Crawford & Company — Q1 2015 Form 10-Q
Business context and period. Claims management, business process outsourcing and consulting provider serving insurance and self-insured clients in more than 70 countries. This filing covers the three months ended March 31, 2015, compared with Q1 2014; balance-sheet comparisons are with December 31, 2014. The statements are unaudited and were reviewed, not audited, by Ernst & Young. Results of most international operations are reported on a two-month lag.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue before reimbursements | $287.8m | $275.3m; up 4.5% |
| Total revenue | $306.6m | $289.4m; up 6.0% |
| Income before taxes | $5.5m | $10.9m; down 49.2% |
| Net income | $3.3m | $6.6m; down 50.2% |
| Net income attributable to Crawford shareholders | $3.0m | $6.7m; down 55.1% |
| EPS, diluted | Class A $0.06; Class B $0.04 | Class A $0.12; Class B $0.11 |
| Net cash used in operating activities | $15.6m | $65.3m used |
| Cash and cash equivalents | $40.8m | $52.5m at Dec. 31, 2014 |
| Long- and short-term borrowings, including current debt and leases | $245.6m | $156.8m at Dec. 31, 2014 |
Net income was about 1.1% of total revenue, versus about 2.3% a year earlier. Operating cash outflow improved year over year, primarily on better receivable collections, higher deferred revenue and lower payments of accrued liabilities. Investing cash outflow was $73.8m, including $66.1m net cash paid for GAB Robins; financing provided $81.2m, largely reflecting increased borrowings. Working capital was approximately $114.0m, up $6.0m from year-end. The credit facility had $127.1m available, including the effect of $17.2m in outstanding letters of credit.
Segments and changes versus prior period
- Americas: Revenue before reimbursements rose 1.8% to $89.5m, while segment operating earnings fell 28.2% to $5.0m. Cases received declined 16.0%, mainly from fewer weather-related and high-frequency, low-severity claims. An insurer outsourcing project supported revenue but required higher staffing costs.
- EMEA/AP: Revenue rose 13.6% to $91.3m, including $16.3m from GAB Robins; excluding acquisition effects and currency changes, revenue increased 1.3%. Operating earnings fell 19.6% to $1.5m, reflecting reduced U.K. weather-related activity and other cost pressures.
- Broadspire: Revenue increased 7.6% to $69.7m and operating earnings rose 76.6% to $3.5m. Case volumes increased 32.8%, helped by new and existing clients, medical-management referrals and the transfer of accident-and-health cases from Americas.
- Legal Settlement Administration: Revenue declined 11.8% to $37.4m as the Deepwater Horizon settlement and other large projects wound down. Operating earnings were nearly flat at $5.0m, with margin improving to 13.2% from 11.7%. Awarded project backlog was $102.7m; approximately $82.0m was expected to be recognized during the rest of 2015.
Total segment operating earnings declined to $15.0m from $15.8m. Higher unallocated corporate costs, interest expense, intangible amortization and new special charges further reduced pretax income. Foreign-exchange movements reduced Americas revenue by approximately $4.2m and EMEA/AP revenue by approximately $6.4m. Reimbursements increased 34.5%; these generally offset related expenses and do not affect operating earnings.
Liquidity, debt and other balance-sheet items
- Cash declined by $11.6m from year-end. Of Q1-end cash, $13.7m was held in the U.S. and $27.1m in foreign subsidiaries; management said foreign cash was available for general corporate purposes, while noting potential U.S. tax consequences if repatriated.
- Debt and capital leases rose substantially, primarily due to borrowings used to fund the GAB Robins acquisition. The company pays variable-rate interest, so future interest expense depends on rates and borrowing levels.
- Goodwill rose to $148.6m from $131.9m and acquired intangible assets to $112.1m from $75.9m, principally reflecting the acquisition.
- Defined-benefit pension liabilities were $133.3m at March 31. The company expected to contribute approximately $6.0m to U.S. plans and $5.1m to U.K. plans during the rest of 2015. It reported no additional required contributions for the remainder of the year, but expected to make these contributions.
Outlook, management commentary and risks
- Management estimated a 2015 effective tax rate of approximately 39%, after known discrete items; this is not earnings guidance.
- Management expected Legal Settlement Administration activity, including Deepwater Horizon work, to continue at a reduced rate through the rest of 2015. The company cautioned that project timing and replacement revenue are uncertain.
- The Manila Global Business Services Center is expected to phase in through 2018. Management estimated approximately $9.0m of 2015 charges and approximately $2.0m of initial 2015 savings; timing and realization of savings are not assured. Q1 included $1.1m of related special charges.
- The company expected approximately $7.0m of special charges for GAB Robins integration and a further estimated $4.0m pretax charge in 2015 for restructuring in EMEA/AP and Americas.
- GAB Robins, acquired in December 2014 for $71.8m, contributed $16.3m of Q1 revenue; its earnings contribution was not material. Purchase-price allocation remained preliminary, and integration synergies and savings were not assured.
- Material risks include claim-volume and weather variability, project-based legal-settlement revenue, foreign exchange and interest rates, client retention and collections, acquisition integration, pension funding, financing availability and covenant compliance, and achieving cost savings. The company reported no material change in market-risk exposure since year-end and no material off-balance-sheet arrangements apart from operating leases.
- Management concluded disclosure controls were effective at providing reasonable assurance; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow and collections remain adequate as unbilled revenue rises and debt remains elevated following the acquisition.
- GAB Robins’ integration progress, final purchase-price allocation, and whether anticipated synergies offset added amortization, interest and integration costs.
- Legal Settlement Administration backlog conversion and replacement of revenue as Deepwater Horizon and other large projects wind down.
- Whether Manila-center savings and planned restructuring benefits materialize against expected charges, and whether further costs arise.
- Actual pension contributions, variable-rate borrowing costs, credit-facility availability and compliance with financing covenants.