Crawford & Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing was reviewed by Ernst & Young, not audited. Crawford provides claims management, business-process outsourcing, consulting, and legal settlement administration services in more than 70 countries.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue before reimbursements | $302.1 million | $283.0 million | $863.7 million | $859.7 million |
| Total revenue | $324.2 million | $308.2 million | $930.6 million | $926.4 million |
| Income before taxes | $28.8 million | $20.6 million | $56.7 million | $58.2 million |
| Net income attributable to Crawford shareholders | $18.2 million | $15.3 million | $34.7 million | $40.9 million |
| Diluted EPS, Class A / Class B | $0.33 / $0.33 | $0.28 / $0.28 | $0.65 / $0.62 | $0.76 / $0.75 |
- Revenue before reimbursements increased 6.8% in Q3 and 0.5% year to date on a reported basis; constant-currency increases were 9.5% and 1.8%, respectively.
- Q3 net income improved despite a $7.0 million arbitration award credit recorded in Q3 2011. Nine-month shareholder net income declined, in part because that prior-year credit did not recur; 2012 also included $2.8 million of technology-outsourcing costs.
- Q3 operating earnings by segment: Americas $6.5 million, EMEA/AP $13.0 million, Broadspire loss of $0.2 million, and Legal Settlement Administration $15.6 million. Year-to-date figures were $7.4 million, $30.4 million, a $0.4 million loss, and $42.1 million, respectively.
- Q3 consolidated net margin was approximately 5.6% of total revenue versus 5.0% a year earlier; year-to-date it was approximately 3.8% versus 4.4%. Q3 EMEA/AP and Legal Settlement Administration operating margins were 13.5% and 25.8%; Broadspire remained loss-making.
- Net cash provided by operating activities was $10.3 million for the first nine months, versus cash used of $17.6 million in 2011. Investing activities used $22.9 million; financing activities provided $3.5 million. Cash declined $11.2 million to $66.4 million.
- Working capital was $92.7 million at September 30, up $9.6 million from year-end 2011. Interest-bearing debt, including short-term borrowings, current debt and capital leases, was approximately $225.4 million, versus approximately $214.2 million at year-end. Available balance under the credit line was $86.9 million, including the letter-of-credit facility.
- Cash dividends paid in the first nine months totaled $4.7 million. The Board declared Q4 dividends of $0.04 per Class A share and $0.03 per Class B share.
Changes and operating drivers
- Americas: Revenue before reimbursements fell 9.3% in Q3 and 12.6% year to date. Lower weather-related claims, reduced referrals, currency effects, and unfavorable service mix/pricing weighed on results. U.S. catastrophe revenue was down 25.7% in Q3; Contractor Connection revenue rose 36.9%.
- EMEA/AP: Revenue before reimbursements rose 10.2% in Q3 and 6.9% year to date. Asia-Pacific growth, particularly ongoing Thailand flood claims, more than offset weaker U.K. activity and some CEMEA declines. Segment operating earnings increased substantially.
- Broadspire: Revenue before reimbursements rose 1.5% in Q3 and 2.0% year to date. Cost controls, improved employee utilization, and lower staffing narrowed operating losses compared with 2011.
- Legal Settlement Administration: Revenue before reimbursements increased 42.7% in Q3 and 11.5% year to date, reflecting Gulf Coast claims work and the Deepwater Horizon class action settlement. Year-to-date operating earnings were slightly lower, with project mix and outsourced service costs affecting margins.
- SG&A expense increased 10.4% in Q3 and 4.3% year to date, mainly from higher professional-indemnity self-insurance expense and professional fees. The effective annual tax rate was estimated at 36%–38% before discrete items; the 2012 rate rose mainly due to income mix.
Outlook, risks, and unusual items
- Management expected Superstorm Sandy to generate significant claims volume in Q4 2012; actual volume and financial impact were not assured.
- Management anticipated a roughly $5.0 million pretax restructuring charge in Q4 2012, with expected annualized operating savings of about $4.2 million in North American operations.
- Legal Settlement Administration backlog was approximately $118 million at September 30, 2012, of which an estimated $48 million was expected to be recognized as revenue during the remainder of 2012. These project revenues can vary with timing and completion.
- Management expected elevated Thailand flood-claim activity to continue through the remainder of 2012 and into 2013, without assurance on timing or revenue amount.
- Minimum required pension contributions were projected at $13.5 million for 2012, $17.8 million for 2013, $18.4 million for 2014, $18.8 million for 2015, $10.9 million for 2016, and $6.7 million for 2017. The U.S. and U.K. defined-benefit plans were described as significantly underfunded; estimates depend on interest-rate and asset-return assumptions.
- Other stated risks include claims volumes and catastrophe activity, economic and foreign-exchange changes, client retention and outsourcing decisions, collection of receivables, competition, pension funding, credit-facility covenants, and successful technology transition and cybersecurity. The filing disclosed ordinary-course claims and employment litigation; management said it had provided for known and foreseeable risks.
- Technology infrastructure outsourcing began during the quarter and generated $0.3 million of Q3 charges. Management reported no negative impact to financial-reporting controls from the transition or data-center move and concluded disclosure controls were effective.
- The company repurchased 144,000 shares in total under its authorization through September 30, 2012, at reported average prices of $3.95 for Class A and $3.83 for Class B; 1,856,694 shares remained authorized.
Important facts for investors to verify
- Whether Sandy-related claims and continued Thailand flood work translated into the anticipated Q4 revenue and earnings, and how much those results depended on project timing.
- Whether the announced $5.0 million restructuring charge and projected $4.2 million annual savings were realized, and whether further costs or execution risks emerged.
- Whether Americas’ lower claims volumes and year-to-date earnings decline persisted, and whether Broadspire achieved sustained profitability.
- Whether receivables and unbilled revenue growth converted into cash: together they rose approximately $42.8 million from year-end while cash declined.
- How pension funding needs, debt levels, available credit, and credit-facility covenants affect liquidity and future dividends.
- Whether Legal Settlement Administration backlog converted to revenue and earnings as expected, given project concentration and variable completion schedules.