Crawford & Company — FY2011 Form 10-K
Business and period. Crawford provides claims management, business process outsourcing and consulting to insurers and self-insured entities, plus legal settlement administration. This filing covers the year ended December 31, 2011; international subsidiaries outside the U.S., Canada and the Caribbean are consolidated on a two-month lag. The company reports four segments: Americas, EMEA/AP, Broadspire and Legal Settlement Administration.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue before reimbursements | $1,125.4 million | $1,030.4 million |
| Total revenue, including reimbursements | $1,211.4 million | $1,110.8 million |
| Net income attributable to Crawford shareholders | $45.4 million | $28.3 million |
| Diluted EPS, Class B | $0.83 | $0.53 |
| Cash from operating activities | $36.7 million | $26.2 million |
| Cash and cash equivalents at year-end | $77.6 million | $93.5 million |
| Total debt | $214.2 million | $223.3 million |
| Current ratio | 1.3:1 | 1.3:1 |
Total revenue rose 9.1%; revenue before reimbursements rose 9.2%. Net income increased 60.3%. Consolidated pretax income was $58.4 million, versus $38.5 million. Reimbursements are pass-through expenses that offset in earnings; management generally discusses segment revenue excluding them. Segment operating earnings totaled $88.1 million, up from $81.5 million. The filing does not provide a consolidated operating margin using a standard GAAP operating-income measure.
Fourth-quarter revenue before reimbursements was $265.6 million, down from $301.5 million in Q4 2010. Q4 net income attributable to shareholders was $4.5 million, versus $14.8 million; pretax income was $0.2 million. Q4 included $4.6 million of special charges, principally a $3.4 million deferred financing cost write-off and $1.2 million Broadspire severance expense.
Segments and changes versus prior periods
- Americas: Revenue before reimbursements increased 6.8% to $357.7 million, while operating earnings fell 4.3% to $19.9 million and margin declined to 5.5% from 6.2%. Higher weather-related activity, including catastrophe cases, supported revenue; case mix and servicing costs pressured earnings.
- EMEA/AP: Revenue rose 19.1% to $340.2 million and operating earnings rose 14.5% to $28.4 million. Growth reflected higher case volumes, weather-related activity in Asia-Pacific and favorable currency translation; margin eased to 8.4% from 8.7%.
- Broadspire: Revenue decreased 4.4% to $234.8 million. The segment remained loss-making, with an operating loss of $11.4 million, slightly improved from $11.7 million. Lower employment-related claims and the loss of a major client weighed on results; operating efficiencies reduced direct compensation expense.
- Legal Settlement Administration: Revenue increased 17.3% to $192.6 million and operating earnings rose 7.6% to $51.3 million. Results were driven by a large special project; operating margin declined to 26.6% from 29.0%. Awarded-project backlog fell to about $64 million from $90 million, with $58.8 million expected to be recognized within 12 months.
Management realigned segment reporting in 2011, moving Canada and Latin America/Caribbean into Americas; prior periods were recast, with no change to consolidated results. Crawford acquired Settlement Services, Inc. in October 2011 for $3.6 million cash, with possible additional earnout consideration of up to $2.0 million.
Cash, debt and liquidity
Operating cash flow increased $10.5 million to $36.7 million, primarily reflecting improved working-capital movements and lower pension contributions. Average days sales outstanding increased 7.7 days during 2011 as the large legal-administration project wound down. Investing cash use was $34.9 million, including $29.9 million of property, equipment and capitalized software spending; management forecast 2012 additions of approximately $28.2 million. Financing activities used $18.0 million, including $4.9 million of dividends.
On December 8, 2011, Crawford entered a new $325 million senior secured revolving credit facility maturing December 8, 2016, and borrowed $248.3 million at closing, principally to refinance prior borrowings. At year-end, approximately $95.0 million of the revolving line was unused after letters of credit. The company reported covenant compliance and expected to remain compliant through 2012, while noting covenant sensitivity to EBITDA and debt levels. Working capital was $83.1 million. Cash held by foreign subsidiaries was $61.2 million and was generally intended to remain invested abroad.
Defined-benefit pension plans were underfunded by $137.7 million at the latest measurement date, down from $168.5 million in 2010. Crawford contributed $20.0 million to its U.S. plan and $22.8 million to U.K. plans in 2011. Expected 2012 contributions were approximately $13.8 million to the U.S. plan and $6.8 million to U.K. plans; future required funding is sensitive to discount rates and asset returns.
Outlook, risks and unusual items
- Management expected revenue and operating earnings from the Gulf Coast Claims Facility special project to decline significantly from 2011 levels through the first half of 2012, with further decline through the currently expected August 2013 project end; timing is not assured. The project generated $121.1 million, more than 10% of consolidated revenue before reimbursements in 2011, and more than half of Legal Settlement Administration revenue in 2011 and 2010.
- Management forecast a 2012 effective tax rate of 29%–31% before discrete items. The filing does not provide consolidated revenue or earnings guidance.
- Key risks include unpredictable claim volumes and catastrophe activity; soft/hard insurance-cycle changes; economic weakness and low U.S. employment affecting Broadspire; customer concentration; project-based legal-administration revenue volatility; intense price competition; international, foreign-exchange and cybersecurity risks; and the ability to recruit catastrophe adjusters.
- Broadspire’s indefinite-lived trade name, carried at $29.1 million, was not impaired at year-end but remained exposed to possible impairment if operating performance or valuation assumptions deteriorate. Management also cited risks in completing the migration of Broadspire systems to its proprietary Risk Tech platform.
- FY2011 special items included a $7.0 million pretax gain from final settlement of a Platinum arbitration, partly offset by the $3.4 million financing-cost write-off and $1.2 million Broadspire severance. A $5.5 million tax benefit reflected release of a valuation allowance on foreign tax credits. No goodwill or intangible impairment charge was recorded in 2011; charges were $10.8 million in 2010 and $140.9 million in 2009.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. Routine claims-related litigation and indemnification matters were disclosed; management stated that adequate reserves had been provided, while acknowledging outcomes cannot be assured.
Investor verification priorities
- Track the Gulf Coast Claims Facility wind-down, its revenue contribution and replacement project pipeline, alongside the declining legal-administration backlog.
- Assess Broadspire’s path to profitability, customer retention, Risk Tech implementation costs and the $29.1 million trade-name impairment sensitivity.
- Monitor pension funding requirements, cash generation and covenant headroom under the secured credit facility.
- Review receivables and collections as days sales outstanding rose while the major project wound down; verify that customer concentration and project timing remain manageable.
- Reconcile reported earnings with special credits, tax benefits, pension assumptions and foreign-currency effects; consider the distinction between segment operating earnings and consolidated GAAP income.