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 second quarter ended June 30, 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 Consolidated Results
Second Quarter 2019

Revenues before reimbursements of $256.9 million, compared with $279.0 million for the 2018 second quarter, which included $13.9 million of revenues from the Garden City Group business line which was disposed of in June 2018

Net income attributable to shareholders of $2.6 million, compared to a $(2.4) million loss in the same period last year

Diluted earnings per share of $0.06 for CRD-A and $0.04 for CRD-B, compared with $(0.04) for CRD-A and $(0.06) for CRD-B in the prior year second quarter

Non-GAAP Consolidated Results
Second Quarter 2019

Non-GAAP results for 2019 have been presented on a constant dollar basis to 2018 and excluding the pretax arbitration settlement charges of $11.4 million in the 2019 period. 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 and the loss on disposition of business line.

Revenues before reimbursements, on a non-GAAP basis, of $264.2 million, which remained relatively flat compared with $265.1 million for the 2018 second quarter
 

Net income attributable to shareholders, on a non-GAAP basis, totaled $11.3 million in the 2019 second quarter, compared to $11.0 million in the same period last year
 

Diluted earnings per share, on a non-GAAP basis, of $0.21 for CRD-A and $0.19 for CRD-B in the 2019 second quarter unchanged from $0.21 for CRD-A and $0.19 for CRD-B in the prior year second quarter
 

Consolidated adjusted operating earnings, on a non-GAAP basis, were $22.9 million, or 8.7% of revenues, in the 2019 second quarter, compared with $21.7 million, or 8.2% of revenues, in the 2018 second quarter
 

Consolidated adjusted EBITDA, a non-GAAP financial measure, was $30.6 million, or 11.6% of non-GAAP revenues, in the 2019 second quarter, compared with $32.5 million, or 12.3% of revenues, in the 2018 period

Management Comments

Mr. Harsha V. Agadi, president and chief executive officer of Crawford & Company, stated, “For the 2019 second quarter, on a constant currency basis and excluding GCG, we delivered 6% operating earnings growth on revenues that were essentially flat year over year and strong sequential improvement over our first quarter operating earnings. Importantly, the strategic investments that we have made in our salespeople to drive market share and in new product development are firmly taking hold. This can clearly be seen in our new business development where we have seen a sharp acceleration in new client wins. Through the second quarter we have signed $47.0 million in annual revenue value from new customers, which compares to $30.0 million for the first six months of 2018. This success and our growing new business development pipeline provide confidence in our full year outlook.

We have also been working to transition Crawford towards more predictable, recurring revenue business as we strive to reduce the volatility from weather. To accomplish this, we have shifted our investment in technology over the last year towards transformational efforts versus maintenance spending as we work to create solutions designed to solve our clients’ most complex challenges. Our goal is to be a leader in the outsourced claims market and offer our clients industry-leading solutions designed to solve their most complex challenges. Along these lines, I am very excited with a key new client win with a top 15 P&C carrier in the United States who outsourced the handling of their small business claims to us. Claims management is our expertise, and we can offer an industry-leading end-to-end solution at a more effective cost to the client. Looking forward, handling small and medium carriers’ claims on an outsourced basis represents a large and untapped market opportunity which will ultimately increase the predictability of our revenues and cash flow.

While I am pleased with where our business is positioned and confident in the outlook, I am also very encouraged with the success that we have achieved improving our cash generation while remaining disciplined on expenses. Through the second quarter, we generated a $27.4 million year-over-year increase in operating cash flow and our free cash flow improved by $37.1 million over the prior year period. We will continue to be disciplined and use our capital to drive value for shareholders through a disciplined capital allocation strategy focused on investment in the business, accretive M&A, and returning capital to shareholders through a consistent quarterly dividend and share repurchases. Of note, we have bought back 701,506 shares of CRD-A and 1,449,240 of CRD-B at an average cost of $9.11 per share, year to date, representing 4% of our outstanding shares.”

Mr. Agadi concluded, “We continue to make strong progress positioning Crawford not only for growth but also for continued leadership in the outsourced claims industry. Our new business wins are accelerating as a result of our investment in people, products, and innovation. Additionally, our clients are seeing the many benefits that we can provide and are beginning to outsource large portions of their claims to Crawford which is an exciting growth opportunity. While our new clients’ business will take time to ramp, 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 Second Quarter

Crawford Claims Solutions

Crawford Claims Solutions revenues before reimbursements were $86.0 million in the second quarter of 2019, decreasing from $93.1 million in the second quarter of 2018 partially due to a decrease in weather related activity in the U.S., as 2018 revenues included $4.1 million from the runoff of 2017 hurricane claims. On a constant dollar basis, second quarter 2019 revenues were $89.6 million.

Excluding centralized indirect support costs, gross profit decreased to $19.6 million, or a gross margin of 22.7% in 2019 from $21.5 million, or a gross margin of 23.1% in 2018, due primarily to lower earnings in Canada and Europe compared to the prior year. After the allocation of indirect costs, operating earnings were $1.7 million in the 2019 second quarter compared with operating earnings of $4.1 million in the second quarter of 2018, representing an operating margin of 2.0% in the 2019 quarter and 4.4% in the 2018 quarter.

Crawford TPA Solutions: Broadspire

Crawford TPA Solutions: Broadspire segment revenues before reimbursements were $99.5 million in the 2019 second quarter, decreasing from $102.6 million in the 2018 second quarter. Changes in foreign exchange rates resulted in a decrease in revenues of approximately 1.3%, or $1.3 million, for the three months ended June 30, 2019, as compared with the 2018 period. Additionally, 2019 revenues were negatively impacted by decreased cases received.

Excluding centralized indirect support costs, gross profit decreased to $23.7 million, or a gross margin of 23.8% in 2019 from $26.5 million, or a gross margin of 25.8% in 2018, as lower direct expenses did not offset the lower revenues. After allocation of indirect costs, Crawford TPA Solutions: Broadspire recorded operating earnings of $5.0 million in the second quarter of 2019 representing an operating margin of 5.1% compared with $8.1 million, or 7.9% of revenues, in the 2018 second quarter.

Crawford Specialty Solutions

Crawford Specialty Solutions revenues before reimbursements were $71.4 million in the second quarter of 2019, down from $83.3 million in the same period of 2018, which included $13.9 million of GCG revenues. Non-GAAP segment revenues excluding GCG were $69.4 million in the 2018 period. Changes in foreign exchange rates resulted in a decrease of our Crawford Specialty Solutions segment revenues by approximately 2.8%, or $2.4 million for the three months ended June 30, 2019, as compared with the 2018 period. Absent foreign exchange rate fluctuations, Crawford Specialty Solutions segment revenues would have been $73.8 million for the three months ended June 30, 2019, increasing 6% over prior year non-GAAP revenues of $69.4 million.

Excluding indirect support costs, gross profit decreased to $25.2 million, or a gross margin of 35.3%, in 2019 from $26.8 million, or a gross margin of 32.1%, in 2018, due primarily to the absence of the Garden City Group. After allocation of indirect costs, operating earnings were $12.6 million in the 2019 second quarter compared with $10.0 million in the 2018 period. The segment’s operating margin for the 2019 quarter was 17.7% as compared to 12.0% 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 a credit of $3.2 million in the second quarter of 2019, compared with costs of $0.7 million in the same period of 2018. The decrease for the three months ended June 30, 2019 was due to decreases in professional fees, bad debt expense and other administrative costs, partially offset by an increase in defined benefit pension expense.

Arbitration Settlement Charges

During the three months ended June 30, 2019, the Company recognized pretax charges in the amount of $11.4 million, or $0.15 per share after income taxes, related to an arbitration panel award to three of the four former executives of the Company's former Garden City Group associated with their departure from that company on December 31, 2015. The expense is classified as "Arbitration Settlement Charges" on the Company's unaudited Condensed Consolidated Statements of Operations.

Balance Sheet and Cash Flow

The Company’s consolidated cash and cash equivalents position as of June 30, 2019, totaled $39.2 million, compared with $53.1 million at December 31, 2018. The Company’s total debt outstanding as of June 30, 2019, totaled $202.8 million, compared with $190.4 million at December 31, 2018.

The Company’s operations provided $8.7 million of cash during the 2019 period, compared with a use of cash of $18.7 million in the 2018 period. The $27.4 million 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 of the Garden City Group disposal, and a decrease in discretionary U.S. and U.K. pension contributions in 2019 compared to 2018. Free cash flow improved by $37.1 million over 2018 for the six month period.

As expected, the Company made no contributions to its U.S defined benefit pension plan and $0.3 million to its U.K. plans for the 2019 six month period, compared with contributions of $6.0 million and $2.8 million, respectively, in the 2018 six month period.

During the six months ended June 30, 2019, the Company repurchased 701,506 shares of CRD-A and 1,449,240 of CRD-B at an average cost of $9.11 per share.

2019 Guidance

The Company is updating its 2019 guidance to reflect the impact of foreign exchange on revenues and the GCG arbitration settlement as follows:

Consolidated revenues before reimbursements between $1.02 and $1.07 billion;

Net income attributable to shareholders of Crawford & Company between $38.0 and $43.0 million, or $0.70 to $0.80 diluted earnings per CRD-A share, and $0.63 to $0.73 diluted earnings per CRD-B share;

Non-GAAP net income attributable to shareholders of Crawford & Company, before arbitration settlement charges, 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.