Crawford & Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Crawford provides claims management, business process outsourcing and legal settlement administration services in more than 70 countries. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparator |
|---|---|---|
| Revenue before reimbursements | $286.3 | $267.8; up 6.9% |
| Total revenue, including reimbursements | $307.1 | $287.3; up 6.9% |
| Income before taxes | $14.7 | $9.6; up 52.6% |
| Net income | $9.7 | $6.2; up 55.6% |
| Net income attributable to Crawford shareholders | $9.7 | $6.1; up 60.6% |
| Diluted EPS | Class A $0.18; Class B $0.17 | Class A $0.12; Class B $0.11 |
| Cash from operating activities | $(41.4) | $(38.2) |
| Cash and cash equivalents | $59.4 at March 31 | $71.2 at December 31, 2012 |
| Working capital | $59.4 at March 31 | Up $9.6 from December 31, 2012 |
| Short- and long-term borrowings, including current installments and capital leases | $205.1 at March 31 | $166.4 at December 31, 2012 |
Revenue before reimbursements grew 6.9%; the filing does not present a consolidated operating margin as a headline measure. Net income attributable to shareholders was approximately 3.4% of revenue before reimbursements. Cash used in operations exceeded net income, principally reflecting payments of accrued liabilities and working-capital demands. Investing activities used $6.0 million, while financing activities provided $35.4 million, including increased short-term borrowings. The company reported $105.0 million of available balance under its credit line, including $17.8 million of outstanding letters of credit.
Material changes and segment performance
- Americas: Revenue before reimbursements rose 8.7% to $84.2 million; segment operating earnings were $3.2 million versus a $0.5 million loss. Superstorm Sandy claims and Contractor Connection growth contributed; a $2.3 million gain on sale of Latin American customer-contract rights also benefited results.
- EMEA/AP: Revenue increased 7.1% to $87.6 million and operating earnings rose 22.2% to $6.8 million. The company cited lower bad-debt expense and a $0.9 million Italian-client performance bonus. Case volumes declined 2.4% overall.
- Broadspire: Revenue declined 4.3% to $57.8 million and the segment recorded a $1.8 million operating loss, compared with approximately break-even results a year earlier. Lower medical-management revenue and workers’ compensation claims were cited; some additional reported cases generated little or no revenue.
- Legal Settlement Administration: Revenue rose 17.9% to $56.7 million and operating earnings increased 12.4% to $12.0 million; operating margin eased to 21.2% from 22.2%. Higher outsourced-service costs weighed on margin.
Consolidated net income also benefited from the absence of the $0.9 million pretax special charge recorded in Q1 2012 for technology-outsourcing transition costs. Q1 2013 included no special charges. Other comprehensive income was $1.2 million, including $2.1 million of pension-related amortization and a $0.9 million foreign-currency translation loss.
Outlook, commentary and risks
- The filing provides no formal earnings or revenue guidance. Management estimated an approximately 33% effective tax rate for 2013 before discrete items.
- Management expected elevated Thailand flood-claim activity for the remainder of 2013, but gave no assurance about its timing or revenue contribution. Deepwater Horizon settlement work was expected to continue through 2013 at a reduced rate; timing and duration were uncertain.
- Legal Settlement Administration had an awarded-project backlog of approximately $135 million at March 31, 2013, of which an estimated $90 million was expected to be recognized during the rest of 2013. Project timing and revenue recognition can vary.
- Required 2013 contributions to the U.S. defined-benefit pension plan included $3.1 million per remaining quarter plus $7.8 million in September. The company also expected U.K. contributions of approximately $1.7 million per quarter for the rest of the year. Pension plans were described as significantly underfunded.
- Risks include variable claims volumes and catastrophe activity, client retention and outsourcing decisions, collection of receivables, foreign-exchange and interest-rate movements, pension funding needs, financing availability and covenant compliance, and the project-based nature of settlement work. The company reported no material change in market-risk exposures from year-end.
- Management concluded disclosure controls were not effective at March 31 because a previously identified material weakness in income-tax accounting remained under remediation. The company expected to complete remediation during 2013; completion was not yet established in this filing.
- Contingencies include ordinary-course claims and employment-related litigation; management said it had made adequate provisions for known and foreseeable risks. A new 10-year Berkeley Heights, New Jersey lease was expected to begin July 1, 2013, with approximately $6.9 million in total lease payments, plus certain taxes and operating costs.
Most important facts for investors to verify
- Whether operating cash flow improves and short-term borrowing declines as annual compensation, pension and other payments pass; cash fell while total borrowings rose during the quarter.
- How much reported earnings depended on the $2.3 million contract-rights gain, the $0.9 million client bonus, Sandy-related work and the absence of prior-year special charges.
- Whether Broadspire restores profitability and whether revenue trends improve in its medical-management and workers’ compensation businesses.
- Whether the $135 million settlement-administration backlog converts to revenue on the estimated schedule, and how Deepwater Horizon activity changes.
- Progress and evidence supporting remediation of the income-tax accounting material weakness, as disclosure controls were still deemed ineffective.
- Actual pension contributions, funding requirements and compliance with credit-facility covenants and dividend restrictions.
The interim financial statements were reviewed by Ernst & Young LLP, not audited; the reviewer reported no material modifications identified in its review.