Crawford & Company — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Crawford provides claims management and related services to insurers and self-insured organizations, along with legal settlement administration. Financial amounts below are in U.S. dollars; “revenue before reimbursements” excludes pass-through expenses.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue before reimbursements | $245.8m | $266.9m | $731.5m | $785.7m |
| Total revenue | $268.9m | $291.3m | $790.8m | $855.3m |
| Net income (loss) attributable to Crawford | ($39.5m) | $6.9m | ($124.6m) | $23.9m |
| EPS, diluted | ($0.76) | $0.13 | ($2.41) | $0.47 |
| Operating cash flow | Not separately presented | $9.8m | $33.4m |
- The reported loss included noncash goodwill and intangible-asset impairment charges of $46.9m in Q3 and $140.9m year to date. The company reported adjusted net income, excluding impairment, of $7.2m for Q3 and $16.2m for the nine months, versus $6.9m and $23.9m, respectively, in 2008.
- Operating earnings, the company’s non-GAAP segment measure, were $15.0m in Q3 versus $19.3m, and $46.4m year to date versus $59.7m. The filing attributes weaker results principally to Broadspire, pension costs, foreign exchange and, in Q3, lower U.S. Property & Casualty revenue.
- Q3 consolidated revenue before reimbursements declined 7.9% year over year; nine-month revenue declined 6.9%. Total revenue includes reimbursements that offset related expenses.
- Cash and cash equivalents were $55.1m at September 30, down from $73.1m at December 31, 2008. Working capital was $85.9m, up $16.3m. Operating cash flow was $9.8m; investing cash outflow was $18.2m and financing cash outflow was $11.5m.
- Long-term debt and capital leases, including current installments, totaled approximately $181.8m, versus $183.5m at year-end 2008. Short-term borrowings were $11.3m. The $100m revolving facility had $69.1m of unused availability, including the effect of $19.6m in issued but undrawn letters of credit. The company reported compliance with credit covenants at September 30.
- Q3 operating margin by segment: U.S. Property & Casualty 9.3% (12.1% prior year); International Operations 7.1% (7.4%); Broadspire negative 1.7% (positive 1.4%); Legal Settlement Administration 19.2% (15.5%).
Material changes and business drivers
- Broadspire: Revenue before reimbursements fell 8.4% in Q3 and 7.7% year to date; case volumes fell 10.1% and 13.2%. The U.S. employment downturn reduced workers’ compensation referrals. The segment recorded operating losses of $1.2m in Q3 and $3.7m year to date. All remaining Broadspire goodwill was impaired; the filing cites weaker current and forecast results, declining employment and lower stock prices.
- International Operations: Reported revenue declined 11.8% in Q3 and 13.9% year to date, substantially affected by the stronger U.S. dollar. On a constant-currency basis, revenue increased 0.9% and 4.6%, respectively. Case volumes declined 8.3% in Q3 and 6.1% year to date.
- U.S. Property & Casualty: Q3 revenue declined 7.1%, with cases down 15.4%; nine-month revenue increased 3.1%, supported by catastrophe services and service mix/rates. Warranty and vehicle claim volumes were notably lower.
- Legal Settlement Administration: Revenue increased 15.9% in Q3 and 10.3% year to date, supported by bankruptcy and securities administration projects. Project backlog was $55.4m at September 30, of which $15.9m was expected to be recognized during the remainder of 2009.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said existing financial resources, operating cash generation and borrowing sources were expected to support operations for the next 12 months.
- The October 27, 2009 Fifth Amendment extended the revolver’s maturity to October 30, 2013 and changed pricing, including a 2.0% LIBOR floor; management expected the revised terms to increase future pretax interest expense. It also revised leverage covenant limits and allowed, subject to additional commitments, up to $50m of additional revolver or term-loan capacity.
- The U.S. defined benefit pension plan was underfunded by $151.1m at December 31, 2008. Estimated minimum U.S. plan contributions are $23.5m in 2010, $33.0m in 2011 and $29.9m in 2012; management also expected a $2.6m contribution in Q4 2009. The company identifies pension funding obligations as a significant risk.
- A major Broadspire client notified the company it would not renew its contract when it expires in December 2009. That client represented approximately $5.5m of Q3 and $16.1m of nine-month 2009 revenue.
- A new sublease for part of the Broadspire office in Plantation, Florida was expected to generate a Q4 2009 loss of about $1.8m and potentially up to $2.6m of additional losses in 2010 if options are exercised. The company estimated total cash savings over the lease term of $10.2m–$13.0m.
- Earnout cash payments were estimated at $5.4m in Q4 2009 and $0.9m in Q2 2010. The company disclosed an unresolved arbitration with Platinum over a Broadspire purchase-price adjustment; it could not determine the outcome, though management did not then expect to fund certain separate pre-acquisition proceedings.
- Risks include claim-volume and outsourcing changes, economic and employment conditions, foreign-exchange movements, customer credit and contract retention, pension funding, debt covenant compliance, catastrophe exposure, and possible further goodwill or intangible impairments.
Important facts for investors to verify
- Whether Broadspire can stabilize case volumes and operating performance, particularly after the client contract expiration.
- The assumptions behind the $140.9m impairment and potential for further impairment.
- Liquidity, covenant headroom, borrowing costs and the impact of the Fifth Amendment.
- Actual pension contributions and changes in plan funding requirements.
- Conversion of Legal Settlement Administration backlog into revenue and cash, and realization of expected sublease savings.
- Developments in the Platinum arbitration and the timing and amount of earnout payments.