Crawford & Company — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also presents fourth-quarter results. Figures below are in U.S. dollars; revenue figures labeled “before reimbursements” exclude client-reimbursed out-of-pocket costs.
Business context
Crawford provides claims management, business process outsourcing, medical management, and legal settlement administration in more than 70 countries. Its four segments are Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. A substantial portion of international results is reported on a two-month lag.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue before reimbursements | $1,142.9 million | $1,163.4 million | Down 1.8% |
| Total revenue, including reimbursements | $1,217.0 million | $1,253.4 million | Down 2.9% |
| Income before taxes | $59.9 million | $81.1 million | Down 26.2% |
| Net income attributable to shareholders | $30.6 million | $51.0 million | Down 39.9% |
| Diluted EPS, Class B | $0.52 | $0.90 | Down 42.2% |
| Cash from operating activities | $6.6 million | $77.8 million | Down $71.2 million |
| Cash and cash equivalents at year-end | $52.5 million | $76.0 million | Down $23.5 million |
| Total debt, including capital leases | $156.8 million | $137.6 million | Up $19.2 million |
| Current ratio | 1.4:1 | 1.2:1 | Improved |
Operating cash flow was pressured by lower earnings, higher receivables, and other working-capital movements. Capital expenditures were $29.2 million; operating cash flow less capital expenditures was approximately negative $22.6 million. The reported debt-to-total-capital ratio was 47.6%, compared with 40.8% in 2013. Available revolving-credit capacity was $149.1 million, including the effect of acquisition-related UK borrowing not reflected on the year-end balance sheet.
Segment operating earnings were $23.7 million for Americas (6.6% margin), $19.7 million for EMEA/AP (5.7%), $15.5 million for Broadspire (5.8%), and $22.8 million for Legal Settlement Administration (13.4%). Total segment operating earnings were $81.7 million; this measure excludes several corporate and other items and is not GAAP net income.
Material changes versus 2013
- Americas revenue rose 5.0% and segment operating earnings rose 27.7%, supported by Contractor Connection growth and stronger Canadian activity. Higher case volumes were partly offset by fewer major weather events, unfavorable service mix and pricing, and currency effects.
- Broadspire revenue increased 6.6% and operating earnings rose to $15.5 million, reflecting client and referral growth and improved expense control.
- EMEA/AP revenue fell 1.7% and operating earnings fell 38.7%. The decline reflected the wind-down of Thailand flood work, higher Specialty Markets start-up costs, and the absence of some prior-year weather-related activity and a client bonus.
- Legal Settlement Administration revenue declined 22.2% and operating earnings declined 51.1%, mainly as Deepwater Horizon and other large projects wound down. Awarded-project backlog was $102.0 million at year-end, down from $108.2 million; about $88.0 million was expected to be recognized within 12 months.
- The effective tax rate rose to 48.1% from 36.7%, contributing to the sharper decline in net income. No special charges or credits were recorded in 2014 or 2013; 2012 included $11.3 million of special charges.
Outlook, significant events, and risks
- GAB Robins acquisition: Crawford acquired the UK claims provider on December 1, 2014, for $71.8 million. Its results and acquisition borrowing were excluded from the 2014 consolidated statements because of the international reporting lag. The UK borrower incurred approximately $78.4 million of debt to fund the transaction. Integration was subject to UK Competition & Markets Authority review, expected by management in the first half of 2015; approximately $7 million of 2015 integration charges were anticipated.
- Global Business Services Center: Announced in January 2015, the Manila center was planned to phase in through 2018. Management forecast cumulative savings of about $60 million through 2019 and annual savings of about $20 million thereafter, with charges of about $20 million through 2018, including an estimated $9 million charge and $2 million initial savings in 2015. These are expectations, not assured outcomes.
- 2015 planning assumptions: Management expected an effective tax rate of 38%–40% before discrete items, approximately $40 million of property, equipment, and software additions, and planned annual U.S. pension contributions of $9 million for the next four fiscal years. Management stated it expected available resources and borrowing capacity to support operations for the next 12 months and expected covenant compliance during 2015.
- Pensions: Defined-benefit plans were underfunded by approximately $142.3 million at year-end, versus $103.0 million in 2013. Updated U.S. mortality assumptions increased the U.S. plan obligation by about $35.4 million. Required contributions, investment performance, interest rates, mortality assumptions, and future regulation could affect liquidity and earnings.
- Business and financial risks: Revenue depends on unpredictable claim referrals, weather and catastrophe activity, outsourcing decisions, and insurance-market conditions. Project-based legal settlement revenue is volatile and major projects were winding down. Other risks include customer concentration, foreign exchange, competition, cybersecurity and technology disruption, litigation and self-insurance exposure, potential goodwill impairment, and variable-rate debt and covenant compliance.
- At December 31, 2014, the company reported compliance with credit-facility covenants. The facility includes a maximum leverage ratio of 3.25:1 and minimum fixed-charge coverage ratio of 1.50:1; noncompliance could allow lenders to accelerate debt. The filing reports no material off-balance-sheet arrangements other than operating leases.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Key investor verification points
- Reconcile the sharp decline in operating cash flow with receivables, collections, and other working-capital movements; assess the sustainability of cash conversion.
- Confirm total post-acquisition debt and interest burden, including the approximately $78.4 million UK borrowing omitted from the December 31, 2014 balance sheet, and monitor covenant headroom.
- Track performance and integration costs for GAB Robins, CMA review conditions, and realized synergies against management’s expectations.
- Measure whether the Manila center delivers forecast savings after restructuring costs and implementation risks.
- Assess replacement revenue and earnings as major Legal Settlement Administration projects wind down, including conversion of the reported backlog.
- Monitor pension funding, goodwill impairment sensitivities in Americas and EMEA/AP, and the elevated effective tax rate.
- Review the filing’s two-month reporting lag for certain international operations when comparing reported results with acquisition timing and current-period conditions.