Crawford & Company — Q1 2014 Form 10-Q
Business context and period: Claims-management, business-process outsourcing, consulting, and legal-settlement services provider operating in more than 70 countries. This unaudited interim report covers the three months ended March 31, 2014, compared with Q1 2013; international results other than Canada and the Caribbean are generally reported on a two-month lag. The financial statements received an independent accountant’s review, not an audit.
Financial performance and condition
- Revenue: Revenue before reimbursements was $275.3 million, down 3.8%; total revenue including reimbursed expenses was $289.4 million, down 5.8%.
- Profit and margins: Income before tax was $10.9 million, down 25.9%; net income was $6.6 million, down 32.0%; income attributable to Crawford shareholders was $6.7 million, down 31.7%. Diluted EPS fell to $0.12 for Class A and $0.11 for Class B, from $0.18 and $0.17, respectively. Shareholder-attributable net income was about 2.4% of revenue before reimbursements.
- Cash flow: Operating cash use was $65.3 million versus $41.4 million used a year earlier, primarily reflecting higher receivables and payments for incentive compensation and retirement plans. Investing cash use was $6.2 million; financing provided $45.5 million, principally supported by increased borrowing. Cash declined $27.4 million to $48.5 million.
- Liquidity and debt: Working capital was approximately $47.4 million, down $4.9 million from year-end. Short-term borrowings were $83.8 million; long-term debt and capital leases were $101.6 million, with $0.9 million current installments. Total borrowings and capital leases were $186.2 million, versus $137.6 million at December 31, 2013. Available credit-facility balance was $298.5 million, including $17.8 million of outstanding letters of credit.
- Other indicators: The annual effective tax rate was estimated at approximately 36% before discrete items. The company paid $2.5 million in dividends and repurchased 174,108 Class A shares for about $1.4 million during the quarter.
Material changes versus Q1 2013
- Americas revenue rose 4.3% to $87.9 million and segment operating earnings increased to $6.9 million from $3.2 million. Contractor Connection growth, Canadian activity, and severe winter weather contributed; lower catastrophe-service revenue partly offset gains.
- EMEA/AP revenue fell 8.3% to $80.3 million and operating earnings declined to $1.9 million from $6.8 million. Prior-year Thailand and Australian catastrophe work and a client performance bonus did not recur at comparable levels; 2014 also included investment in Specialty Markets start-up operations.
- Broadspire revenue increased 12.0% to $64.8 million and moved from a $1.8 million operating loss to $2.0 million operating earnings, supported by organic growth, market-share gains, client retention, and medical-management referrals.
- Legal Settlement Administration revenue declined 25.2% to $42.4 million and operating earnings fell to $5.0 million from $12.0 million; margin declined to 11.7% from 21.2%, largely as Deepwater Horizon and other large projects wound down.
- Consolidated SG&A increased 1.3%. Other income was $0.4 million in Q1 2014, including an earnout gain, versus $2.3 million in Q1 2013 from the sale of Latin American customer-contract rights. Foreign exchange reduced reported Americas and EMEA/AP revenue by approximately $3.2 million and $1.8 million, respectively.
Outlook, risks, and unusual items
- Management expected Deepwater Horizon and other major project activity to continue winding down, with reduced related Legal Settlement Administration and EMEA/AP revenue and earnings through the remainder of 2014. Legal Settlement Administration backlog was about $101 million; approximately $88 million was expected to be recognized during the rest of 2014. Project timing and continued revenue are not assured.
- Required U.S. defined-benefit pension contributions were $15.2 million for the remainder of 2014; the company also expected about $5.1 million of additional U.K. plan contributions. Proposed updated U.S. mortality assumptions could increase pension liabilities, funding needs, and expense.
- Management cited risks including case-volume variability, weather and disaster patterns, client outsourcing decisions and retention, project-based settlement work, foreign exchange and interest rates, pension underfunding, collection of receivables, financing availability and covenant compliance, competition, and cybersecurity and technology execution.
- The company sold its 74.9% interest in Crawford South Africa in February 2014 to the noncontrolling-interest holder; net assets sold were $2.5 million, including $1.6 million cash, and the sale was financed with a loan payable in two years. Crawford’s contractual support obligation to Lloyd Warwick International is up to approximately $6 million.
- No special charges were recorded in either comparative quarter. Claims-related litigation, employment claims, insurance deductibles, and self-insured retentions remain contingencies; management said adequate provisions had been made for known and foreseeable risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether receivables and unbilled revenues, which increased by $22.4 million from year-end, convert to cash as expected; operating cash outflow was $65.3 million.
- Borrowing levels, credit-facility availability, and compliance with financing covenants, particularly given the increase in debt and seasonal working-capital needs.
- Actual pension contributions and any impact from revised mortality assumptions on pension obligations and future cash requirements.
- Progress in replacing revenue and earnings as Deepwater Horizon, Thailand, and other large projects wind down, including conversion of the disclosed backlog.
- Whether improvement in Broadspire and Americas operating performance is sustained and whether EMEA/AP and Legal Settlement Administration margins recover.