Crawford & Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods unless noted. Crawford provides claims management, business process outsourcing, and consulting services in more than 70 countries. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue before reimbursements | $293.3m | $302.1m | $878.6m | $863.7m |
| Total revenue | $313.5m | $324.2m | $946.7m | $930.6m |
| Income before taxes | $22.9m | $28.8m | $64.5m | $56.7m |
| Net income attributable to Crawford shareholders | $13.4m | $18.2m | $40.2m | $34.7m |
| Diluted EPS, Class A / Class B | $0.25 / $0.24 | $0.33 / $0.33 | $0.74 / $0.71 | $0.65 / $0.62 |
| Net cash from operating activities | Not separately reported for quarter | Not separately reported for quarter | $(9.5)m | $10.3m |
- Margins and costs: Segment operating earnings totaled $26.0m in Q3, down from $34.9m; nine-month earnings were $80.0m, slightly above $79.2m. Q3 revenue before reimbursements fell 2.9%, while nine-month revenue rose 1.7%. Q3 SG&A declined 4.2%; nine-month SG&A was approximately flat.
- Segment trends: Q3 operating earnings increased in Americas to $9.7m and Broadspire to $1.9m, but declined in EMEA/AP to $4.3m and Legal Settlement Administration to $10.2m. For nine months, Americas and Broadspire improved, while EMEA/AP and Legal Settlement Administration declined. Q3 segment operating margins were 10.1% Americas, 5.1% EMEA/AP, 3.0% Broadspire, and 20.3% Legal Settlement Administration.
- Cash flow and investment: Nine-month operating cash flow was negative, versus positive $10.3m a year earlier, largely reflecting reductions in accounts payable and accrued liabilities and increased receivables. Investing cash outflow was $22.6m, including $20.1m for property, equipment, and capitalized software, plus $2.5m for acquisitions.
- Liquidity and debt: Cash was $51.1m at September 30, down from $71.2m at year-end; working capital was $70.8m, up $21.1m. Total short- and long-term borrowings, including current installments and capital leases, were $185.5m, versus $166.4m at year-end. The company reported $126.3m available under its credit line, including $17.8m of outstanding letters of credit.
- Dividends and equity: Nine-month cash dividends paid were $6.4m. The company repurchased $1.9m of stock and had authorization for a further 1,059,751 shares at September 30.
Material changes and unusual items
- Q3 revenue weakness principally reflected lower EMEA/AP and Legal Settlement Administration activity. Americas revenue benefited from Canadian flood claims, Superstorm Sandy work, and Contractor Connection growth.
- EMEA/AP revenue fell 12.4% in Q3, including a sharp decline in Thailand flood-related work; U.K. case volumes also continued to weaken. Legal Settlement Administration revenue declined as Deepwater Horizon project work tapered.
- Broadspire’s nine-month results included an approximately $3.0m one-time benefit from release of deferred revenue after it was relieved of certain lifetime-contract servicing obligations. Nine-month Americas results included a $2.3m gain on sale of Latin American customer-contract rights.
- No special charges were recorded in 2013; 2012 included $2.8m of charges related to outsourcing technology infrastructure. A $1.3m discrete tax expense resulted from enacted U.K. tax-rate changes, offset by other discrete items. Management estimated a 2013 effective tax rate of approximately 38% before discrete items.
- Other comprehensive loss included foreign-currency translation losses of $10.7m for the nine months. The balance sheet also reflects substantial pension-related obligations; pension contributions to U.S. and U.K. plans totaled approximately $20.1m in the first nine months.
Outlook, risks, and contingencies
- The filing gives no formal consolidated earnings or revenue guidance. Management expected approximately $40m of Legal Settlement Administration backlog to be recognized over the remainder of 2013, from a $117m awarded-project backlog; it expected Deepwater Horizon activity to continue through year-end at a reduced rate, without assurance on project timing.
- Expected fourth-quarter pension contributions were $2.6m to the U.S. plan and approximately $1.7m to U.K. plans. Management said U.S. operating cash and borrowing capacity should fund U.S. operations and obligations for the foreseeable future, while noting that foreign cash may not be repatriated without tax consequences.
- Key business risks include variable claim volumes and catastrophe activity, client outsourcing decisions and retention, competition, foreign exchange, receivable collection, talent retention, technology execution, and the significant underfunding and future funding needs of U.S. and U.K. defined-benefit plans. Credit-facility covenants restrict dividends.
- Claims-related and employment litigation may create defense, settlement, or other costs; management stated that adequate provisions had been made for known and foreseeable risks. A new 10-year Berkeley Heights office lease carries approximately $6.9m in total lease payments, plus related costs.
- Controls concern: Management concluded disclosure controls remained ineffective at September 30 because remediation of a material weakness in income-tax accounting was ongoing. Remediation included additional tax personnel and planned software, policy, and review improvements; the company expected to complete actions during 2013.
Most important facts for investors to verify
- Whether the negative operating cash flow and receivables growth reverse, and whether client collections remain timely.
- Whether EMEA/AP and Legal Settlement Administration revenue declines stabilize as Thailand and Deepwater Horizon project work runs off.
- Whether Broadspire’s reported improvement is sustained after excluding the one-time deferred-revenue release.
- Actual pension contributions, funding requirements, and compliance with credit-facility covenants as borrowings rise.
- Completion and effectiveness of the income-tax control remediation, including any subsequent disclosures about the material weakness.