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 third quarter ended September 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 Third Quarter 2019

Revenues before reimbursements of $254.7 million, compared with $255.0 million for the 2018 third quarter

Net income attributable to shareholders of $11.0 million, compared to $7.9 million in the same period last year

Diluted earnings per share of $0.21 for CRD-A and $0.19 for CRD-B, compared with $0.15 for CRD-A and $0.13 for CRD-B in the prior year third quarter

Non-GAAP Consolidated Results Third Quarter 2019

Non-GAAP results for 2019 have been presented on a constant dollar basis to 2018 and excluding the pretax arbitration and claim settlements of $1.2 million in the 2019 period. Non-GAAP consolidated results for the 2018 quarter exclude the loss on disposition of business line.

Revenues before reimbursements, on a non-GAAP basis, of $262.0 million, increasing 2.7% compared with $255.0 million for the 2018 third quarter
 

Net income attributable to shareholders, on a non-GAAP basis, totaled $12.1 million in the 2019 third quarter, up compared to $8.8 million in the same period last year
 

Diluted earnings per share, on a non-GAAP basis, of $0.23 for CRD-A and $0.21 for CRD-B in the 2019 third quarter, up from $0.17 for CRD-A and $0.15 for CRD-B in the prior year third quarter
 

Consolidated adjusted operating earnings, on a non-GAAP basis, were $24.0 million, or 9.2% of non-GAAP revenues, in the 2019 third quarter, up compared with $16.5 million, or 6.5% of revenues, in the 2018 third quarter
 

Consolidated adjusted EBITDA, a non-GAAP financial measure, was $32.5 million, or 12.4% of non-GAAP revenues, in the 2019 third quarter, up compared with $25.5 million, or 10.0% of revenues, in the 2018 period

Management Comments

Mr. Harsha V. Agadi, president and chief executive officer of Crawford & Company, stated, “For the 2019 third quarter, on a constant currency basis, we delivered 2.7% revenue growth and solid margin expansion, demonstrating an improving trend from the second quarter’s result. The velocity of new business wins across the Company, globally, continues to build as our investments in technology and new client solutions are resonating in the market. While I am excited with our new client wins and pace of business, our results are being impacted by more benign weather in the third quarter, continuing into the fourth quarter, and a slower than expected revenue ramp by new clients. While I am disappointed with the reduction in our full year 2019 guidance, I remain confident that our goal of delivering 5% revenue growth and 15% earnings growth, annually, is achievable in the medium-term.

As we have previously mentioned, the strategic investments that we have made in our sales teams to drive market share and in new product development to access large untapped markets continues to drive momentum in our business as can be seen in our new client wins where we have signed $85.1 million in annual revenue value, year to date, which provides solid visibility to future revenue and profit growth. As an example, our TPA segment has won 76 new clients through September with an estimated $32 million of revenue annually, which is only in the early stages of ramping up. We were also pleased with the new client wins in our Contractor Connection business where we entered agreements with major carriers in the U.S. and the U.K. during the quarter and also initiated a pilot program with a major Canadian carrier.

Weather has been a factor this quarter as global insured losses from catastrophes are estimated to be less that 50% of the level reported in the year ago third quarter. A clear focus of our management team is to reduce our reliance on severe weather in an effort to deliver more predictable financial results. To that end, we are focused on handling small and medium carriers’ claims on an outsourced basis which represents a large and untapped market opportunity and will ultimately increase the predictability of our revenues and cash flow. Claims management is our expertise, and we can offer an industry-leading end-to-end solution at a more effective cost to the client. Early signs of our success can be seen in our CCS segment where we onboarded a number of U.S. and U.K. carriers during the third quarter.

Another priority for our management team is the continued improvement in our cash generation while maintaining our expense discipline. Through the third quarter, we generated a $38.9 million improvement in free cash flow compared to the 2018 year to date period. We have been using this cash flow in part to strengthen our balance sheet and our leverage ratio of net funded debt to EBITDA is now below 1.5x. We have also been using our cash flow to buy back our shares as we continue to see our share price as very attractive. In the third quarter, we repurchased approximately 633 thousand shares for an average price of $9.62. Year to date, we have repurchased approximately 2.8 million shares, at an average price of $9.23.”

Mr. Agadi concluded, “While I am disappointed to be reducing our outlook for the remainder of the year, I am more confident than ever that our goal of delivering 5% revenue growth and 15% earnings growth, annually, is in sight.  Our new business wins and growing client revenue value provide visibility to improving financial results as we look to 2020. 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 that will ultimately help fuel our growth and reduce our reliance on severe weather.”

Segment Results for the Third Quarter

Crawford TPA Solutions

Crawford TPA Solutions segment revenues before reimbursements were $99.5 million in the 2019 third quarter, decreasing from $100.3 million in the 2018 third quarter. Absent foreign exchange rate fluctuations, revenues were $100.7 million, up from the prior year third quarter. Changes in foreign exchange rates resulted in a decrease in revenues of 1.2%, or $1.2 million, for the three months ended September 30, 2019, as compared with the 2018 period.

Excluding centralized indirect support costs, gross profit increased to $26.7 million, or a gross margin of 26.8% in 2019 from $26.5 million, or a gross margin of 26.5% in 2018, with slightly lower direct expenses as a percentage of revenues. After allocation of indirect costs, Crawford TPA Solutions recorded operating earnings of $9.3 million in the third quarter of 2019 representing an operating margin of 9.4% compared with $8.1 million, or 8.0% of revenues, in the 2018 third quarter.

Crawford Claims Solutions

Crawford Claims Solutions revenues before reimbursements were $86.3 million in the third quarter of 2019, increasing from $85.3 million in the third quarter of 2018 due to new clients in the U.S. and increases in the U.K. and Australia. Absent foreign currency rate fluctuations, third quarter 2019 revenues were $89.8 million up 5.3% from prior year third quarter.

Excluding centralized indirect support costs, gross profit increased to $19.8 million, or a gross margin of 22.9% in 2019 from $17.7 million, or a gross margin of 20.7% in 2018, due to an increase in new clients and expense reductions. After the allocation of indirect costs, operating earnings were $2.7 million in the 2019 third quarter compared with operating loss of $(0.1) million in the third quarter of 2018. These results represent an operating margin of 3.1% in the 2019 quarter and (0.2)% in the 2018 quarter.

Crawford Specialty Solutions

Crawford Specialty Solutions revenues before reimbursements were $68.9 million in the third quarter of 2019, down from $69.4 million in the same period of 2018. Absent foreign exchange rate fluctuations, revenues would have been $71.5 million for the three months ended September 30, 2019, increasing 3% over prior year revenues of $69.4 million. Changes in foreign exchange rates resulted in a decrease in revenues by 3.7%, or $2.6 million for the three months ended September 30, 2019, as compared with the 2018 period.

Excluding indirect support costs, gross profit decreased to $24.8 million, or a gross margin of 36.0%, in 2019 from $25.9 million, or a gross margin of 37.3%, in 2018, due to increased headcount to support client growth. After allocation of indirect costs, operating earnings were $13.3 million in the 2019 third quarter compared with $14.4 million in the 2018 period. The segment’s operating margin for the 2019 quarter was 19.3% as compared to 20.7% in the 2018 quarter.

Unallocated Corporate and Shared Costs and Credits, Net

Unallocated corporate costs, net were $1.6 million in the third quarter of 2019, compared with $5.8 million in the same period of 2018. The decrease for the three months ended September 30, 2019 was due to decreases in professional fees, self-insurance expense and other administrative costs, partially offset by an increase in defined benefit pension expense.

Arbitration and Claim Settlements

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. During the three months ended September 30, 2019, the Company received a claim from the fourth former executive of the Garden City Group, which was settled for $1.2 million. The total expense for the nine months ended September 30, 2019 of $12.6 million, is classified as "Arbitration and claim settlements" 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 September 30, 2019, totaled $46.1 million, compared with $53.1 million at December 31, 2018. The Company’s total debt outstanding as of September 30, 2019, totaled $189.4 million, compared with $190.4 million at December 31, 2018.

The Company’s operations provided $42.3 million of cash during the 2019 period, compared with $16.0 million in the 2018 period. The $26.3 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 in June 2018, and a decrease in discretionary U.S. and U.K. pension contributions in 2019 compared to 2018. Free cash flow improved by $38.9 million over 2018 for the nine month period.

As expected, the Company made no contributions to its U.S defined benefit pension plan and $0.5 million to its U.K. plans for the 2019 nine month period, compared with contributions of $19.0 million and $4.2 million, respectively, in the 2018 nine month period.

During the nine months ended September 30, 2019, the Company repurchased 1,103,398 shares of CRD-A and 1,680,377 of CRD-B at an average cost of $9.33 and 9.16 per share, respectively.

2019 Guidance

As a result of benign weather continuing into the fourth quarter and slower than expected revenue contribution from new clients, the Company is adjusting its 2019 guidance as follows:

Consolidated revenues before reimbursements between $1.00 and $1.05 billion;

Net income attributable to shareholders of Crawford & Company between $32.0 and $35.0 million, or $0.63 to $0.68 diluted earnings per CRD-A share, and $0.55 to $0.60 diluted earnings per CRD-B share;

Non-GAAP net income attributable to shareholders of Crawford & Company, before arbitration and claim settlements, between $40.0 and $45.0 million, or $0.80 to $0.85 diluted earnings per CRD-A share, and $0.72 to $0.77 diluted earnings per CRD-B share;

Consolidated operating earnings between $82.5 and $87.5 million;

Consolidated adjusted EBITDA between $115.0 and $120.0 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.