CRD-A

Crawford & Company (CRDA/CRDB) - Q3 2007 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for the period ended September 30, 2007. Crawford & Company is the world's largest independent provider of claims management solutions to insurance companies and self-insured entities, operating globally with over 700 locations. The company operates through four segments: U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration.

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 20% year-over-year, driven primarily by the Broadspire segment (up 129.7% due to the BMSI acquisition) and International Operations (up 22.8%). Conversely, U.S. Property & Casualty revenues declined 17.6% due to lower catastrophe activity and the sale of subrogation/investigation businesses.
• Profitability Decline: Despite revenue growth, Net Income fell 21.4%. This was caused by a significant increase in Corporate Interest Expense ($13.2M in 2007 vs. $2.4M in 2006) and higher unallocated corporate costs. Additionally, the prior year included a $3.1M gain on the sale of the investigations business, which was absent in 2007.
• One-Time Gains: The 2007 results included a $4.8M pre-tax gain on the sale of the former corporate headquarters (recognized upon leaseback expiration) and a $4.0M pre-tax gain on the sale of the U.S. subrogation business.
• Cash Flow: Operating cash flow dropped significantly to $3.9M from $31.0M, primarily due to a $12.9M increase in unbilled revenues (largely in the U.K. due to flood events) and a decrease in deferred revenues.

Guidance, Outlook, and Risks

• Dividends: The company paid no dividends in the first nine months of 2007. Management does not anticipate paying cash dividends for the fourth quarter of 2007 due to pension funding requirements and credit agreement covenants.
• Debt Covenants: The company is subject to a $12.5M annual limit on cash dividends under its Credit Agreement. It remains in compliance with financial covenants, but failure to meet them could trigger a default.
• Interest Rate Risk: The company entered a three-year interest rate swap in May 2007 to hedge $175M of floating-rate debt. A 1% increase in market rates would increase annual pre-tax interest expense by less than $500,000.
• Legal Risks: The company faces potential wage and hour litigation and claims related to self-insured risks. Management believes provisions are adequate but notes the potential for material adverse effects if litigation outcomes are unfavorable.
• Outlook: Management expects the effective annual income tax rate for 2007 to be 36.4%, lower than the 37.6% rate in 2006, due to the mix of domestic and international income.

Investor Verification Checklist

• Dividend Policy: Verify the impact of the credit agreement covenants on future dividend payments, given the current suspension.
• Working Capital: Investigate the $19.3M increase in unbilled revenues to ensure collectability, particularly regarding U.K. flood-related claims.
• Interest Expense: Monitor the trajectory of corporate interest expense, which has risen sharply due to higher debt levels and the cost of the BMSI acquisition financing.
• Segment Margins: Review the margin compression in the U.S. Property & Casualty segment (down to 4.1% operating margin) versus the recovery in Broadspire (up to 1.7% from a loss).
• Pension Obligations: Assess the funding status of the defined benefit pension plans, which are cited as a constraint on capital allocation and share repurchases.