Crawford & Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Crawford provides claims management, business process outsourcing, and legal settlement administration services. The interim financial statements were reviewed by Ernst & Young, not audited. Segment reporting was realigned, with prior periods recast for comparability; consolidated results were unchanged.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue before reimbursements | $285.0 million | $236.3 million |
| Total revenue | $304.1 million | $252.1 million |
| Income before income taxes | $18.0 million | $4.0 million |
| Net income | $11.9 million | $3.1 million |
| Net income attributable to Crawford shareholders | $12.1 million | $3.1 million |
| Basic and diluted EPS | $0.23 | $0.06 |
| Net cash used in operating activities | $50.2 million | $23.8 million |
- Revenue before reimbursements rose 20.6%; total revenue rose 20.7%. Shareholder net income increased 297.7%. Calculated net margin on total revenue was approximately 3.9%, versus 1.2% in Q1 2010.
- Segment operating earnings were $24.1 million, versus $12.6 million. Segment margins: Americas 3.6% (8.1%); EMEA/AP 9.0% (7.0%); Broadspire negative 5.3% (negative 3.8%); Legal Settlement Administration 28.3% (15.9%). Segment operating earnings are a management measure, not consolidated GAAP operating income.
- Cash and cash equivalents were $46.7 million at quarter-end, down from $93.5 million at December 31, 2010. Working capital was approximately $87.5 million. The company attributed the operating cash outflow partly to seasonal first-quarter payments, $21.7 million of U.S. and U.K. pension contributions, and a $30.7 million increase in receivables and unbilled revenue.
- Long-term debt and capital leases, including current installments, totaled $222.6 million; short-term borrowings were $14.0 million. A $100 million revolving facility had $65.7 million of unused capacity, including the effect of $20.3 million in outstanding letters of credit. Management said available resources and expected operating cash and borrowing capacity should fund operations for the next 12 months.
- The company reinstated a quarterly dividend of $0.02 per common share, paying $1.1 million during the quarter.
Material changes and management commentary
- Legal Settlement Administration revenue increased 191.2% to $60.2 million, mainly from a special project begun in 2010. Project backlog was $110.0 million at March 31, including an estimated $84.0 million expected to be recognized during the rest of 2011. Management expected the project to remain active through 2011 at a lower level than Q1 and continue to an expected end date of August 2013.
- EMEA/AP revenue rose 16.0% and operating earnings increased to $7.2 million, supported by a 26.5% increase in case volume. Americas revenue was nearly flat (+0.5%), but operating earnings fell 54.5% to $3.1 million, reflecting lower U.S. field-claims activity, higher contractor use, and bad debt expense.
- Broadspire revenue declined 3.5% and its operating loss widened to $3.2 million. Management cited lower U.S. employment and workplace-injury claims, a significant client loss, and low-rate special-project work. Expenses also included consultants working on the Risk Tech claims system.
- SG&A increased 14.4%, with higher professional indemnity self-insured costs, bad debt expense, professional fees (mostly Risk Tech implementation), severance, and incentive compensation. The Q1 2010 comparison included a $2.7 million pretax sublease loss; none was recorded in Q1 2011.
Outlook, risks, and contingencies
- Management estimated a 2011 effective annual income tax rate of approximately 28%–30% before discrete items. The filing gives no full-year revenue or earnings guidance and cautions that Q1 results are not necessarily indicative of full-year results.
- Key business risks include fluctuating claim referrals and catastrophe activity, insurance underwriting cycles, client outsourcing decisions and contract renewals, competition, bad debt and collection risk, staffing, foreign exchange and interest rates, and implementation of the Risk Tech system.
- The U.S. and U.K. defined benefit pension plans are significantly underfunded; funding needs and related regulatory changes may affect future cash flows. Credit-agreement covenants restrict dividends, and additional debt repayments may be required in certain circumstances.
- In the ordinary course, Crawford faces claims alleging errors in claims administration and employment-related litigation; management said provisions were adequate for known and foreseeable risks. Platinum has agreed to indemnify Crawford for certain pre-acquisition Broadspire proceedings, though Crawford could bear costs if that indemnity does not apply. Management did not then expect to fund those matters.
- Crawford’s arbitration claims against Platinum for alleged acquisition-agreement breaches were subject to an approximately $16.0 million recovery cap. The company expected the arbitration to conclude in 2011 but could not predict the outcome; any recovery would be recorded when settled.
Important facts for investors to verify
- Whether the Legal Settlement Administration special project delivers the expected backlog revenue and how its anticipated lower activity affects results after Q1.
- Whether Americas profitability improves and Broadspire’s operating losses narrow, including progress and spending on Risk Tech.
- Receivables collection and operating cash flow as the Q1 seasonal cash outflows unwind.
- Required pension funding, debt-covenant headroom, and continuing access to revolving credit.
- Developments in the Platinum arbitration and indemnification matters, and any material changes in claims, employment, or other litigation exposure.