Business context and reporting period
Crawford & Company provides claims management, business process outsourcing, consulting, and legal settlement administration services to insurers and self-insured entities. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; most international subsidiaries’ results are included on a two-month lag.
Unless noted otherwise, financial amounts below are in millions of dollars. The independent accountant performed an interim review, not an audit.
Financial performance and condition
- Third quarter: Revenue before reimbursements was $293.8, up 0.2% year over year; total revenue was $314.9, up 0.5%. Income before taxes was $19.4 versus $22.9, and net income attributable to Crawford shareholders was $10.2 versus $13.4. Diluted EPS was $0.19 for Class A and $0.17 for Class B, compared with $0.25 and $0.24, respectively.
- First nine months: Revenue before reimbursements was $857.4, down 2.4%; total revenue was $911.3, down 3.7%. Income before taxes was $47.9 versus $64.5, and shareholder net income was $27.3 versus $40.2. Diluted EPS was $0.51 for Class A and $0.47 for Class B, down from $0.74 and $0.71.
- Costs and margins: Q3 SG&A increased 4.7% to $59.3; nine-month SG&A increased 3.4% to $180.0. Management attributed increases to non-employee labor and professional fees, among other items. Nine-month segment operating earnings fell to $60.0 from $80.0. The filing estimates a 2014 effective tax rate of approximately 41% before discrete items.
- Cash flow: Operating cash flow was negative $44.2 for the nine months, versus negative $9.5 a year earlier. Investing cash flow was negative $25.0; financing provided $38.8. Cash declined $31.2 to $44.7, primarily amid higher receivables and unbilled revenue and lower accrued liabilities.
- Liquidity and debt: Working capital was approximately $91.0, up $38.7 from year-end 2013. Short-term borrowings were $46.4; long-term debt and capital leases, including current installments, totaled approximately $142.0. Total borrowings and capital leases were $188.4 versus $137.6 at year-end. Credit-facility availability was $196.1, including $17.5 of outstanding letters of credit. Of cash, $41.1 was held by foreign subsidiaries and management said it was available for general corporate purposes.
- Other balance-sheet items: Accounts receivable rose to $187.5 from $160.4 and unbilled revenue to $128.0 from $105.8. Accrued pension liabilities were $76.7, down from $103.0. The company contributed $20.1 to U.S. and U.K. defined benefit plans during the first nine months.
Material changes versus prior comparable periods
- Q3 revenue was nearly flat, as EMEA/AP and Broadspire growth offset declines in Americas and Legal Settlement Administration. Nine-month revenue declined, principally due to EMEA/AP and Legal Settlement Administration.
- Americas: Q3 operating earnings fell to $7.0 from $9.7, partly because prior-year Ontario flood and Superstorm Sandy work did not recur. Nine-month earnings increased to $22.1 from $17.4, supported by Contractor Connection growth and Canadian activity; the prior-year period also included a $2.3 gain on a Latin American customer-contract rights sale.
- EMEA/AP: Nine-month operating earnings dropped to $10.4 from $19.5. Prior-year Thailand flood, Australian flood and bush-fire work, and a $0.9 client bonus contributed to the comparison; management also cited startup costs for Specialty Markets.
- Broadspire: Revenue before reimbursements rose 7.8% in Q3 and 6.9% year to date; operating earnings increased to $4.4 and $9.1, respectively. Growth reflected higher case volumes, new clients, medical management referrals, and transferred workers’ compensation claims. The 2013 year-to-date comparison included a one-time $3.0 benefit from release of deferred revenue.
- Legal Settlement Administration: Nine-month revenue declined to $130.3 from $169.7 and operating earnings to $18.3 from $38.7, as Deepwater Horizon and other large projects wound down. Backlog was $89.0 versus $117.0 a year earlier; $35.0 was expected to be recognized in the remainder of 2014.
- Q3 and nine-month cash dividends per share increased year over year: Class A to $0.07 and $0.17, and Class B to $0.05 and $0.13, respectively.
Outlook, commentary, risks, and unusual items
- No consolidated earnings or revenue guidance is provided. Management said Legal Settlement Administration activity, including Deepwater Horizon, was expected to continue through the remainder of 2014 at a reduced rate; project completion timing and replacement revenue are uncertain. The Thailand flood claims project was substantially complete.
- Management expected approximately $1.7 of additional U.K. pension contributions in the remainder of 2014 and no further required contributions to the U.S. plan or U.K. plans for the rest of the year, while noting that pension mortality assumptions could increase liabilities, funding needs, and expense.
- During the first nine months, the company reduced a contingent consideration liability from a prior acquisition by $2.0 to zero and impaired $1.3 of related intangible assets, with the amounts recorded in SG&A and Legal Settlement Administration segment results. Separately, it acquired U.K. firm Buckley Scott for $3.8, with a $1.1 estimated contingent earnout, and sold its South African subsidiary at net book value.
- The company cited exposure to case-volume and catastrophe variability, project-based settlement work, client retention and collections, foreign exchange and interest rates, pension funding, financing availability and covenant compliance, competition, cybersecurity, and execution of technology integration. Claims and employment litigation may entail defense, settlement, and other costs; management said provisions were adequate for known, probable, and estimable matters.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period. The filing states no material off-balance-sheet arrangements other than operating leases.
Key facts for investors to verify
- Whether receivables and unbilled revenue convert to cash as expected, given the $44.2 of operating cash use and cash balance decline.
- Credit-facility availability, covenant compliance, borrowing costs, and the effect of increased debt on liquidity and future dividends.
- Whether Broadspire’s growth and cost utilization can offset declining legacy project revenue and whether Legal Settlement Administration backlog converts on schedule.
- Future pension funding requirements and the impact of updated mortality assumptions on plan liabilities and expense.
- Final purchase-accounting values and earnout exposure for Buckley Scott, and the effects of the prior-acquisition impairment and contingent-liability reversal.