Crawford & Company — Q1 2010 Form 10-Q
Business context and period. Crawford provides claims management, business process outsourcing and legal settlement administration services to insurers and self-insured entities. This unaudited quarterly report covers the three months ended March 31, 2010, compared with Q1 2009; balance-sheet comparisons are with December 31, 2009. The interim financial statements were reviewed by Ernst & Young, not audited.
Financial results
| Metric | Q1 2010 | Q1 2009 / comparator |
|---|---|---|
| Revenue before reimbursements | $236.3 million | $236.1 million; up 0.1% reported, down 5.5% excluding currency effects |
| Total revenue | $252.1 million | $250.3 million; up 0.7% |
| Income before taxes | $4.0 million | $4.1 million; down 4.4% |
| Net income | $3.1 million | $3.0 million |
| Net income attributable to Crawford | $3.1 million | $3.1 million; down 0.9% |
| Basic and diluted EPS | $0.06 | $0.06 |
| Operating cash flow | $(23.8) million | $(12.0) million |
| Investing cash flow | $(5.7) million | $(5.9) million |
| Financing cash flow | $8.5 million | $(9.2) million |
Net margin was approximately 1.2% of total revenue; pretax margin was approximately 1.6%. SG&A was $49.0 million, down 4.9%. Interest expense, net, rose to $4.1 million from $3.5 million. Restructuring and other costs were $2.7 million, versus $1.8 million. Management estimated a 2010 effective tax rate of approximately 22% before discrete items.
Segments
| Segment | Revenue before reimbursements | Operating earnings (loss) | Change and context |
|---|---|---|---|
| U.S. Property & Casualty | $49.2 million, down 11.0% | $5.1 million; 10.4% margin | Lower property, vehicle, warranty and weather-related claims; Contractor Connection revenue grew. |
| International Operations | $104.5 million, up 15.2% | $6.6 million; 6.3% margin | Reported growth was mainly currency-driven; constant-currency revenue growth was less than 1%. |
| Broadspire | $62.0 million, down 16.9% | $(2.3) million loss | Lower workers’ compensation and casualty referrals, reduced U.S. employment and a major client loss contributed. |
| Legal Settlement Administration | $20.7 million, up 32.8% | $3.3 million; 15.9% margin | Backlog was $50.7 million, of which an estimated $43.2 million was expected to be recognized during the remainder of 2010. |
Liquidity, debt and financial position
- Cash fell $22.1 million during the quarter to $48.3 million. Working capital was $72.1 million, up $5.4 million from year-end.
- Accounts receivable and unbilled revenue increased $18.6 million from December 31, primarily due to more days of revenue outstanding. Management cited this increase and pension funding among the drivers of cash used in operations.
- Short-term borrowings were $13.9 million, versus $32,000 at year-end. Long-term debt and capital leases, including current installments, totaled approximately $174.8 million. Cash less these borrowings implies approximate net debt of $140 million.
- The company had a $100 million revolving credit facility expiring October 2013. Unused capacity was $66.6 million, including $19.6 million committed to letters of credit.
- Q1 contributions to underfunded U.S. and U.K. defined-benefit plans totaled $11.2 million. The company expected to contribute a further $15.0–$23.5 million to its frozen U.S. plan during the rest of 2010. Management said available resources, expected operating cash and borrowing capacity should support operations for the next 12 months.
Outlook, risks and unusual items
- No formal revenue or earnings guidance was provided. Management described the insurance underwriting environment in 2009 and early 2010 as a soft market and said claims volumes are difficult to predict. It expected reduced third-party involvement in vehicle claims and continued weakness in warranty claims as long-running contracts expire.
- The $2.7 million Q1 restructuring charge related to subleasing additional space at a Plantation, Florida facility and relocating Broadspire operations. If the sublessor exercises a remaining option, Crawford said it could record a further approximately $658,000 loss in 2010.
- Broadspire’s major client did not renew its contract after December 2009; the client represented approximately $5.8 million, or 7.8%, of Broadspire’s Q1 2009 revenue.
- Two disputes with Platinum Equity relating to the BMSI acquisition remain unresolved. In one purchase-price arbitration, Crawford claims $740,000 while Platinum claims $14.5 million; the company could not determine the outcome. A separate representation-and-warranty arbitration has a contractual damages cap of $15 million, and its outcome was also undetermined. Crawford said it did not believe it would fund certain other pre-existing BMSI proceedings covered by Platinum’s indemnity.
- Principal risks include claims-volume and outsourcing changes, economic and foreign-exchange conditions, competition, client credit and collections, pension underfunding, financing covenant compliance, disasters, litigation and execution of technology initiatives. Management reported no material change in market-risk exposure and no material change in internal control over financial reporting.
Investor verification points
- Check whether receivables and unbilled revenue convert to cash, given their increase and the larger operating cash outflow.
- Track pension contributions, plan underfunding and the related effect on liquidity and credit-agreement compliance.
- Assess whether Broadspire can offset lost-client and lower-claims effects, and whether cost reductions improve its operating result.
- Monitor currency effects on International Operations and the sustainability of Legal Settlement Administration’s project-based revenue and backlog conversion.
- Follow the Platinum arbitrations and any remaining Plantation sublease option; outcomes and potential financial effects were uncertain.