Crawford & Company — Q2 2010 Form 10-Q
Business context and period. Crawford provides claims management, business-process outsourcing and consulting services to insurers and self-insured organizations. This unaudited report covers the quarter and six months ended June 30, 2010, compared with the same periods in 2009. Unless otherwise indicated, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue before reimbursements | $238.2 | $249.7 | $474.4 | $485.7 |
| Total revenue | $256.0 | $271.6 | $508.0 | $521.9 |
| Loss (income) before tax | $(1.6) | $(86.3) | $2.3 | $(82.1) |
| Net income (loss) attributable to Crawford | $(2.5) | $(88.1) | $0.5 | $(85.0) |
| Basic and diluted EPS | $(0.05) | $(1.70) | $0.01 | $(1.65) |
- Revenue before reimbursements fell 4.6% in the quarter and 2.3% year to date. Excluding favorable foreign-exchange translation, management reported declines of 8.9% and 7.3%, respectively.
- Q2 2010 included a $7.3 million noncash goodwill impairment charge; Q2 2009 included a $94.0 million charge. Excluding those charges, management reported attributable net income of $4.3 million versus $5.9 million for Q2, and $7.4 million versus $9.0 million for the first half. These are management-presented figures, not GAAP results.
- SG&A expense declined 7.4% for the quarter and 6.2% for the first half. Net corporate interest expense was $3.7 million in Q2 and $7.8 million for the first half.
Segments
- U.S. Property & Casualty: Revenue before reimbursements declined 14.3% in Q2 to $47.0 million; operating earnings fell to $3.3 million from $6.2 million, with margin down to 7.0% from 11.3%. Lower case referrals, including fewer catastrophe and warranty claims, were key factors. Contractor Connection revenue grew.
- International Operations: Revenue rose 10.3% to $105.8 million in Q2, mainly from favorable currency translation; on a constant-currency basis it declined 0.9%. Operating earnings decreased to $7.3 million from $8.5 million, and margin to 6.9% from 8.8%.
- Broadspire: Revenue fell 16.3% to $61.2 million in Q2; operating loss widened to $1.8 million from $0.6 million. Management cited lower workers’ compensation and casualty referrals, reduced U.S. employment and loss of a significant client.
- Legal Settlement Administration: Q2 revenue declined 6.4% to $24.3 million, but operating earnings rose to $5.6 million from $4.3 million and margin improved to 22.9% from 16.5%. First-half revenue increased 8.3%. Awarded-project backlog was $56.5 million, of which an estimated $41.3 million was expected to be recognized over the rest of 2010.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was negative $29.6 million, versus positive $3.7 million in 2009. The filing cites higher receivables and unbilled revenue, and pension contributions, among the drivers. Investing cash outflow was $12.2 million; financing cash inflow was $11.6 million.
- Cash declined to $38.2 million from $70.4 million at year-end 2009. Accounts receivable and unbilled revenue totaled $254.5 million, up from $233.0 million; management attributed the rise primarily to more days of revenue outstanding.
- Working capital was $64.4 million, down $2.3 million from year-end. Current assets were $317.6 million and current liabilities $253.2 million.
- At June 30, short-term borrowings were $17.9 million; long-term debt and capital leases, including current installments, totaled approximately $174.2 million. The $100 million revolving facility had $62.8 million of unused availability, including the effect of $19.3 million in letters of credit.
- Management said available resources, expected operating cash generation and borrowing capacity should be sufficient for the next 12 months. Cash used in operations typically peaks in Q1, but the company expected a further $6.2 million contribution to its frozen U.S. pension plan during the remainder of 2010.
- U.S. and U.K. defined-benefit plans remained significantly underfunded. First-half contributions were $18.2 million; estimated minimum U.S. plan contributions for 2011–2017 ranged from $8.3 million to $32.0 million annually, subject to potential additional requirements under recently enacted legislation.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management cited the soft insurance underwriting market and said claims volumes are difficult to forecast. Risks include case-volume changes, catastrophe activity, employment levels, client outsourcing decisions, foreign exchange and interest rates, pension funding, collectability, competition and legal outcomes.
- The company recorded $2.0 million of Q2 severance costs for administrative reductions affecting 146 employees; it expected approximately $9.6 million in annual pretax savings. First-half restructuring and other costs totaled $4.7 million, including a $2.7 million loss related to a Florida sublease.
- In a Broadspire purchase-price arbitration, a July 30, 2010 decision led Crawford to pay Platinum $6.1 million plus interest on August 6. The company recorded a $7.3 million goodwill impairment in Q2. Remaining issues could require up to a further $6.6 million plus interest, fees and expenses; management said the outcome and timing remained uncertain, and future payments could adversely affect liquidity or results.
- Other disclosed contingencies include claims arising in the ordinary course of business and employment-related litigation risk. The company stated it had made adequate provision for known and foreseeable claims. It reported no material change in market-risk exposure, no material change in internal financial controls, and effective disclosure controls. The independent accountant performed an interim review, not a full audit.
Important facts for investors to verify
- Whether receivables and unbilled revenue convert to cash, and whether days outstanding improve.
- Progress in stabilizing U.S. Property & Casualty and Broadspire case volumes, margins and client retention.
- Cash availability, covenant compliance, debt repayment needs and the projected pension funding schedule.
- Final outcomes and total costs of the Broadspire purchase-price and representations-and-warranties arbitrations.
- Whether planned cost savings are achieved and whether Legal Settlement Administration’s backlog converts to revenue as expected.