Crawford & Company — 2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. Crawford provides claims management, business process outsourcing, and legal settlement administration in more than 70 countries. Its four segments are U.S. Services, International, Broadspire, and Garden City Group (GCG). In Q4, Crawford moved Canada and Latin America/Caribbean into International; prior segment results were recast, with no effect on consolidated results. Certain international results are reported on a two-month lag.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue before client reimbursements | $1,170.4 million | $1,142.9 million |
| GAAP total revenue, including reimbursements | $1,241.5 million | $1,217.0 million |
| Segment operating earnings | $87.0 million | $81.7 million |
| Loss/income before taxes | $(31.8) million | $59.9 million |
| Net loss/income attributable to Crawford shareholders | $(45.5) million | $30.6 million |
| Diluted EPS, Class B | $(0.87) | $0.52 |
| Cash from operating activities | $61.7 million | $6.6 million |
| Cash used in investing activities | $101.2 million | $31.8 million |
| Cash and cash equivalents at year-end | $76.1 million | $52.5 million |
| Total debt, including capital leases | $247.3 million | $156.8 million |
| Current ratio | 1.4:1 | 1.4:1 |
Revenue before reimbursements grew 2.4%. Segment operating earnings are management’s segment measure and exclude corporate costs, interest, amortization of certain acquired intangibles, impairment and restructuring charges, taxes, and other items; they are not consolidated GAAP earnings. The 2015 loss included $49.3 million of noncash goodwill impairment and $34.4 million of restructuring and special charges. The reported tax provision was $13.8 million despite the pretax loss; management cited largely nondeductible impairment, unbenefited foreign losses, and income mix.
Segment results
| Segment | 2015 revenue before reimbursements | 2015 operating earnings | Change versus 2014 |
|---|---|---|---|
| U.S. Services | $242.5 million | $32.7 million | Revenue +12.6%; earnings +81.3% |
| International | $506.7 million | $18.8 million | Revenue +3.8%; earnings −25.8% |
| Broadspire | $293.0 million | $24.0 million | Revenue +9.0%; earnings +55.3% |
| Garden City Group | $128.2 million | $11.5 million | Revenue −24.7%; earnings −49.6% |
Material changes and management commentary
- U.S. Services: Growth reflected a major carrier outsourcing project and expansion of Contractor Connection; lower weather-related field claims partly offset gains. Segment margin improved to 13.5% from 8.4%.
- International: GAB Robins contributed about $79.8 million of 2015 revenue, but foreign exchange reduced segment revenue by $62.1 million versus 2014. Excluding GAB Robins and currency effects, U.K. activity weakened; segment margin declined to 3.7% from 5.2%.
- Broadspire: Revenue and earnings rose with organic growth, new clients, medical-management referrals, and improved expense control. Some reported volume growth reflected the transfer of accident-and-health cases from U.S. Services.
- GCG: Lower activity on Deepwater Horizon and another large settlement project reduced revenue and earnings. Awarded-project backlog fell to $81 million from $102 million; about $69.4 million was expected to be recognized in the next 12 months. Management expected activity on the major projects to continue in 2016 at further reduced rates.
- Acquisition and restructuring: GAB Robins was acquired in December 2014 for approximately $74.0 million; its results are included in 2015, limiting comparability. Integration costs continued. Crawford also incurred $49.3 million of goodwill impairment, including impairment associated with the former International and Americas reporting units. Remaining International goodwill of $49.7 million was identified as particularly exposed to further impairment.
Cash, debt, and liquidity
Operating cash flow rose to $61.7 million, mainly from improved receivable collections and lower prepaid expenses. Investing outflow increased to $101.2 million, principally reflecting $68.3 million of net acquisition payments. Financing provided $67.9 million, including increased revolving-credit borrowings; Crawford paid $13.5 million in dividends and repurchased $1.2 million of shares. Working capital was $111.8 million, and available credit-facility capacity was approximately $142.4 million, including outstanding letters of credit.
Credit-facility borrowings were $243.7 million at year-end, up from $155.0 million. The $400 million revolving facility matures November 2018. Crawford was in compliance with its covenants at year-end and said it expected to remain compliant through 2016; the filing notes covenant performance is sensitive to EBITDA and debt levels. The company also reported an underfunded defined-benefit pension position of approximately $121.7 million for specified plans and planned $9.0 million annual U.S. plan contributions for 2016–2018, plus an estimated $6.3 million U.K. contribution in 2016.
Outlook, risks, and contingencies
- Management projected approximately $29 million of 2016 property, equipment, and capitalized-software additions. It stated that available resources, operating cash generation, and borrowing capacity should support operations for the next 12 months.
- The Manila and Pune service centers were expected to be phased in through 2018, with approximately $60 million of cumulative savings through 2019 and about $20 million in annual savings thereafter. The filing described expected implementation charges, but provides estimates in different contexts; the precise reconciliation of future restructuring charges should be verified.
- Management expected a 2016 effective tax rate of 40%–42% before discrete items. No consolidated revenue or earnings guidance was provided.
- Key risks include unpredictable claims volumes and catastrophe activity; client and project concentration; GCG project runoff; integration and cost-savings execution; currency exposure; pension funding; goodwill impairment; cybersecurity and technology dependence; and debt-covenant compliance. A hypothetical 100-basis-point interest-rate change was estimated to affect pretax interest expense by about $2.4 million based on 2015 floating-rate debt.
- Crawford voluntarily reported potential Foreign Corrupt Practices Act violations to the SEC and Department of Justice and said it was cooperating; it could not predict any action or financial impact. The company also faces claims and investigations in the ordinary course and reported that reserves were provided for known and foreseeable matters.
- Auditor Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether GAB Robins integration and the service-center initiatives deliver the stated savings, and how future restructuring costs reconcile across the filing’s estimates.
- Whether International segment performance stabilizes and whether the remaining $49.7 million of goodwill avoids further impairment.
- Progress on debt reduction, covenant headroom, and pension contributions relative to operating cash generation.
- Developments, potential penalties, and associated costs from the FCPA investigation, which the filing says cannot yet be estimated.
- GCG backlog conversion and replacement of revenues as major settlement projects wind down, as well as retention of significant U.S. Services clients.