Crawford & Company — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are with FY 2009. The filing also reports quarterly results. Most international subsidiaries (other than Canada and the Caribbean) report on a two-month lag.
Business context
Crawford provides claims management, business process outsourcing, medical and risk-management services, and legal settlement administration in more than 70 countries. Its four segments are U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration. Figures described as revenue before reimbursements exclude client-reimbursed out-of-pocket costs.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue before reimbursements | $1,030.4 million | $969.9 million |
| Total revenue, including reimbursements | $1,110.8 million | $1,048.2 million |
| Net income (loss) attributable to Crawford | $28.3 million | $(115.7) million |
| Diluted EPS | $0.53 | $(2.23) |
| Cash from operating activities | $26.2 million | $51.7 million |
| Cash and cash equivalents at year-end | $93.5 million | $70.4 million |
| Total debt, including current installments | $223.3 million | $181.3 million |
| Current ratio | 1.3:1 | 1.3:1 |
Revenue before reimbursements rose 6.2%, but cash from operations fell 49%, principally due to higher pension contributions, including $30 million of accelerated U.S. plan contributions. Capital expenditures were $27.8 million; investing activities used $42.5 million. Working capital was $82.6 million, up $15.8 million year over year.
Year-end debt was principally a term loan; the $100 million revolving facility had no borrowings outstanding, with $79.7 million unused after letters of credit. The company reported compliance with its credit covenants: leverage ratio 2.47 versus a 3.50 maximum, and fixed-charge coverage 3.47 versus a 1.50 minimum. Debt includes a $50 million term-loan increase used to fund accelerated pension contributions.
Segment results and changes
| Segment | 2010 revenue before reimbursements | 2010 operating earnings (loss) | Change versus 2009 |
|---|---|---|---|
| U.S. Property & Casualty | $190.0 million | $11.5 million | Revenue down 8.4%; earnings down 38.5% |
| International Operations | $430.7 million | $34.9 million | Revenue up 9.9%; earnings up 3.3% |
| Broadspire | $245.5 million | $(11.7) million | Revenue down 15.0%; loss widened |
| Legal Settlement Administration | $164.2 million | $47.7 million | Revenue up 100.2%; earnings up 263.0% |
International revenue growth reflected favorable currency translation and higher case volumes; excluding currency effects, revenue increased 3.6%. Legal Settlement Administration’s results were driven largely by the Gulf Coast Claims Facility (GCCF) special project. Broadspire was hurt by lower workers’ compensation claim activity, weak employment, a prior major contract loss, and a $1.3 million provision related to a bankrupt client. U.S. Property & Casualty was affected by lower claim referrals and fewer catastrophe-related cases. Segment operating margins were 6.1% for U.S. Property & Casualty, 8.1% for International Operations, (4.8)% for Broadspire, and 29.0% for Legal Settlement Administration.
Fourth-quarter 2010 revenue before reimbursements was $301.5 million versus $238.4 million a year earlier; net income attributable to Crawford was $14.8 million versus $8.9 million. Legal Settlement Administration operating earnings were $27.8 million in the quarter. The filing attributes the strong annual and quarterly legal-settlement performance primarily to the GCCF project.
Outlook, risks, and unusual items
- Management expects GCCF-related revenue and operating earnings in 2011 to be significantly below 2010 levels. Approximately $75 million of the $90 million awarded-project backlog at year-end was expected to be recognized within 12 months; project timing and realization remain uncertain.
- The company expects Broadspire revenue and earnings to be affected by the termination of a bankrupt major client, which generated approximately $9.7 million of 2010 revenue. Work on a separate Broadspire casualty project continued into 2011, but its extent was uncertain.
- FY 2010 included $10.8 million of goodwill and intangible-asset impairment charges, primarily related to additional BMSI purchase consideration, and $4.7 million of restructuring and other costs, including severance and a facility sublease loss. FY 2009 included $140.9 million of impairment charges, principally Broadspire goodwill.
- Defined-benefit pension plans were underfunded by $168.5 million at the 2010 measurement date, before the January 2011 $20 million U.S. contribution. Management expected a further $6.9 million U.K. contribution in 2011 and projected no additional U.S. plan funding for 2011 beyond the January payment; future requirements are sensitive to investment returns, discount rates, and regulation.
- Management expected a 2011 effective tax rate of 29%–31% and property, equipment, and software additions of approximately $26 million. No consolidated revenue or earnings guidance is provided.
- Other material risks include uncertain claims volumes, insurance-cycle and catastrophe exposure, pricing competition, international and foreign-exchange risks, customer concentration, litigation and indemnity claims, and debt-covenant compliance. The company cited a material single customer in International Operations; loss of that relationship could reduce segment revenue and earnings.
- The board declared a $0.02-per-share quarterly dividend for both share classes in February 2011, payable in March. Future dividends remain subject to cash needs, pension funding, debt repayment, and credit-agreement restrictions.
Key investor verification points
- Track post-GCCF revenue, margins, project backlog conversion, and the expected normalization of receivables and DSO.
- Verify Broadspire’s response to client losses, the bankrupt customer’s receivable recovery, and whether the segment returns to profitability.
- Monitor pension contributions and funded status alongside operating cash flow and debt levels.
- Review leverage and fixed-charge coverage against tightening covenant limits, and the company’s plans for refinancing before the October 2013 term-loan maturity.
- Assess the persistence of International Operations’ growth excluding foreign-exchange effects and the exposure to its significant customer.