Crawford & Company — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; balance-sheet comparisons are to December 31, 2008. Crawford provides claims management and related services through U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration. Unless stated otherwise, figures below are in U.S. dollars.
Financial results and material changes
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue before reimbursements | $249.7 million | $263.3 million | $485.7 million | $518.8 million |
| Total revenue, including reimbursements | $271.6 million | $289.3 million | $521.9 million | $563.9 million |
| Net income (loss) attributable to Crawford | $(88.1) million | $7.9 million | $(85.0) million | $17.0 million |
| Basic and diluted EPS | $(1.70) | $0.16 | $(1.65) | $0.33 |
| Operating cash flow | Not separately provided for the quarter | $3.7 million | $11.1 million |
- Revenue before reimbursements declined 5.2% in Q2 and 6.4% in the first half. GAAP results included a preliminary, noncash $94 million goodwill impairment charge related to Broadspire. Excluding that charge, management reported attributable net income of $5.9 million for Q2 and $9.0 million for the first half, versus $7.9 million and $17.0 million in the comparable 2008 periods.
- The first-half results also included $1.8 million of restructuring costs. Management cited lower Broadspire revenue, higher costs for the frozen U.S. pension plan, currency translation effects, and restructuring costs as factors behind weaker results; corporate interest expense declined to $7.1 million from $9.1 million.
- Segment operating results for Q2 / first half, respectively: U.S. Property & Casualty earned $6.2 million / $12.4 million, up from $5.1 million / $11.0 million; International Operations earned $8.2 million / $15.7 million, down from $10.4 million / $19.4 million; Broadspire recorded losses of $0.6 million / $2.6 million, versus earnings of $2.5 million / $4.3 million; and Legal Settlement Administration earned $4.3 million / $5.8 million, versus $3.1 million / $5.6 million. These are the company’s segment operating earnings measure, not GAAP net income.
- International revenue before reimbursements fell 15.3% in Q2 and 15.1% year to date in reported dollars, but management said it grew 6.1% and 6.6%, respectively, on a constant-currency basis. U.S. Property & Casualty benefited from catastrophe work; Legal Settlement Administration gained from new bankruptcy and class-action projects.
Financial position, liquidity, and debt
- At June 30, cash and cash equivalents were $58.1 million, down from $73.1 million at year-end; working capital was $70.6 million, about $1.0 million higher than at December 31. Current assets were $326.5 million and current liabilities $255.9 million.
- Short-term borrowings were $12.7 million. Long-term borrowings, including current installments and capital leases, totaled $182.4 million; combined borrowings were approximately $195.1 million. The company reported $69.1 million of unused revolving-credit availability after a $19.9 million letter-of-credit commitment. The $100 million revolving facility expires October 30, 2011.
- Operating cash flow for the first half was $3.7 million, compared with $11.1 million in 2008. Investing activities used $12.5 million and financing activities used $4.4 million. Cash declined by $15.0 million over the period.
- Total shareholders’ investment fell to $95.6 million from $180.4 million at year-end, primarily reflecting the reported loss and other comprehensive loss. Goodwill declined to $161.0 million from $251.9 million, primarily due to the impairment charge.
- The company said it was in compliance with all Credit Agreement covenants at June 30 and believed existing resources, operating cash generation, and borrowing sources would fund operations for the next 12 months. Management reported no material off-balance-sheet arrangements other than operating leases.
Outlook, risks, contingencies, and unusual items
- No formal earnings or revenue guidance is provided. Management estimated a 26% effective annual tax rate for 2009 before discrete items and the nondeductible goodwill impairment charge.
- The Broadspire impairment was preliminary: the detailed valuation was incomplete, and any revision was expected to be recorded in Q3 2009. The company did not expect an additional charge above $10 million. The charge was not tax-deductible and, management said, did not breach credit covenants.
- Management identified the underfunded U.S. and U.K. defined-benefit pension plans as a significant funding obligation. The U.S. plan was underfunded by $151.1 million at December 31, 2008. Estimated minimum U.S. plan contributions include $23.3 million in 2010, $36.6 million in 2011, and further annual contributions through 2017. First-half contributions to U.S. and U.K. plans totaled approximately $7.4 million.
- A major Broadspire client notified the company it would not renew its contract when it expires in December 2009. First-half revenue and segment operating earnings associated with that client were approximately $10.6 million and $1.1 million; the company did not expect a material effect over the remaining contract period.
- The company and former Broadspire owner Platinum disputed a purchase-price adjustment in arbitration; the company said the possible outcome could not be determined. Other legal claims arise in the ordinary course, and management said provisions for self-insured risks were adequate. The filing also describes potential payments under acquisition earnouts of approximately $5.1 million in Q3 2009 and $0.9 million in Q2 2010.
- Key risks include lower claim referrals and employment levels, client retention and collections, foreign-exchange movements, pension funding requirements, credit availability and covenant compliance, competition, and further goodwill impairment. Management noted that the insurance market was transitioning toward harder conditions and that future claim volumes were difficult to predict.
- After quarter-end, the board committee reduced potential cash payments under the Short-Term Incentive Plan by 50% from previously approved amounts. The company also suspended certain 2009 executive retirement-plan matching contributions and service credits. The filing reports that disclosure controls were effective; the independent accountant’s interim review was not an audit.
Important facts for investors to verify
- Final Broadspire goodwill valuation and any Q3 impairment adjustment.
- Broadspire operating performance, claim volumes, cost actions, and the financial impact of the nonrenewed client contract.
- Cash generation, revolver availability, covenant compliance, and progress funding the pension plans.
- International operating trends after separating currency effects from underlying performance.
- Outcome and potential financial effect of the Platinum arbitration, earnout payments, and other contingencies.