Business context and reporting period
Crawford & Company provides claims management, business-process outsourcing and related services to insurers, self-insured entities and legal-settlement clients. Its four segments are U.S. Property & Casualty, International Operations, Broadspire and Legal Settlement Administration. This Form 10-K covers the fiscal year ended December 31, 2009; international subsidiaries outside Canada and the Caribbean report on a two-month lag.
Financial performance and liquidity
- Revenue: Annual revenue before reimbursements was $969.9 million, down 7.5% from 2008; GAAP total revenue, including pass-through reimbursements, was $1.048 billion, down 7.7%.
- Profit: Crawford reported a net loss attributable to the company of $115.7 million, or $2.23 per diluted share, versus net income of $32.3 million, or $0.62 per diluted share, in 2008. The 2009 loss included $140.9 million of noncash goodwill and intangible-asset impairment charges, primarily related to Broadspire. Fourth-quarter attributable net income was $8.9 million, versus $8.3 million in fourth-quarter 2008.
- Segment results: Total segment operating earnings, a management measure, were $63.7 million versus $75.8 million in 2008. U.S. Property & Casualty earned $18.9 million (9.1% margin); International earned $33.3 million (8.5%); Broadspire recorded a $1.6 million loss; Legal Settlement Administration earned $13.1 million (16.0%).
- Cash flow: Operating cash flow was $51.7 million, down from $71.6 million. Investing used $31.2 million and financing used $26.6 million. Year-end cash was $70.4 million.
- Debt and liquidity: Total debt was $181.3 million, down from $196.9 million. The company had $80.4 million of unused revolving credit availability, including the effect of outstanding letters of credit. Working capital was approximately $66.7 million; the current ratio was 1.3:1. The year-end leverage ratio was 2.52:1, below the 3.25:1 covenant maximum, and the company reported compliance with its covenants.
- Pensions and equity: Defined-benefit pension plans were underfunded by $216.3 million, compared with $183.3 million a year earlier. Shareholders’ investment attributable to Crawford fell to $56.7 million from $175.6 million; debt-to-total-capital rose to 76.2% from 52.9%.
Material changes versus 2008
- International revenue declined 11.8% in reported dollars; currency movements reduced it by $62.5 million. On a constant-dollar basis, revenue grew 2.3%.
- U.S. Property & Casualty revenue fell 4.7%, with cases received down 2.4%; vehicle and warranty-services case volumes dropped 27.7% and 43.8%, respectively. Contractor Connection revenue increased 38.4%.
- Broadspire revenue fell 7.4% and cases received declined 11.2%, reflecting lower employment and fewer workers’ compensation referrals; the segment moved from $3.5 million of operating earnings to a $1.6 million loss.
- Legal Settlement Administration revenue rose 9.5%; new assignments increased to 275 from 182, and year-end awarded-project backlog grew to $55.0 million from $41.9 million. Management estimated $48.1 million would enter revenue within 12 months.
- Net corporate interest expense declined to $14.2 million from $17.6 million. The pension deficit increased, and unallocated corporate and shared costs rose to $10.7 million from $6.7 million.
Outlook, commentary and risks
- Management expected a 2010 effective tax rate of 23%–25% and anticipated operating cash flow below 2009 levels, citing planned pension contributions. It expected to contribute approximately $33.5 million to U.S. defined-benefit plans and $8.0 million to U.K. plans in 2010; the U.S. amount includes a $10.0 million discretionary contribution made in January.
- The company said current financial resources, operating cash generation and borrowing capacity should fund operations for the next 12 months, while noting uncertainty around future cash generation and covenant compliance. A roughly $5.9 million excess-cash-flow debt payment was expected in March 2010.
- Management expected approximately $3.5 million of moving and sublease losses in 2010 in connection with relocating Broadspire’s Plantation, Florida operations. RiskTech claims-platform implementation was planned to continue through 2011; anticipated efficiencies were not assured.
- Key risks include volatile case volumes, economic and employment conditions, catastrophe activity, pricing and competition, foreign-exchange movements, significant pension-funding obligations, debt covenants, dependence on a major International Operations customer, and project variability in legal settlements. A Broadspire client representing 7.3% of segment revenue in 2009 did not intend to renew its contract after its December 2009 expiration.
- The company had not paid cash dividends since 2006; credit-agreement restrictions limit dividend payments. It disclosed ordinary-course claims-related litigation and employment-law exposure, and an unresolved arbitration with Platinum over the Broadspire acquisition purchase-price adjustment; the possible outcome was undetermined.
- Management and the independent auditor reported effective internal control over financial reporting at year-end; the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether Broadspire’s operating performance stabilizes and whether further impairment or restructuring charges arise.
- Actual pension contributions, pension-plan assumptions and funding deficit compared with management’s estimates.
- Case volumes, pricing and client retention, especially the lost Broadspire contract and the significant International Operations customer relationship.
- Cash generation, debt repayments, covenant headroom and availability of refinancing before the October 2013 term-loan maturity.
- Conversion of the $55.0 million legal-settlement backlog into recognized revenue and cash, given project timing variability.
- Final 2010 Plantation sublease and relocation costs, and the outcome and financial effect of the Platinum arbitration.