Crawford & Company — Q2 2011 Form 10-Q
Business context and period. Crawford provides claims management, business process outsourcing, and legal settlement administration services in more than 70 countries. This unaudited report covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. The company realigned its reporting segments in Q1 2011; prior-period segment results were recast, with no effect on consolidated results.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue before reimbursements | $291.7 million | $238.2 million | $576.8 million | $474.4 million |
| Total revenue | $314.1 million | $256.0 million | $618.2 million | $508.0 million |
| Income (loss) before tax | $19.7 million | $(1.6) million | $37.6 million | $2.3 million |
| Net income attributable to Crawford shareholders | $13.5 million | $(2.5) million | $25.6 million | $0.5 million |
| Diluted EPS | $0.25 | $(0.05) | $0.48 | $0.01 |
- Revenue before reimbursements rose 22.5% in Q2 and 21.6% in the first half; management cited growth in Legal Settlement Administration, Americas, and EMEA/AP, partly offset by Broadspire declines. In constant dollars, growth was 18.8% and 19.3%, respectively.
- Q2 operating earnings by segment: Americas $10.2 million, EMEA/AP $7.6 million, Broadspire loss $3.1 million, and Legal Settlement Administration $14.8 million. The strong legal-settlement results reflected a special project.
- SG&A increased 13.4% in Q2 and 13.9% year to date, driven partly by professional-indemnity self-insurance costs, bad debt expense, professional fees, severance, and incentive compensation.
- Cash from operations was a use of $33.2 million in the first half, versus a $29.6 million use in 2010. Cash and equivalents fell to $37.2 million from $93.5 million at year-end; operating cash use reflected pension contributions and a $41.3 million net increase in accounts receivable and unbilled revenue.
- Investing activities used $18.8 million, including $6.9 million for acquisitions. Financing activities used $6.1 million; the company paid $2.1 million in dividends and made $3.3 million in term-debt payments.
- Working capital was $99.4 million. Long-term debt and capital leases totaled $220.5 million, including current installments; the $100 million revolving facility had $79.9 million of availability after letters of credit. Total assets were $823.5 million and shareholders’ investment was $131.6 million.
- The company paid $20.0 million and $3.5 million into its U.S. and U.K. underfunded pension plans, respectively, during the first half. Pension-related cash needs remain material.
Changes, outlook, and risks
- Segment trends: Americas and EMEA/AP benefited from weather-related activity and higher case volumes. Broadspire revenue before reimbursements fell 5.3% in Q2 and 4.4% year to date; management cited weak U.S. employment, lower-value claim mix, and a low-rate special project. Legal Settlement Administration revenue increased sharply year over year.
- Outlook: No consolidated revenue or earnings guidance is provided. Management estimated a 2011 effective tax rate of approximately 31% before discrete items, and said existing resources and borrowing capacity should cover operations for the next 12 months. It expected the legal-administration special project to continue through 2011 at a lower level than in the first half and to run until an expected August 2013 end date. Of the $75.2 million project backlog at quarter-end, $55.1 million was expected to be recognized during the rest of 2011.
- Subsequent event: A July 25, 2011 arbitration decision is expected to produce a $7.0 million pretax gain ($5.8 million after tax) in Q3, partly treated as a purchase-price adjustment.
- Key risks: Claim referrals depend on economic and employment conditions, insurance-market cycles, outsourcing decisions, and unpredictable catastrophes. Other risks include underfunded U.S. and U.K. pensions, receivables collection, foreign exchange, client retention, financing covenants, staffing, technology implementation, and potential goodwill impairment. Management reported no material change in market-risk exposure.
- Claims-related litigation and employment-law claims may create defense costs or liabilities; management said provisions for known and foreseeable risks were adequate. The company also disclosed an indemnified set of legacy Broadspire proceedings and did not record loss contingencies for those matters.
- Ernst & Young reviewed the interim financial statements and reported that it was not aware of material modifications needed for GAAP conformity; this was a review, not an audit. Management concluded disclosure controls were effective, and reported no material change in internal control over financial reporting.
Investor verification priorities
- Assess the sustainability and concentration of Legal Settlement Administration’s special-project revenue, earnings, and backlog conversion.
- Track receivables, unbilled revenue, allowance for doubtful accounts, and collection timing given their contribution to operating cash outflow.
- Review pension funding requirements, plan underfunding, and the effect of future contributions on liquidity and dividends.
- Confirm debt-covenant compliance, revolver availability, and any potential excess-cash-flow repayment obligations.
- Verify realization and timing of the Q3 arbitration gain and monitor Broadspire’s path toward improved profitability.