Crawford & Company — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2012. Crawford provides claims management, business process outsourcing, medical management, and legal settlement administration services in more than 70 countries. Its four reporting segments are Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. International subsidiaries (other than Canada and the Caribbean) are reported on a two-month lag. The interim financial statements are unaudited and were reviewed by Ernst & Young.
Key financial metrics
Amounts below are in millions, except per-share data. “Revenue before reimbursements” excludes client-reimbursed expenses.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue before reimbursements | $293.8 | $291.7 | $561.6 | $576.8 |
| Total revenue | $319.0 | $314.1 | $606.4 | $618.2 |
| Income before income taxes | $18.3 | $19.7 | $27.9 | $37.6 |
| Net income attributable to Crawford shareholders | $10.4 | $13.5 | $16.5 | $25.6 |
| Diluted EPS, Class A / Class B | $0.19 / $0.18 | $0.25 / $0.25 | $0.31 / $0.29 | $0.48 / $0.48 |
| Operating cash flow | Not separately reported for the quarter | $(26.4) | $(33.2) |
- Q2 revenue before reimbursements grew 0.7% (1.7% in constant currency), while first-half revenue fell 2.6% (2.0% in constant currency). Total revenue included $25.2 million of Q2 reimbursements and $44.8 million for the first half.
- Shareholder-attributable income declined about 23% in Q2 and 36% in the first half year over year. Q2 diluted EPS was $0.19 for Class A and $0.18 for Class B; first-half diluted EPS was $0.31 and $0.29, respectively.
- For the first half, investing cash outflow was $16.5 million, primarily property, equipment, and software spending. Financing provided $12.0 million, including increased short-term borrowings; cash declined $32.0 million to $45.7 million.
- At June 30, current assets were $389.0 million and current liabilities $308.1 million; working capital was approximately $80.9 million. Long-term debt and capital leases, including current installments, totaled approximately $209.8 million. Short-term borrowings were $21.3 million.
- The filing reports segment operating earnings, not consolidated operating income: Q2 Americas $1.4 million (1.8% margin), EMEA/AP $11.8 million (12.5%), Broadspire loss of $0.3 million, and Legal Settlement Administration $15.8 million (25.3%). First-half margins were 0.6%, 9.9%, negative 0.2%, and 24.0%, respectively.
Material changes versus comparable periods
- Americas revenue fell 19.0% in Q2 and 14.3% in the first half; case volumes declined 14.0% and 12.4%, respectively. Management attributed weakness mainly to fewer weather-related claims, lower Canadian referrals, and reduced outsourcing by some clients. Americas operating earnings dropped sharply.
- EMEA/AP revenue increased 7.5% in Q2 and 5.1% in the first half, supported by Thailand flood claim work, Australia activity, and growth in parts of continental Europe. EMEA/AP operating earnings improved.
- Broadspire revenue rose 3.5% in Q2 and 2.2% for the first half. Cost controls and higher employee utilization reduced operating losses versus 2011.
- Legal Settlement Administration revenue rose 23.0% in Q2 but was down 0.4% for the first half. First-half operating earnings declined, and margins were lower, reflecting the mix and costs of the Gulf Coast claims projects.
- Q2 and first-half results included special charges of $1.6 million and $2.5 million, respectively, for the outsourcing transition of parts of U.S. technology infrastructure; there were no such charges in 2011.
Outlook, management commentary, risks, and unusual items
- No full-year earnings or revenue guidance is provided. Management estimated a 2012 effective tax rate of 37%–39% before discrete items and expected approximately $0.3 million of additional technology-transition charges in Q3. A July U.K. tax-rate change was expected to add about $0.7 million of tax expense in Q3.
- Legal Settlement Administration had awarded-project backlog of approximately $73.0 million at June 30, of which an estimated $59.0 million was expected to be recognized in the remainder of 2012. Thailand flood-related activity was expected to remain high into 2013, but timing and revenue were not assured.
- The Deepwater Horizon Gulf Coast Claims Facility work transitioned to administration of the class action settlement after preliminary court approval in May 2012. The duration and resulting revenue are uncertain.
- Cash use in operations reflected increased receivables and unbilled revenue, partly offset by lower pension contributions than in 2011. Receivables and unbilled revenue increased $49.7 million from year-end. Cash held abroad was $41.4 million; management said it intended to reinvest foreign funds outside the U.S., and taxable repatriation could be required if circumstances change.
- U.S. and U.K. defined benefit plans are significantly underfunded. First-half 2012 contributions were $4.6 million to the U.S. plan and $3.4 million to the U.K. plan, compared with $20.0 million and $3.5 million, respectively, in the first half of 2011. Management was evaluating the effect of MAP-21 on future U.S. plan contributions.
- Liquidity included $80.2 million of unused credit-line capacity at June 30, including $18.8 million of outstanding letters of credit. Long-term borrowings were variable-rate; interest expense was lower year over year following the December 2011 credit facility. Future dividends remain subject to cash needs and credit-facility covenants.
- Key risks cited include claim-volume and catastrophe variability, economic and currency movements, competition, client outsourcing and contract-renewal decisions, receivable collection, pension funding, financing covenant compliance, staffing, technology transition and cybersecurity, and potential goodwill or intangible-asset impairment. The company also faces claims and litigation in its ordinary course of business and employment matters; management said it had made provisions for known and foreseeable risks.
- After quarter-end, the board increased quarterly dividends to $0.04 per Class A share and $0.03 per Class B share, payable August 30, 2012. A new share repurchase authorization permits purchases of up to 2 million shares through May 2015; 57,000 shares had been repurchased by June 30.
Important facts for investors to verify
- Whether Americas case volumes and margins recover, particularly if weather-related claims remain subdued or clients retain claims in-house.
- Whether Thailand and Deepwater Horizon project work converts into the anticipated revenue and backlog, and how project mix affects margins.
- Receivable and unbilled-revenue collectability and days outstanding, given their increase and the negative operating cash flow.
- Future pension contributions, the effect of MAP-21, and the company’s ability to meet credit-facility covenants and maintain liquidity.
- Execution and total cost of the U.S. technology outsourcing transition, including the expected additional Q3 charge.
- Dividend and repurchase plans relative to cash generation, borrowings, and pension obligations.