: Broadspire

Crawford TPA Solutions: Broadspire segment revenues before reimbursements were $97.8 million in the 2019 first quarter, decreasing 2% from $100.2 million in the 2018 first quarter. Changes in foreign exchange rates resulted in a decrease in revenues of approximately 1.0%, or $1.0 million, for the three months ended March 31, 2019 as compared with the 2018 period. Revenues were negatively impacted by a decrease in cases received.

Excluding centralized indirect support costs, gross profit decreased to $25.5 million, or a gross margin of 26.0% in 2019 from $26.4 million, or a gross margin of 26.3% in 2018, as lower direct expenses did not fully offset the lower revenues. After allocation of indirect costs, Crawford TPA Solutions: Broadspire recorded operating earnings of $6.7 million in the first quarter of 2019 representing an operating margin of 6.9% compared with $7.8 million, or 7.8% of revenues in the 2018 first quarter.

Crawford Specialty Solutions

Crawford Specialty Solutions revenues before reimbursements were $65.9 million in the first quarter of 2019, down 20% from $82.4 million in the same period of 2018 which included $16.0 million of GCG revenues. Non-GAAP segment revenues excluding GCG were $66.5 million in the 2018 period. Changes in foreign exchange rates resulted in a decrease of our Crawford Specialty Solutions segment revenues by approximately 1.9%, or $1.6 million for the three months ended March 31, 2019, as compared with the 2018 period. Absent foreign exchange rate fluctuations, Crawford Specialty Solutions segment revenues would have been $67.5 million for the three months ended March 31, 2019, increasing over prior year non-GAAP revenues of $66.5 million.

Excluding indirect support costs, gross profit decreased to $22.4 million, or a gross margin of 34.0% in 2019 from $26.9 million, or a gross margin of 32.6% in 2018, due primarily to the absence of the Garden City Group’s gross contribution. After allocation of indirect costs, operating earnings were $12.2 million in the 2019 first quarter compared with $10.0 million in the 2018 period. The segment’s operating margin for the 2019 quarter was 18.5% as compared to 12.2% in the 2018 quarter. This improvement was primarily due to the absence of the Garden City Group business which had an operating loss in the 2018 period after the allocation of indirect costs.

Unallocated Corporate and Shared Costs and Credits, Net

Unallocated corporate costs, net were $3.9 million in the first quarter of 2019, compared with $0.8 million in the same period of 2018. The increase for the three months ended March 31, 2019 was due to an increase in self-insured expenses, professional fees and defined benefit pension expense.

Balance Sheet and Cash Flow

The Company’s consolidated cash and cash equivalents position as of March 31, 2019, totaled $49.7 million, compared with $53.1 million at December 31, 2018. The Company’s total debt outstanding as of March 31, 2019, totaled $210.1 million, compared with $190.4 million at December 31, 2018.

The Company’s operations provided $0.5 million of cash during the 2019 period, compared with a use of cash of $13.6 million in the 2018 period. The increase in cash provided by operating activities was primarily due to better accounts receivable management and lower working capital requirements, including the positive cash flow impact as a result of the Garden City Group business disposal, and a decrease in discretionary U.S. and U.K. pension contributions in 2019 compared to 2018. Free cash flow improved $21.7 million over the 2018 first quarter.

As expected, the Company made no contributions to its U.S defined benefit pension plan and $0.2 million to its U.K. plans for the 2019 three month period, compared with contributions of $3.0 million and $1.4 million, respectively, in the 2018 period.

During the three months ended March 31, 2019, the Company repurchased 421,427 shares of CRD-A and 1,376,889 of CRD-B at an average cost of $9.13.

2019 Guidance

Crawford & Company is reaffirming its guidance for 2019 as follows:

Consolidated revenues before reimbursements between $1.05 and $1.10 billion;

Net income attributable to shareholders of Crawford & Company between $46.0 and $51.0 million, or $0.85 to $0.95 diluted earnings per CRD-A share, and $0.78 to $0.88 diluted earnings per CRD-B share;

Consolidated operating earnings between $90.0 and $100.0 million;

Consolidated adjusted EBITDA between $130.0 and $140.0 million;

To a significant extent, Crawford’s business depends on case volumes. The Company cannot predict the future trend of case volumes for a number of reasons, including the fact that the frequency and severity of weather-related claims and the occurrence of natural and man-made disasters, which are a significant source of claims and revenue for the Company, are generally not subject to accurate forecasting.