Business context and reporting period
Crawford & Company provides claims management, business process outsourcing and consulting services to insurers and self-insured entities. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Unless noted otherwise, amounts below are in U.S. dollars and millions.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue before reimbursements | $254.5 | $245.8 | $728.9 | $731.5 |
| Total revenue | $278.1 | $268.9 | $786.1 | $790.8 |
| Income (loss) before income taxes | $15.3 | $(37.6) | $17.6 | $(119.7) |
| Net income (loss) attributable to Crawford | $13.0 | $(39.5) | $13.5 | $(124.6) |
| Diluted EPS | $0.24 | $(0.76) | $0.25 | $(2.41) |
Reported 2010 results included goodwill impairment charges of $7.3 million for the nine months; 2009 included charges of $46.9 million in Q3 and $140.9 million year to date. Excluding impairment, Crawford reports attributable net income of $13.0 million versus $7.4 million in Q3 2009, and $20.8 million versus $16.4 million for the nine-month periods. These are management’s adjusted comparisons, not reported GAAP net income.
- Q3 revenue before reimbursements rose 3.6%; nine-month revenue declined 0.3%. Q3 total operating expenses included no impairment charge; reported Q3 2009 expenses included $46.9 million of impairment.
- For the first nine months, net cash used in operating activities was $25.1 million, versus $9.8 million provided in 2009. Investing used $25.9 million; financing provided $24.3 million. Cash fell $28.2 million to $42.2 million.
- Operating cash flow was pressured by a $55.2 million increase in accounts receivable and unbilled revenue, and pension contributions. The company contributed $25.0 million to U.S. and U.K. defined benefit plans in the nine-month period and a further $5.1 million to its frozen U.S. plan in October.
- At September 30, working capital was $70.4 million. Current assets were $355.9 million and current liabilities $285.6 million. Short-term borrowings were $31.1 million; long-term debt and capital leases, including current installments, totaled $174.0 million. The company had a $100 million revolving facility, with $49.8 million of unused availability after outstanding letters of credit.
- SG&A expense was $50.2 million in Q3, down from $53.8 million; for nine months it was $149.5 million, down from $159.7 million. Management attributed the decreases mainly to lower professional-indemnity self-insurance expense and termination of a computer-hosting contract.
Segment trends and material changes
| Segment | Q3 revenue before reimbursements, year over year | Q3 operating earnings (loss) | Key context |
|---|---|---|---|
| U.S. Property & Casualty | Down 7.2% | $3.6 million, versus $4.8 million | Lower claims and catastrophe activity; received cases fell 4.8%. |
| International Operations | Up 4.1% | $7.8 million, versus $7.5 million | Cases received rose 11.0%; nine-month reported revenue growth was substantially helped by a weaker U.S. dollar. |
| Broadspire | Down 12.4% | $(0.7) million, versus $(1.2) million | Lower workers’ compensation referrals, a lost significant client, and lower rates and service mix weighed on revenue. |
| Legal Settlement Administration | Up 80.1% | $11.0 million, versus $4.1 million | Growth and higher margins were driven largely by a special project; project revenue is variable. |
For the nine months, segment operating earnings were $48.7 million versus $46.6 million. Legal Settlement Administration’s project backlog was approximately $75.0 million at September 30, of which an estimated $36.0 million was expected to be recognized during the remainder of 2010.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said current financial resources, expected operating cash generation and borrowing capacity should be sufficient for operations over the next 12 months.
- Management expected the Legal Settlement Administration special project to continue until its anticipated August 2013 end date, but was uncertain whether the then-current activity level would continue beyond 2010. Broadspire also had a customer casualty-claims project continuing into Q4, with 2011 demand uncertain.
- Management cited case-volume uncertainty, including economic conditions, outsourcing decisions by clients, weather and catastrophe activity, competition, foreign exchange, and the significant underfunding of U.S. and U.K. pension plans. Estimated minimum contributions to the frozen U.S. plan include $20.8 million in 2011, $24.7 million in 2012 and $37.0 million in 2013; additional statutory requirements were still being evaluated.
- The company paid Platinum Equity $6.1 million plus interest in August in connection with arbitration over its Broadspire acquisition and recorded a $7.3 million goodwill impairment. Following an October 27, 2010 arbitration determination, Crawford said further amounts could be no more than $6.218 million plus interest, fees and expenses; no accrual was recorded because the outcome was not considered probable. The company said any required payment could materially adversely affect liquidity, financial condition or results. A separate arbitration claim against Platinum is capped at $15 million; outcome and timing were uncertain.
- The company recorded $4.65 million of restructuring and other costs for nine months, including $2.0 million for administrative staff reductions and $2.7 million related to a Florida facility sublease. Management said eliminating 146 positions was expected to generate approximately $9.6 million in annual pretax savings.
- The interim financial statements were reviewed, not audited, by Ernst & Young. The auditor reported no material modifications that should be made for GAAP conformity. Management concluded disclosure controls were effective at providing reasonable assurance and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether receivables and unbilled revenues are collected promptly, given the $55.2 million increase and negative operating cash flow.
- Whether pension funding needs, including the scheduled contributions and possible additional statutory requirements, constrain liquidity or borrowing capacity.
- The final outcome and cash consequences of both Platinum arbitrations, including the potential additional payment and any resulting impairment.
- Whether Legal Settlement Administration project activity and backlog convert to revenue as expected, and whether performance remains resilient when the special project winds down.
- Whether U.S. claims volumes and Broadspire revenue recover, and whether management realizes the projected savings from administrative reductions.