Crawford & Company — Q2 2014 Form 10-Q
Business context and period. Crawford provides claims management, business process outsourcing and consulting services to insurers and self-insured entities, operating through Americas, EMEA/AP, Broadspire and Legal Settlement Administration. This unaudited quarterly report covers the three and six months ended June 30, 2014; international results outside Canada and the Caribbean are reported on a two-month lag. Ernst & Young reviewed the interim statements but did not audit them.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue before reimbursements | $288.2 million | $298.9 million | $563.6 million | $585.2 million |
| Total revenue | $307.1 million | $326.1 million | $596.4 million | $633.3 million |
| Income before taxes | $17.6 million | $26.9 million | $28.4 million | $41.5 million |
| Net income attributable to Crawford shareholders | $10.5 million | $17.0 million | $17.1 million | $26.7 million |
| Diluted EPS, Class A / Class B | $0.19 / $0.18 | $0.31 / $0.30 | $0.32 / $0.30 | $0.49 / $0.47 |
| Cash dividends per share, Class A / Class B | $0.05 / $0.04 | $0.04 / $0.03 | $0.10 / $0.08 | $0.08 / $0.06 |
Cash flow and liquidity. Cash used in operating activities was $59.6 million in the first half, versus $15.1 million used a year earlier. Investing activities used $13.9 million; financing activities provided $45.5 million. Cash ended June 30 at $47.7 million, down from $76.0 million at year-end 2013. Working capital was approximately $90.1 million. Current assets were $383.8 million and current liabilities $293.7 million.
Debt. Short-term borrowings were $49.1 million; long-term debt and capital leases, including current installments, totaled approximately $142.2 million. Total borrowings and capital leases were $191.3 million, up from $137.6 million at December 31, 2013. The company reported $193.4 million available under its credit facility, including $17.5 million of undrawn letters of credit.
Changes versus prior period
- Revenue before reimbursements declined 3.6% in Q2 and 3.7% for the first half. Shareholder-attributable net income fell about 38% in Q2 and 36% in the first half.
- Americas: Revenue grew 13.3% in Q2 and 8.8% year to date; segment operating earnings rose to $8.1 million and $15.1 million, respectively. Growth included Contractor Connection, Canada and weather-related activity.
- EMEA/AP: Revenue was nearly flat in Q2 and down 4.4% year to date; operating earnings declined to $4.3 million in Q2 and $6.2 million in the first half. Prior-year Thailand flood and Australia catastrophe work, lower service mix/rates, and investment in Specialty Markets weighed on results.
- Broadspire: Revenue increased 1.4% in Q2 and 6.4% year to date, but Q2 operating earnings fell to $2.7 million from $4.4 million. Comparisons include a $3.0 million one-time 2013 revenue and earnings benefit from release of deferred revenue.
- Legal Settlement Administration: Revenue fell to $40.7 million in Q2 from $63.0 million and to $83.0 million for the first half from $119.6 million. Operating earnings declined to $5.7 million in Q2 and $10.7 million year to date as Deepwater Horizon and other large projects wound down.
Outlook, risks and unusual items
- Management expects Legal Settlement Administration revenues and related earnings from major projects to remain at reduced levels through the rest of 2014; project timing is uncertain. Its awarded-project backlog was $96.6 million at June 30, of which an estimated $72.6 million was expected to be recognized during the remainder of 2014.
- The company estimated a 2014 annual effective tax rate of approximately 38%, before discrete items. It expected to contribute $5.8 million to its U.S. pension plan and approximately $3.4 million to U.K. plans during the remainder of 2014. U.S. and U.K. defined benefit plans are significantly underfunded; proposed mortality assumptions could increase pension liabilities, funding needs and expense.
- Q2 included a $2.0 million reduction of contingent consideration for a prior acquisition, offset in part by a $1.3 million impairment of acquired intangible assets. The contingent consideration was deemed not payable. There were no special charges recorded in the first half; $2.7 million of liabilities from 2012 special charges remained at June 30.
- Other risks include volatile, project-based settlement revenue; dependence on claim referrals, outsourcing decisions and catastrophe activity; client retention and receivable collection; currency and interest-rate movements; credit-facility covenants and availability; pension funding; litigation and employment claims; and cybersecurity and technology execution. Management said known and foreseeable litigation risks were adequately provided for. No material change in market-risk exposure was reported.
- The company sold its South African subsidiary in February 2014. It also announced a new authorization effective August 16, 2014, allowing repurchases of up to 2 million shares through July 2017.
Key facts for investors to verify
- Whether the negative first-half operating cash flow and higher receivables and unbilled revenue convert to cash in the second half.
- Progress in replacing revenue and earnings as Deepwater Horizon and other large Legal Settlement Administration projects wind down.
- Whether Americas and Broadspire growth and operating performance can offset EMEA/AP and Legal Settlement Administration declines.
- Credit-facility headroom, borrowing levels, covenant compliance, and the effect of pension contributions on liquidity.
- The eventual impact of updated pension mortality assumptions and the company’s pension funding requirements.
- Whether the $96.6 million Legal Settlement Administration backlog is recognized on schedule and yields expected margins.