Crawford & Company — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone Q4 filing; quarterly comparisons below are from the unaudited fourth-quarter data. Unless stated otherwise, dollar amounts are in millions. Revenue before reimbursements excludes client pass-through expenses; GAAP total revenue includes them.
Business context and reporting period
Crawford provides claims management, workers’ compensation and medical management, and legal settlement administration services in more than 70 countries. Its four segments are Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. International operations outside the U.S., Canada, and the Caribbean are consolidated on a two-month lag.
Financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue before reimbursements | $1,163.4 | $1,176.7 |
| GAAP total revenue | $1,253.4 | $1,266.1 |
| Income before taxes | $81.1 | $83.4 |
| Net income attributable to shareholders | $51.0 | $48.9 |
| Diluted EPS, Class B | $0.90 | $0.87 |
| Cash provided by operating activities | $77.8 | $92.9 |
| Cash and cash equivalents at year-end | $76.0 | $71.2 |
| Total debt, including capital leases | $137.6 | $166.4 |
| Current ratio | 1.2:1 | 1.2:1 |
2013 operating earnings by segment were Americas $18.5 (5.4% margin), EMEA/AP $32.2 (9.2%), Broadspire $8.2 (3.3%), and Legal Settlement Administration $46.8 (21.4%). Combined segment operating earnings were $105.7, down from $120.7 in 2012. The company reported no special charges or credits in 2013; 2012 included $11.3 of special charges. The effective tax rate was 36.7%, versus 40.4% in 2012.
Fourth quarter: Revenue before reimbursements was $284.9, versus $313.0 in Q4 2012; income before taxes was $16.6 versus $26.8; shareholder net income was $10.8 versus $14.2; and diluted Class B EPS was $0.19 versus $0.25.
Working capital was approximately $52.3, down from $68.6. Cash flow from investing was an outflow of $33.5, including $31.0 for property, equipment, and capitalized software. Financing cash outflow was $39.1. Debt to total capital improved to 40.8% from 55.0%. Of $76.0 in cash, $68.1 was held by foreign subsidiaries.
Material changes versus the prior comparable period
- Revenue before reimbursements declined 1.1%, mainly as Thailand flood-claim work and Legal Settlement Administration special-project revenue tapered.
- Americas revenue rose 2.3% and operating earnings rose 56.0%, helped by Canadian flood claims, Superstorm Sandy work, Contractor Connection growth, cost reductions, and a $2.3 gain on the sale of Latin American customer-contract rights.
- EMEA/AP revenue fell 4.5% and operating earnings fell 33.7%. Thailand revenue declined to $16.3 from $37.0 as handling of the 2011 flood claims was substantially completed.
- Broadspire revenue rose 5.6% and operating earnings improved to $8.2 from near breakeven. Results included a one-time $3.0 release of deferred revenue after the company was relieved of certain lifetime-claims servicing obligations.
- Legal Settlement Administration revenue fell 7.5% and operating earnings fell 22.4%. Awarded-project backlog declined to $108.2 from $151.9; management estimated $91.2 would be recognized within 12 months.
- Operating cash flow decreased $15.0, primarily due to higher payments for accounts payable, accrued liabilities, pensions, and compensation. Year-end debt decreased, while short-term borrowings rose to $35.0 from $13.3.
Outlook, management commentary, risks, and unusual items
- Management expected Deepwater Horizon and other large settlement projects to continue generating revenue into 2014, but at reduced levels; project timing and replacement revenue were uncertain. Legal Settlement Administration backlog was materially lower year over year.
- Management expected a 2014 effective tax rate of 33%–35% before discrete items and forecast approximately $37 million of 2014 property, equipment, and capitalized-software additions.
- Management believed available resources, operating cash generation, and borrowing capacity would support operations for the next 12 months and expected covenant compliance during 2014. The $400 million revolving facility matures November 25, 2018; $247.2 million was available at year-end, including the effect of outstanding letters of credit. The company was in compliance with covenants at December 31, 2013.
- Defined-benefit pension plans were underfunded by approximately $103.0, improved from $168.2 in 2012. Expected 2014 contributions were approximately $17.9 to the U.S. qualified plan and $7.0 to U.K. plans. Pension funding remains a significant use of cash and is sensitive to markets and assumptions.
- Key risks include unpredictable claim volumes and catastrophe activity, client insourcing and outsourcing decisions, competition, dependence on large clients and project-based settlement work, foreign-exchange exposure, cybersecurity and sensitive-data risks, technology and outsourcing execution, litigation and self-insured claims, and debt-covenant compliance. A single EMEA/AP customer was material to that segment but represented less than 10% of consolidated revenue.
- The company disclosed a previously identified material weakness in corporate tax accounting, which management said was remediated by year-end through staffing, software, and process improvements. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2013; the auditor issued unqualified opinions on the financial statements and internal controls.
- Other notable items: the November 2013 credit-facility amendment increased commitments from $325 million to $400 million, extended maturity, reduced pricing, and raised the maximum leverage covenant to 3.25:1. Jesse C. Crawford beneficially owned approximately 52% of voting Class B shares. The company’s two share classes have different voting rights and dividend levels.
Important facts for investors to verify
- Whether replacement projects and customers offset the expected decline in settlement-administration revenue and the reduced Deepwater Horizon work.
- Whether segment margins, especially EMEA/AP and Legal Settlement Administration, stabilize as unusual project volumes wind down; assess Broadspire’s results excluding its $3.0 one-time benefit.
- Cash conversion and liquidity trends, including pension contributions, working-capital needs, short-term borrowings, and compliance headroom under credit-facility covenants.
- Pension funding assumptions and required contributions, as well as sensitivity of funded status to discount rates and asset returns.
- Progress in sustaining tax-accounting controls and the potential impact of foreign exchange, customer concentration, cybersecurity, and litigation risks.