Crawford & Company 10-Q Summary: Period Ended September 30, 2001
Business Context and Reporting Period
This is a quarterly report (Form 10-Q) for Crawford & Company, a provider of claims processing and program administration services, for the period ended September 30, 2001. The company operates in two segments: Domestic Operations (U.S.) and International Operations (64 other countries). The financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2001 | Q3 2000 | 9 Months 2001 | 9 Months 2000 |
|---|---|---|---|---|
| Revenues | $181.4 million | $180.1 million | $547.4 million | $542.0 million |
| Net Income | $6.7 million | $9.7 million | $23.6 million | $30.7 million |
| Diluted EPS | $0.14 | $0.20 | $0.49 | $0.63 |
| Operating Income | $12.8 million | $17.7 million | $44.6 million | $55.4 million |
| Cash & Equivalents | $14.8 million | $22.1 million (Dec 2000) | N/A | |
| Short-term Debt | $40.3 million | $44.4 million (Dec 2000) | N/A | |
| Long-term Debt | $36.5 million | $36.7 million (Dec 2000) | N/A |
Liquidity: Working capital decreased by $3.3 million to approximately $102.8 million. Net cash provided by operating activities for the nine months ended September 30, 2001, was $35.5 million, down from $45.6 million in the prior year.
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 31% for the quarter and 23% for the nine-month period compared to 2000. Operating margins compressed due to rising compensation costs and lower case volumes.
- Revenue Mix: Total revenue remained relatively flat. Domestic revenue grew slightly (1.4% in Q3), driven by class action services (+21.4%), while insurance company referrals remained flat and self-insured entity revenue dipped. International revenue declined 1.3% in Q3, impacted by a 5.8% drop in case volume and a strong U.S. dollar.
- Cost Pressures: Compensation and fringe benefits as a percentage of revenue increased significantly. Domestic compensation rose to 62.8% of revenue (from 60.2%), and international compensation rose to 66.2% (from 65.0%). Increases were driven by merit raises and higher self-insured medical costs.
- Acquisitions: The company acquired two loss adjusting firms in Canada and Holland in August 2001 for $5.3 million, adding $4.5 million in goodwill.
Outlook, Risks, and Contingencies
- Contract Non-Renewal: A major domestic insurer will not renew a medical bill review contract at December 31, 2001. This contract generated $11.4 million in revenue and $1.3 million in pretax earnings for the first nine months of 2001. Q4 revenue from this contract is expected to be approximately $2.5 million.
- Legal Investigation: The company is cooperating with a federal grand jury investigation regarding billing practices in Domestic Claims Management and Healthcare Management Services dating back to 1992. Legal fees totaled $2.0 million for the nine months ended September 30, 2001. The financial impact remains undetermined.
- Accounting Changes: Adoption of SFAS 142 (Goodwill) on January 1, 2002, will cease goodwill amortization, expected to increase net income by approximately $2.7 million annually ($0.06 per share), excluding potential impairment charges.
- Foreign Exchange: A hypothetical 10% strengthening of the U.S. dollar would decrease pretax income by approximately $1.0 million for the nine-month period. The company does not hedge foreign currency exposure.
Investor Verification Checklist
- Verify the financial impact of the non-renewal of the major domestic insurer contract in Q4 2001 and beyond.
- Monitor the status and potential financial exposure of the federal grand jury investigation into billing practices.
- Assess the sustainability of operating margins given the rising trend in compensation costs as a percentage of revenue.
- Review the performance of class action services, which provided a significant revenue boost but are noted as volatile.
- Confirm the adequacy of restructuring reserves ($2.1 million remaining) for lease terminations and employee separations.