Crawford & Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Crawford provides claims management, business process outsourcing, consulting, and legal settlement administration services in more than 70 countries. Its reporting segments are Americas, Europe, Middle East, Africa and Asia-Pacific (EMEA/AP), Broadspire, and Legal Settlement Administration (LSA). Results for many international subsidiaries, including the U.K., are reported on a two-month lag. The December 2014 GAB Robins acquisition affects period comparability.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue before reimbursements | $293.3 | $293.8 | $885.5 | $857.4 |
| Total revenue | $310.0 | $314.9 | $941.0 | $911.3 |
| Income before taxes | $7.3 | $19.4 | $21.7 | $47.9 |
| Net income (loss) attributable to Crawford shareholders | $(0.9) | $10.2 | $6.2 | $27.3 |
| Diluted EPS, Class A / Class B | $(0.01) / $(0.03) | $0.19 / $0.17 | $0.14 / $0.08 | $0.51 / $0.47 |
For the nine months, revenue before reimbursements grew 3.3%, but pretax income fell 54.6% and shareholder-attributable net income fell 77.4%. Q3 total revenue declined 1.6%, while revenue before reimbursements was nearly flat. Q3 earnings included $11.1 million of restructuring and special charges; nine-month charges were $16.4 million, with none in the comparable 2014 periods. The estimated 2015 effective tax rate was approximately 83%, reflecting low taxable income, income mix, and losses in jurisdictions where tax benefits could not be recognized.
Segment operating earnings were: Americas $12.2 million in Q3 and $27.0 million year to date; EMEA/AP $6.7 million and $9.3 million; Broadspire $7.4 million and $17.0 million; and LSA $1.1 million and $9.8 million. In Q3, Americas, EMEA/AP, and Broadspire earnings improved year over year, while LSA earnings fell sharply. For nine months, EMEA/AP and LSA earnings declined.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was $21.1 million, versus cash used of $44.2 million in 2014. Investing activities used $94.7 million, including $68.3 million net cash for GAB Robins; financing activities provided $83.5 million.
- Cash was $58.3 million at September 30, 2015, versus $52.5 million at year-end 2014. Working capital was approximately $119.5 million, up $11.4 million.
- Short- and long-term debt and capital leases totaled $258.9 million, versus $156.8 million at December 31, 2014. The increase was principally related to acquisition financing and other funding needs. Credit-facility availability was reported at $128.8 million, including $17.2 million of outstanding letters of credit.
- Accrued pension liabilities were $115.1 million, down from $142.3 million at year-end. The company made $13.9 million of U.S. and U.K. pension contributions during the first nine months and expected to contribute a further approximately $4.7 million in 2015.
Material changes and management outlook
- GAB Robins contributed $19.6 million of Q3 and $57.7 million of nine-month revenue before reimbursements. The acquisition’s preliminary purchase price was $74.0 million; the company paid $68.3 million net cash for acquisitions during the first nine months. Its contribution to earnings was not material, according to the filing.
- Americas revenue was broadly flat in Q3 despite a 14.1% decline in cases received; a major U.S. carrier outsourcing project and Contractor Connection growth partly offset lower weather-related claims and foreign exchange effects. Broadspire revenue rose 8.8% in Q3, supported by organic growth and increased referrals. EMEA/AP revenue rose 14.0% in Q3, substantially reflecting GAB Robins. LSA revenue fell 39.0% in Q3 as the Deepwater Horizon settlement project and other large projects wound down.
- Management expected LSA activity to continue through year-end at a reduced rate. Its awarded project backlog was approximately $76 million at September 30, including an estimated $25 million expected to be recognized during the rest of 2015.
- Management expected $10–15 million of additional Q4 restructuring charges, intended to remove approximately $25–28 million of annual costs. It forecast total cost-reduction benefits of approximately $47–50 million in 2016 versus the 2015 run rate. Savings and timing were not assured. The Manila Global Business Services Center was expected to phase in through 2018.
- Subsequent to quarter-end, a November 5 credit agreement amendment excluded specified restructuring charges from Consolidated EBITDA calculations and temporarily relaxed financial covenants: maximum leverage rose from 3.25x to 3.75x for quarters ending December 2015 through September 2016, then steps down; minimum fixed-charge coverage fell from 1.50x to 1.25x. The amendment did not change facility availability or maturity.
Risks, contingencies, and unusual items
- The company voluntarily reported potential Foreign Corrupt Practices Act violations to the SEC and Department of Justice and was cooperating with their investigation. The filing said it could not predict any action or financial effect. It recorded $3.4 million of related legal and professional fees through September and had $1.7 million of related liabilities remaining.
- Other Q3 special charges included $1.6 million for the former CEO’s separation. Restructuring charges covered the Manila center, GAB Robins integration/EMEA/AP restructuring, and Americas actions. A separate $1.3 million legal claim settlement contributed to higher unallocated corporate costs.
- LSA revenue and earnings remain exposed to project timing and the end of large engagements. Other stated risks include claim volumes and outsourcing decisions, foreign exchange, acquisition integration, cost-saving execution, pension funding, client retention and collections, cybersecurity, and compliance with financing covenants.
- The company entered a 10-year London office lease with future payments of approximately $15.2 million, subject to market-rate adjustments. It also disclosed potential litigation and regulatory matters, stating that provisions had been made for known risks management considered probable and reasonably estimable.
Important facts for investors to verify
- Whether the FCPA investigation results in enforcement action, penalties, or additional costs.
- Whether cost reductions and savings meet management’s stated targets, and whether restructuring charges remain within the amended covenant exclusions.
- Debt, available borrowing capacity, and covenant compliance following the November 2015 amendment.
- Whether LSA replaces revenue and earnings as major settlement projects wind down, and whether backlog converts to revenue as expected.
- Whether GAB Robins integration, foreign exchange, pension funding, and lower claims volumes affect margins and cash generation.