CRAWFORD & CO annual report, FY2014

Crawford & Company — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing also presents fourth-quarter results. Figures below are in U.S. dollars; revenue figures labeled “before reimbursements” exclude client-reimbursed out-of-pocket costs.

Business context

Crawford provides claims management, business process outsourcing, medical management, and legal settlement administration in more than 70 countries. Its four segments are Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. A substantial portion of international results is reported on a two-month lag.

Financial performance and liquidity

Metric20142013Change
Revenue before reimbursements$1,142.9 million$1,163.4 millionDown 1.8%
Total revenue, including reimbursements$1,217.0 million$1,253.4 millionDown 2.9%
Income before taxes$59.9 million$81.1 millionDown 26.2%
Net income attributable to shareholders$30.6 million$51.0 millionDown 39.9%
Diluted EPS, Class B$0.52$0.90Down 42.2%
Cash from operating activities$6.6 million$77.8 millionDown $71.2 million
Cash and cash equivalents at year-end$52.5 million$76.0 millionDown $23.5 million
Total debt, including capital leases$156.8 million$137.6 millionUp $19.2 million
Current ratio1.4:11.2:1Improved

Operating cash flow was pressured by lower earnings, higher receivables, and other working-capital movements. Capital expenditures were $29.2 million; operating cash flow less capital expenditures was approximately negative $22.6 million. The reported debt-to-total-capital ratio was 47.6%, compared with 40.8% in 2013. Available revolving-credit capacity was $149.1 million, including the effect of acquisition-related UK borrowing not reflected on the year-end balance sheet.

Segment operating earnings were $23.7 million for Americas (6.6% margin), $19.7 million for EMEA/AP (5.7%), $15.5 million for Broadspire (5.8%), and $22.8 million for Legal Settlement Administration (13.4%). Total segment operating earnings were $81.7 million; this measure excludes several corporate and other items and is not GAAP net income.

Material changes versus 2013

  • Americas revenue rose 5.0% and segment operating earnings rose 27.7%, supported by Contractor Connection growth and stronger Canadian activity. Higher case volumes were partly offset by fewer major weather events, unfavorable service mix and pricing, and currency effects.
  • Broadspire revenue increased 6.6% and operating earnings rose to $15.5 million, reflecting client and referral growth and improved expense control.
  • EMEA/AP revenue fell 1.7% and operating earnings fell 38.7%. The decline reflected the wind-down of Thailand flood work, higher Specialty Markets start-up costs, and the absence of some prior-year weather-related activity and a client bonus.
  • Legal Settlement Administration revenue declined 22.2% and operating earnings declined 51.1%, mainly as Deepwater Horizon and other large projects wound down. Awarded-project backlog was $102.0 million at year-end, down from $108.2 million; about $88.0 million was expected to be recognized within 12 months.
  • The effective tax rate rose to 48.1% from 36.7%, contributing to the sharper decline in net income. No special charges or credits were recorded in 2014 or 2013; 2012 included $11.3 million of special charges.

Outlook, significant events, and risks

  • GAB Robins acquisition: Crawford acquired the UK claims provider on December 1, 2014, for $71.8 million. Its results and acquisition borrowing were excluded from the 2014 consolidated statements because of the international reporting lag. The UK borrower incurred approximately $78.4 million of debt to fund the transaction. Integration was subject to UK Competition & Markets Authority review, expected by management in the first half of 2015; approximately $7 million of 2015 integration charges were anticipated.
  • Global Business Services Center: Announced in January 2015, the Manila center was planned to phase in through 2018. Management forecast cumulative savings of about $60 million through 2019 and annual savings of about $20 million thereafter, with charges of about $20 million through 2018, including an estimated $9 million charge and $2 million initial savings in 2015. These are expectations, not assured outcomes.
  • 2015 planning assumptions: Management expected an effective tax rate of 38%–40% before discrete items, approximately $40 million of property, equipment, and software additions, and planned annual U.S. pension contributions of $9 million for the next four fiscal years. Management stated it expected available resources and borrowing capacity to support operations for the next 12 months and expected covenant compliance during 2015.
  • Pensions: Defined-benefit plans were underfunded by approximately $142.3 million at year-end, versus $103.0 million in 2013. Updated U.S. mortality assumptions increased the U.S. plan obligation by about $35.4 million. Required contributions, investment performance, interest rates, mortality assumptions, and future regulation could affect liquidity and earnings.
  • Business and financial risks: Revenue depends on unpredictable claim referrals, weather and catastrophe activity, outsourcing decisions, and insurance-market conditions. Project-based legal settlement revenue is volatile and major projects were winding down. Other risks include customer concentration, foreign exchange, competition, cybersecurity and technology disruption, litigation and self-insurance exposure, potential goodwill impairment, and variable-rate debt and covenant compliance.
  • At December 31, 2014, the company reported compliance with credit-facility covenants. The facility includes a maximum leverage ratio of 3.25:1 and minimum fixed-charge coverage ratio of 1.50:1; noncompliance could allow lenders to accelerate debt. The filing reports no material off-balance-sheet arrangements other than operating leases.
  • The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.

Key investor verification points

  • Reconcile the sharp decline in operating cash flow with receivables, collections, and other working-capital movements; assess the sustainability of cash conversion.
  • Confirm total post-acquisition debt and interest burden, including the approximately $78.4 million UK borrowing omitted from the December 31, 2014 balance sheet, and monitor covenant headroom.
  • Track performance and integration costs for GAB Robins, CMA review conditions, and realized synergies against management’s expectations.
  • Measure whether the Manila center delivers forecast savings after restructuring costs and implementation risks.
  • Assess replacement revenue and earnings as major Legal Settlement Administration projects wind down, including conversion of the reported backlog.
  • Monitor pension funding, goodwill impairment sensitivities in Americas and EMEA/AP, and the elevated effective tax rate.
  • Review the filing’s two-month reporting lag for certain international operations when comparing reported results with acquisition timing and current-period conditions.