Crawford & Company — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing. Some international subsidiaries report on a two-month lag. Amounts below are U.S. dollars.
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. Unless stated otherwise, segment revenue figures exclude client-reimbursed expenses, which are included in GAAP consolidated revenue but offset related expenses.
Financial highlights
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue before reimbursements | $1,176.7 million | $1,125.4 million | +4.6% |
| GAAP total revenue, including reimbursements | $1,266.1 million | $1,211.4 million | +4.5% |
| Income before income taxes | $83.4 million | $58.4 million | +42.8% |
| Net income attributable to Crawford shareholders | $48.9 million | $45.4 million | +7.7% |
| Diluted EPS, Class B | $0.87 | $0.83 | +4.8% |
| Cash from operating activities | $92.9 million | $36.7 million | Increased $56.2 million |
| Cash and cash equivalents at year-end | $71.2 million | $77.6 million | Down $6.5 million |
| Total debt | $166.4 million | $214.2 million | Down $47.8 million |
Segment operating earnings, a non-GAAP segment measure that excludes corporate costs, interest, taxes, special items, and other items, totaled $120.8 million, versus $88.1 million in 2011. This equaled about 10.3% of revenue before reimbursements, compared with 7.8% in 2011. GAAP net margin on total revenue was about 3.9%, versus 3.7%.
Year-end current assets were $386.8 million and current liabilities $337.0 million; the current ratio was 1.1:1 and working capital was approximately $49.7 million, down from $82.8 million. The $325 million revolving credit facility had $150 million outstanding and $145.6 million available, including the effects of letters of credit. The company reported compliance with its credit covenants at year-end.
Fourth-quarter detail
Fourth-quarter 2012 revenue before reimbursements was $313.0 million, compared with $265.6 million in fourth-quarter 2011. Net income attributable to shareholders was $14.2 million, versus $4.5 million; diluted Class B EPS was $0.25, versus $0.08. Fourth-quarter 2012 included $8.5 million of pretax special charges, primarily for a leased facility loss and North American restructuring.
Material changes and segment performance
- Americas: Revenue fell 6.5% to $334.4 million; operating earnings declined 40.2% to $11.9 million, with margin falling to 3.6% from 5.5%. Management attributed the decline mainly to fewer weather-related claims in the U.S. and Canada during the first half, lower case volume, pricing and mix, and currency effects. Superstorm Sandy lifted activity in the fourth quarter.
- EMEA/AP: Revenue increased 7.8% to $366.7 million and operating earnings rose 70.9% to $48.6 million. Flood claims from Thailand and weather-related activity in Australia supported results; U.K. weather-related activity declined. Currency translation reduced revenue by $10.4 million.
- Broadspire: Revenue increased 1.8% to $239.0 million. The segment reached approximately break-even, compared with an $11.4 million operating loss in 2011, reflecting higher utilization, increased revenue, and cost controls.
- Legal Settlement Administration: Revenue increased 22.8% to $236.6 million and operating earnings rose 17.5% to $60.3 million. Results were supported by Deepwater Horizon-related work, including the GCCF and class action settlement projects. Segment margin declined to 25.5% from 26.6%.
The two Legal Settlement Administration special projects generated $165.6 million of revenue before reimbursements in 2012, versus $121.1 million in 2011, and together exceeded 10% of consolidated revenue in both years. The remaining project was expected to continue into 2013 at a reduced rate, but duration and revenue were uncertain. Awarded-project backlog was $151.9 million at year-end, of which an estimated $116.3 million was expected to be recognized within 12 months.
Outlook, risks, and unusual items
- Management expected a 2013 effective tax rate of 32%–35% before discrete items, and approximately $33 million of 2013 property, equipment, and software additions.
- Management stated that existing financial resources, operating cash flow, and borrowing capacity should fund current operations for the next 12 months, and expected covenant compliance through 2013. Covenant compliance is sensitive to EBITDA and debt levels.
- Defined benefit pension plans were underfunded by $169.6 million at year-end, up from $137.7 million. Estimated 2013 contributions were $18.9 million to the U.S. plan and $6.8 million to U.K. plans. Lower discount rates contributed to the deficit increase.
- 2012 pretax special charges totaled $11.3 million, including $4.3 million for an unused leased facility, North American restructuring charges, and costs tied to outsourcing parts of the U.S. technology infrastructure. The effective tax rate rose to 40.4% from 21.8%, including the effect of tax-related items.
- Material risks include unpredictable claim referrals and catastrophe volumes, project and customer concentration, competition and pricing pressure, foreign exchange exposure, pension funding needs, variable-rate debt and covenant constraints, and execution risks in planned software migrations.
- The company disclosed a material weakness in internal controls over income-tax accounting, citing inadequate tax-function staffing and review processes. Management reported no resulting financial-statement misstatement and planned remediation during 2013. The auditor issued an adverse opinion on internal control over financial reporting, while expressing an unqualified opinion on the financial statements.
- Legal claims arise in the ordinary course of business; management stated reserves were adequate, but outcomes could affect results. The filing also noted potential impairment sensitivity for the Broadspire trade name and Americas goodwill.
Most important facts for investors to verify
- Whether Deepwater Horizon project revenue declines as expected and whether the company replaces that work with new assignments.
- Progress in remediating the income-tax accounting material weakness and any subsequent auditor assessment.
- Actual pension contributions, funded status, and sensitivity to discount rates and asset returns.
- Cash conversion and working-capital trends, including collection of rising unbilled revenue and the level of available revolver capacity.
- Americas recovery, Broadspire profitability, and delivery of expected benefits from software migrations and restructuring.
- Credit covenant headroom and the effect of variable interest rates, foreign exchange, and dividends on liquidity.