Crawford & Company — Q2 2015 Form 10-Q
Business context and reporting period. Crawford provides claims management, business process outsourcing, medical management, and legal settlement administration services across four segments: Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. This unaudited report covers the three and six months ended June 30, 2015; most international operations are reported on a two-month delay. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue before reimbursements | $304.4m | $288.2m | $592.2m | $563.6m |
| Total revenue | $324.4m | $307.1m | $631.0m | $596.4m |
| Income before taxes | $8.9m | $17.6m | $14.4m | $28.4m |
| Net income attributable to Crawford shareholders | $4.1m | $10.5m | $7.0m | $17.1m |
| Diluted EPS, Class A / Class B | $0.08 / $0.06 | $0.19 / $0.18 | $0.14 / $0.11 | $0.32 / $0.30 |
| Operating cash flow | Not provided for the quarter | $10.2m | $(59.6)m |
- Q2 revenue before reimbursements grew 5.6%; first-half revenue grew 5.1%. Growth in Americas, EMEA/AP, and Broadspire more than offset lower Legal Settlement Administration revenue.
- Profit fell sharply despite revenue growth. Q2 service costs before reimbursements rose 11.5% to $232.1m; first-half costs rose 9.5% to $451.4m. The company cited acquired contractor-repair costs, higher compensation on a major U.S. outsourcing contract, self-insured costs, and GAB Robins integration costs.
- Q2 special charges were $4.2m; first-half charges were $5.3m, for the Manila Global Business Services Center, GAB Robins integration, and restructuring. SG&A declined 6.0% in Q2 and 2.5% in the first half.
- Segment operating earnings in Q2: Americas $9.9m (10.0% of segment revenue before reimbursements), EMEA/AP $1.1m (1.1%), Broadspire $6.0m (8.2%), and Legal Settlement Administration $3.7m (10.8%). Broadspire improved; EMEA/AP and Legal Settlement Administration weakened. First-half segment operating earnings were $35.7m versus $36.7m.
- Estimated 2015 effective tax rate: approximately 46%. First-half dividend payments were $6.8m; declared dividends per share for the first half were $0.14 for Class A and $0.10 for Class B.
Liquidity, debt, and financial position
- At June 30, cash was $62.5m, up from $52.5m at year-end; working capital was approximately $135.8m, up $27.8m. Cash included $48.2m held by foreign subsidiaries, which management said was available for general corporate purposes.
- Long- and short-term borrowings, including current installments and capital leases, totaled $254.7m, versus $156.8m at December 31, 2014. The increase primarily funded the GAB Robins acquisition. Available credit facility balance was $127.6m, including $17.2m of outstanding letters of credit.
- First-half investing cash outflow was $82.3m, including $66.1m net cash used for acquisitions. Financing cash inflow was $85.2m, including increased credit-facility borrowings. Cash increased by $10.0m over the period.
- Total assets were $870.9m and shareholders’ investment was $181.1m. Accrued pension liabilities were $126.9m. The company expected to contribute a further $3.0m to U.S. plans and $3.4m to U.K. plans during the remainder of 2015.
Material changes, outlook, and risks
- GAB Robins acquisition: Acquired December 1, 2014 for $71.8m cash consideration, funded primarily by U.K. borrowings. It contributed $21.8m of Q2 and $38.1m of first-half revenue before reimbursements. Purchase-price allocation remained preliminary; integration and restructuring costs affected results and comparability.
- Management expectations: No consolidated earnings or revenue guidance was provided. The Manila service center is expected to phase in through 2018; management estimated approximately $9.0m of 2015 charges and $2.0m of initial 2015 savings, with no assurance of timely completion or savings. Approximately $7.0m of GAB Robins integration charges and $4.0m of 2015 restructuring charges were expected overall; amounts recorded by June 30 were $1.0m and $2.0m, respectively.
- Legal Settlement Administration: Revenue and earnings from the Deepwater Horizon settlement and other large projects were declining; reduced activity was expected to continue through the rest of 2015. Project backlog was $88.0m at June 30, of which an estimated $58.0m was expected to be recognized during the remainder of 2015. Timing and replacement of project work remain uncertain.
- Operating risks: Americas cases received declined 8.5% in Q2 and 12.4% in the first half, mainly due to fewer high-frequency, low-severity claims and reduced weather-related activity. EMEA/AP profitability was pressured by lower U.K. and Asia-Pacific activity, foreign exchange, and acquisition-related costs. Key disclosed risks include claim-volume and outsourcing changes, customer concentration or loss, project timing, acquisition integration, pension funding, foreign exchange, interest rates, client collections, cybersecurity, and credit-facility covenant compliance.
- Other obligations and contingencies: The company entered into 10-year London office leases with approximately $15.2m in future payments, subject to market-rate adjustments after five years. It disclosed routine litigation and employment claims, with insurance coverage for most client-related claims and provisions for known foreseeable risks. A Buckley Scott earnout was valued at $1.17m, with a maximum potential payment of $2.02m.
Investor verification priorities
- Assess whether revenue growth can translate into profit recovery given service-cost growth, special charges, and the low EMEA/AP margin.
- Verify GAB Robins integration progress, final purchase accounting, acquisition-related borrowing, and the expected remaining integration costs.
- Track the Manila center’s actual implementation costs, savings, milestones, and potential execution delays.
- Monitor Legal Settlement Administration backlog conversion and replacement of declining Deepwater Horizon and other large-project work.
- Review debt, facility availability, covenant headroom, pension contributions, and the location and accessibility of foreign cash.
- Evaluate the sustainability of the major U.S. outsourcing contract and trends in underlying claim volumes, especially excluding transferred cases and acquired businesses.