Crawford & Company — Q1 2012 Form 10-Q
Business context and reporting period. Crawford provides claims management, business process outsourcing, consulting, and legal settlement administration services in more than 70 countries. This unaudited filing covers the three months ended March 31, 2012; most international subsidiaries outside Canada and the Caribbean are included on a two-month reporting lag. The interim statements were reviewed by Ernst & Young, not audited.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue before reimbursements | $267.8 million | $285.0 million |
| Total revenue, including reimbursements | $287.3 million | $304.1 million |
| Income before income taxes | $9.6 million | $18.0 million |
| Net income attributable to Crawford shareholders | $6.1 million | $12.1 million |
| Basic EPS, Class A / Class B | $0.12 / $0.11 | $0.23 / $0.23 |
| Operating cash flow | $(38.2) million | $(50.2) million |
- Revenue before reimbursements declined 6.1%; pretax income fell 46.5% and shareholder-attributable net income fell 50.1%. Net income attributable to shareholders was about 2.3% of revenue before reimbursements, versus about 4.3% a year earlier.
- Operating cash outflow improved year over year, but remained substantial. Management says first-quarter cash needs typically peak due to incentive compensation, retirement contributions, and other recurring payments.
- At March 31, cash was $47.4 million, down from $77.6 million at year-end. Working capital was approximately $81.1 million. Accounts receivable and unbilled revenues rose by $18.0 million, which management attributed mainly to more days of revenue outstanding.
- Short-term borrowings were $22.1 million, up from $1.8 million at year-end. Long-term debt and capital leases, including current installments, totaled $213.0 million, versus $212.4 million. The unused line of credit was $73.4 million, with $18.1 million of letters of credit outstanding.
- Capital spending on property and equipment and capitalized software totaled approximately $8.0 million. Cash dividends paid were $1.4 million; declared dividends were $0.03 per Class A share and $0.02 per Class B share.
Material changes and segment results
- Americas: Revenue fell 9.1% to $77.5 million and the segment recorded a $0.5 million operating loss, compared with $3.1 million of operating earnings. Management cited fewer weather-related claims; cases received declined 10.6%.
- EMEA/AP: Revenue rose 2.5% to $81.8 million, but operating earnings fell 21.6% to $5.6 million. U.K. revenue declined amid reduced weather activity and client insourcing; Asia/Pacific revenue increased.
- Broadspire: Revenue increased 1.0% to $60.4 million. The segment returned to operating earnings of $0.1 million from a $3.2 million loss, with management citing expense controls, new clients, and a more favorable service mix.
- Legal Settlement Administration: Revenue fell 20.1% to $48.1 million and operating earnings declined 37.2% to $10.7 million, mainly as work on a prior special project wound down. Backlog was approximately $105 million, of which an estimated $77 million was expected to be recognized during the remainder of 2012.
- Consolidated SG&A was 0.6% lower. Net corporate interest expense declined to $2.2 million from $4.1 million, primarily reflecting lower rates under the credit facility entered into in December 2011. Total operating earnings across segments fell to $15.9 million from $24.1 million.
Outlook, risks, and unusual items
- The filing provides no consolidated revenue or earnings guidance. Management said it believed existing financial resources, expected operating cash generation, and borrowing capacity would be sufficient for operations over the next 12 months.
- Management expected approximately $2.1 million of additional special charges in Q2 and Q3 2012 for the transition of certain U.S. technology infrastructure activities to third-party providers; $0.9 million had been recorded in Q1.
- Management estimated a 2012 effective tax rate of approximately 35% before discrete items. Proposed U.K. tax legislation, if enacted, could result in about $0.7 million of additional tax expense.
- The company made no U.S. defined-benefit pension contribution in Q1, compared with $20 million in Q1 2011. It expected required U.S. contributions of $4.6 million per quarter for the remainder of 2012, and expected approximately $1.6 million of additional U.K. contributions per quarter. The plans are described as significantly underfunded.
- The Gulf Coast Claims Facility project was transitioning to a court-supervised settlement program. Crawford was selected to assist with administration, but management said the financial impact of the new retention could not yet be determined.
- Key risks include claim volumes and weather-related events, insurance clients’ outsourcing decisions, competition, foreign exchange and interest-rate movements, collection of receivables, pension funding, credit-facility covenant compliance, technology transition and cybersecurity, and retention of clients and qualified personnel. The company also disclosed ordinary-course claims and litigation, including potential indemnification matters; management said adequate provisions had been made for known and foreseeable risks.
Important facts for investors to verify
- Whether claim volumes recover, particularly in the Americas and U.K., and whether segment margins improve.
- Collection trends for accounts receivable and unbilled revenue, given their increase and the operating cash outflow.
- Actual pension contributions, funding obligations, and compliance with credit-facility covenants and liquidity requirements.
- Final technology-transition costs and whether the Gulf settlement administration work generates material revenue or earnings.
- Legal, client-indemnification, and self-insured exposures, as well as any changes in the status or estimated impact of contingencies.