Crawford & Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. The interim financial statements were reviewed, not audited.
Business context
Crawford provides claims management, business process outsourcing, consulting, and legal settlement administration services in more than 70 countries. Its four segments are Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. In 2011, the company realigned segment reporting; prior periods were recast, with no effect on consolidated results.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue before reimbursements | $283.0m | $254.5m | $859.7m | $728.9m |
| Total revenue | $308.2m | $278.1m | $926.4m | $786.1m |
| Income before taxes | $20.6m | $15.3m | $58.2m | $17.6m |
| Net income attributable to Crawford shareholders | $15.3m | $13.0m | $40.9m | $13.5m |
| Diluted EPS, Class A / Class B | $0.28 / $0.28 | $0.24 / $0.24 | $0.76 / $0.75 | $0.25 / $0.25 |
- Revenue before reimbursements grew 11.2% in Q3 and 17.9% year to date; on a constant-currency basis, growth was 6.2% and 14.7%, respectively. Revenue growth was led by Legal Settlement Administration, Americas, and EMEA/AP; Broadspire revenue declined.
- Management reported Q3 shareholder net income of $9.4m excluding the $7.0m pretax arbitration award ($5.9m after tax), versus $13.0m in Q3 2010. For the nine-month comparison, excluding the 2011 award and 2010 goodwill impairment and special charges, management cited adjusted net income of $35.0m versus $23.2m.
- Segment operating earnings in Q3 were Americas $6.8m, EMEA/AP $5.7m, Broadspire loss $2.9m, and Legal Settlement Administration $10.8m. For the first nine months, they were $20.1m, $20.5m, a $9.2m loss, and $42.5m, respectively.
- Cash flow from operations was negative $17.6m for the first nine months, compared with negative $25.1m in 2010. Investing cash outflow was $23.2m; financing provided $14.1m. Cash declined $25.5m to $68.0m, including $57.9m held by foreign subsidiaries.
- Working capital was $101.8m, up $19.2m from year-end 2010. Accounts receivable and unbilled revenue increased $47.0m, primarily reflecting more days of revenue outstanding.
- At September 30, short-term borrowings were $21.7m; long-term debt and capital leases, including current installments, totaled about $220.0m. The company had a $100m revolving facility, with $79.9m available after outstanding letters of credit; the revolver expires October 2013. Total liabilities were $700.6m and shareholders’ investment was $144.3m.
- Direct compensation and fringe benefits were 58.9% of revenue before reimbursements in Q3 versus 58.5% a year earlier; for nine months, 58.0% versus 61.0%. No consolidated operating margin is stated as a primary GAAP metric; reported segment operating earnings exclude specified corporate and other items.
- The company reinstated dividends in 2011. Cash dividends paid in the first nine months were $3.5m; Q3 dividends per share were $0.03 for Class A and $0.02 for Class B.
Material changes and management commentary
- Americas revenue rose 10.5% in Q3, helped by weather-related claims and increased catastrophe activity. Hurricane Irene-related cases received late in the quarter were expected to generate revenue in Q4.
- EMEA/AP revenue rose 26.5% in Q3, including a favorable currency effect and increased activity, particularly in Asia/Pacific. Management said weather-related case volumes are difficult to forecast.
- Broadspire revenue fell 4.6% in Q3 and its operating loss widened to $2.9m. Management cited lower workplace-related claims amid high U.S. unemployment, a mix shift toward lower-value claims, and costs of implementing its new Risk Tech claims system.
- Legal Settlement Administration revenue increased 10.5% in Q3 and 84.1% year to date, mainly due to a special project. The segment’s Q3 operating earnings were slightly lower than a year earlier despite higher revenue. Management expected the project to continue through 2011 and into 2012 at a reduced rate, with an anticipated end date of August 2013. Awarded project backlog was $72.5m, of which $36.4m was expected to be recognized over the remainder of 2011.
- On July 25, 2011, an arbitration decision in the company’s dispute with Platinum resulted in a $7.0m pretax award, recorded as a benefit. The company received $4.9m cash during the nine-month period. In 2010, it recorded a $7.3m goodwill impairment and $4.7m of restructuring and other charges.
- The company contributed $25.2m to its U.S. and U.K. underfunded pension plans in the first nine months. Pension funding needs, working-capital demands, debt covenants, and collection of receivables are relevant liquidity considerations.
Outlook, risks, and contingencies
- No specific consolidated revenue or earnings guidance is provided. Management estimated a 2011 effective tax rate of approximately 28%–30% before discrete items and said U.S. operations and potential U.S. borrowing capacity were expected to fund U.S. needs for the foreseeable future.
- Key risks include persistently low case referrals, economic and employment conditions, weather and catastrophe volatility, client outsourcing decisions and contract renewals, foreign exchange and interest rates, receivables collection, pension underfunding, financing availability and covenant compliance, and execution of the Risk Tech implementation.
- Claims-related litigation, employment claims, and indemnification matters are described. Management said it had made adequate provisions for known and foreseeable claims and did not expect them to materially adversely affect results or financial condition. The company stated that Platinum remained responsible for indemnifying it for specified pre-acquisition legal matters, though an unfavorable outcome without indemnification could leave Crawford responsible.
- Operating leases are not recorded on the balance sheet; the company reported no other off-balance-sheet arrangements believed likely to materially affect operations, financial condition, or cash flows. Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess underlying earnings after separating the $7.0m arbitration benefit and compare with management’s adjusted figures and the prior-year impairment and restructuring items.
- Track Broadspire’s operating losses, Risk Tech implementation costs, and whether cost reductions or revenue recovery improve performance.
- Monitor operating cash conversion, receivables and unbilled revenue growth, and the causes of negative operating cash flow despite reported profits.
- Review pension funding obligations, debt and revolver availability, covenant headroom, and the allocation and potential tax consequences of foreign cash.
- Test the sustainability of Legal Settlement Administration’s project-driven revenue and backlog, including expected project run-off and margins.