Crawford & Company — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Crawford provides claims management, business process outsourcing and consulting services across four segments: Americas, EMEA/AP, Broadspire and Legal Settlement Administration. Financial statements are unaudited; international subsidiaries other than Canada and the Caribbean are generally reported on a two-month lag.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue before reimbursements | $298.9m | $293.8m | $585.2m | $561.6m |
| Total revenue | $326.1m | $319.0m | $633.3m | $606.4m |
| Income before taxes | $26.9m | $18.3m | $41.5m | $27.9m |
| Net income attributable to Crawford shareholders | $17.0m | $10.4m | $26.7m | $16.5m |
| Diluted EPS, Class A / Class B | $0.31 / $0.30 | $0.19 / $0.18 | $0.49 / $0.47 | $0.31 / $0.29 |
| Net cash used in operating activities | — | $(15.1)m | $(26.4)m |
Q2 revenue before reimbursements rose 1.7%; six-month revenue rose 4.2%. Higher six-month earnings included the absence of 2012 special charges, lower interest expense and a $2.3m first-quarter gain on the sale of Latin American customer-contract rights. The effective tax rate estimated for 2013 was approximately 36% before discrete items.
At June 30, cash was $47.2m, down from $71.2m at year-end; working capital was $70.2m. Total short- and long-term borrowings, including current installments and capital leases, were $173.9m, versus $166.4m at December 31, 2012. Available balance under the line of credit was $138.1m, including $17.8m of outstanding letters of credit. Cash included $43.8m held by foreign subsidiaries and $3.4m in the U.S. The filing reports cash used in investing activities of $15.1m and cash provided by financing activities of $6.2m for the first six months.
Material changes and segment performance
- Americas: Q2 revenue before reimbursements increased 6.5% to $82.6m; operating earnings rose to $4.4m from $1.4m (margin 5.3% versus 1.8%). Contractor Connection growth, cost reductions in Canada and higher Latin American revenue contributed. Year-to-date results also benefited from Superstorm Sandy claim work and the $2.3m contract-rights gain.
- EMEA/AP: Q2 revenue declined 6.6% to $87.6m and operating earnings fell to $8.4m from $11.7m (margin 9.6% versus 12.5%). Lower U.K. and Asia-Pacific revenue and higher compensation costs weighed on results. U.K. revenue was down 14.6% for the quarter.
- Broadspire: Q2 revenue rose 9.7% to $65.8m; operating earnings were $4.4m versus a $0.4m loss. A one-time approximately $3.0m deferred-revenue release after the company was relieved of servicing certain lifetime-pricing claims, together with higher medical-management revenue, supported the improvement. The six-month period also included approximately 5,000 incident reports from a client that generated little or no revenue.
- Legal Settlement Administration: Q2 revenue increased 0.7% to $63.0m and operating earnings rose to $16.5m from $15.8m. Six-month revenue increased to $119.6m from $110.5m. The segment reported a $130.0m awarded-project backlog, of which an estimated $77.6m was expected to be recognized during the rest of 2013.
Consolidated Q2 SG&A declined 1.1% year over year, while six-month SG&A increased 2.3%. No special charges were recorded in 2013; 2012 included $1.6m for the quarter and $2.5m for the six months related to technology-outsourcing transition costs.
Outlook, risks and other notable matters
- Management expected Deepwater Horizon settlement work to continue for the remainder of 2013 at a reduced rate; timing and continued revenue were not assured. Management also expected high Thailand claims activity for the rest of 2013, without assurance.
- The company expected U.S. pension contributions of $2.6m in each remaining 2013 quarter plus $7.8m in September. It expected additional U.K. pension contributions of approximately $1.7m per quarter for the remainder of 2013.
- A 10-year Berkeley Heights, New Jersey office lease began July 1, 2013, with approximately $6.9m in total lease payments, plus certain taxes and operating expenses.
- The U.S. and U.K. defined-benefit pension plans were described as significantly underfunded. Other key risks include case-referral and catastrophe-volume variability, client retention and collections, outsourcing and technology execution, foreign exchange and interest-rate changes, and compliance with credit-facility covenants. Management said market-risk exposures had not changed materially since year-end.
- Management concluded disclosure controls were not effective at June 30, 2013, due to an ongoing material weakness in income-tax accounting controls. Remediation efforts were underway, with completion expected during 2013. The U.K. corporation-tax rate reduction was expected to create an approximately $1.3m discrete tax expense in the period ending September 30, 2013.
- Management reported adequate provisions for known and foreseeable claims and employment-law matters. The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether operating cash flow turns positive and receivables and unbilled revenues are collected as expected; both increased during the first half.
- Progress and completion of remediation of the income-tax accounting material weakness.
- Actual pension contributions, funding needs and compliance with credit-facility covenants, including dividend restrictions.
- Whether the Broadspire deferred-revenue release and Latin American contract-sale gain are nonrecurring, and how segment earnings perform excluding these items.
- Realization and timing of the Legal Settlement Administration backlog and Deepwater Horizon work, alongside the expected decline in project activity.