Cunningham Lindsey Group Inc.
TSX : LIN

Cunningham Lindsey Group Inc.

November 01, 2007 17:43 ET

Cunningham Lindsey Group Inc.: Financial Results for Third Quarter 2007

TORONTO, ONTARIO--(Marketwire - Nov. 1, 2007) -

(Note: All dollar amounts in this press release are expressed in Canadian dollars, unless otherwise noted.)

Cunningham Lindsey Group Inc. (TSX:LIN) today announced its third quarter results for 2007. Consolidated revenues for the quarter ended September 30, 2007 increased by approximately $12.3 million to $115.7 million compared to the quarter ended September 30, 2006. EBITDA(1) decreased by approximately $0.7 million compared to the third quarter of 2006, to $4.6 million. Net loss (before goodwill impairment) for the third quarter of 2007 was $0.6 million, ($0.03 loss per share) compared to a loss of $1.1 million ($0.05 loss per share) for the third quarter of 2006.

On October 30, 2007, we entered into an agreement (the "Investment Agreement") with Trident IV, L.P. and certain affiliated entities, which are private equity funds managed by Stone Point Capital LLC. Pursuant to this agreement, Stone Point will acquire for approximately $80 million a 51% interest in a newly-formed holding company that will own our operating businesses. Fairfax Financial Holdings Limited will invest approximately $30 million and our senior management will be investing as well. The proceeds from these investments will be used for working capital and to repay our $72.8 million unsecured term loan facility. In connection with the foregoing, Fairfax has agreed to make a cash offer to acquire our outstanding subordinate voting shares that it does not currently own. We will hold a special meeting of shareholders to consider the proposed transaction, which is also subject to applicable regulatory approvals and customary closing conditions. On completion of the proposed transaction, we will indirectly own approximately 45% of the Cunningham Lindsey operating companies and a $125 million note, payable by the new holding company, with a maturity date that matches the maturity of our $125.0 million 7% unsecured Series "B" debentures due June 16, 2008.

Using the enterprise fair value established by the Investment Agreement, we conducted a goodwill impairment test. Based on applicable accounting rules, we recorded a goodwill impairment of $111.0 million. As a result, the net loss for the third quarter was $111.6 million ($5.07 loss per share). After recording the goodwill impairment, as of September 30, 2007 we have shareholders' equity of ($37.5) million. On closing of the proposed transaction, the accounting entries arising from the sale and the cash investment described above will result in positive shareholders' equity.

Mr. Jan Christiansen, President & CEO of Cunningham Lindsey Group Inc. stated, "We have had two major events that have impacted our financial statements for the third quarter of 2007. Firstly, we entered into an agreement which will result in an injection of cash of approximately $110 million into our operations. While the proposed transaction is very positive for the Company, GAAP dictated that we record a significant goodwill impairment charge in the third quarter.

(1) EBITDA (earnings before interest, taxes, depreciation, and amortisation) is defined as revenue from continuing operations less cost of service and selling, general and administration expenses, excluding depreciation and amortisation. EBITDA does not have a standard meaning prescribed by generally accepted accounting principles and may not be comparable to similar measures used by other companies.

Secondly in June and July of 2007, the United Kingdom experienced severe flooding over a wide geographical area, the magnitude of which has not been seen in over 60 years. The flooding generated over 25,000 flood claims for our CL United Kingdom operations. These are complicated claims requiring extensive project management. This had a significant impact on our financial results in the third quarter, and in general has resulted in increased revenue. However, due to the high, up-front costs incurred in servicing this type of claim, the flood claims caused a decrease in EBITDA in the third quarter and have also had a negative impact on our cash flow and debt levels. These up-front expenses include increased staffing costs for relocation and overtime, expenditures related to the opening of four new offices, as well as other significant resources.

Revenue and EBITDA for our operations in the United States decreased in the third quarter relative to the same period in 2006. This was primarily due to the lack of significant weather events, a reduction in outsourced claim activity and reduced demand for claims adjuster training in 2007 compared to 2006 and 2005.

Our operations in Canada doubled their EBITDA in the third quarter of 2007 compared to the same period in 2006. The increase in EBITDA was primarily due to investments in growth in their core claims adjusting business.

The decrease in EBITDA of our operations in Europe was primarily due to one-time employee-related costs.

The growth in revenue and EBITDA in CL International was primarily due to strong performance by their London based construction unit. Revenue for the third quarter was also positively impacted by additional claims arising from the cyclone in Oman earlier in the year."

Third Quarter 2007 Results

Total revenue for the third quarter of 2007 was $115.7 million, an increase of $12.3 million compared to $103.4 million of revenue for the third quarter of 2006. International operations and operations in the United Kingdom reported an increase in revenue compared to the third quarter of 2006. Our operations in Europe reported the same level of revenue for both the third quarters of 2007 and 2006. However, our operations in Canada and the United States reported a decrease in revenue compared to the third quarter of 2006. The increase in consolidated revenue was primarily due to the increased revenue from the United Kingdom flood claims.

EBITDA for the third quarter of 2007 was $4.6 million (4.0% of revenue), a decrease of $0.8 million from EBITDA of $5.4 million (5.2% of revenue) for the third quarter of 2006. Our operations in Europe, the United Kingdom, and the United States reported decreases in EBITDA compared to the third quarter of 2006. This was partially offset by an increase in EBITDA as reported by our International operations and operations in Canada. Corporate costs decreased compared to the third quarter of 2006. The decrease in EBITDA was primarily due to significant costs associated with increased claims volumes in CL United Kingdom.

Net loss (before the goodwill impairment) for the third quarter of 2007 was $0.6 million, ($0.03 loss per share) compared to a loss of $1.1 million ($0.05 loss per share) for the third quarter of 2006. Net loss for the third quarter was $111.6 million ($5.07 loss per share).

An income tax recovery of $0.4 million was recorded in the third quarter of 2007 compared to an income tax expense of $0.9 million in the third quarter of 2006, resulting in a year-over-year reduction in income taxes payable of $1.3 million. The income tax recovery for the third quarter of 2007 included an income tax recovery of $1.4 million (pound sterling0.7 million) arising from tax-deductible Corporate foreign exchange losses, as compared to a tax expense of $0.4 million (pound sterling0.2 million) for the third quarter of 2006.

Total interest expense in the third quarter of 2007 was $4.5 million, $0.2 million more than interest expense of $4.3 million in the third quarter of 2006. Total interest expense in the third quarter of 2007 included $2.2 million of interest incurred on our $125 million 7% unsecured Series "B" debentures and other long-term debt. The other $2.3 million of interest expense in the third quarter of 2007 consisted of $2.1 million of interest and amortisation of issue costs associated with our unsecured non-revolving loan facility, and $0.2 million interest on operating lines and other credit facilities. Interest expense in the third quarter of 2007 was higher than in the third quarter of 2006, primarily due to higher interest rates and an increase in commitment fees in respect of our $72.8 million non-revolving term facility.

Liquidity

Our operating activities used more cash during the third quarter of 2007 than they did in the third quarter of 2006. Cash used in operating activities was $5.3 million in the third quarter of 2007 compared to $0.6 million of cash provided in the third quarter of 2006.

Net debt (defined as total long-term debt, bank indebtedness and other loans, less cash) as at September 30, 2007 was $212.2 million compared to $198.4 million at December 31, 2006. The increase in net debt was to fund operating cash flow, in part driven by the cash required to service the large volume of flood claims in the United Kingdom.

Summary of Financial Results

The following table presents a summary of the financial results for the three and nine months ended September 30, 2007 and 2006:



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(in $000's except share and per share Third Quarter Year-to-date
amounts) 2007 2006 2007 2006
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Revenue
Canada 12,968 13,187 39,871 40,998
United States 13,699 14,901 42,628 47,338
United Kingdom 61,673 49,303 175,748 138,797
Europe 13,026 13,030 44,064 41,796
International 14,322 12,967 41,578 37,544
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Total Revenue 115,688 103,388 343,889 306,473
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EBITDA (1)
Canada 1,003 508 2,384 568
United States 652 1,013 1,837 3,126
United Kingdom 2,400 4,043 11,265 9,577
Europe (1,205) (825) (910) (439)
International 2,351 1,946 5,816 6,349
Corporate (580) (1,322) (3,052) (4,443)
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Total EBITDA 4,621 5,363 17,340 14,738
Depreciation and amortisation expense (1,145) (1,260) (3,516) (3,726)
Interest expense (4,474) (4,336) (13,135) (12,926)
Goodwill impairment (110,962) - (110,962) -
Profit on sale of asset held for sale - - 2,352 -
Income tax recovery (expense) 398 (901) 448 1,403
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Net loss (111,562) (1,134) (107,473) (511)
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Basic and diluted net (loss) earnings
per share $(5.07) $(0.05) $(4.88) $(0.02)
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Total shares outstanding (000) (2) 22,093 22,093 22,093 22,093
Weighted average shares (000) 22,021 22,014 22,021 21,981
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(1) EBITDA (earnings before interest, taxes, depreciation, and amortisation) is defined as revenue from continuing operations less cost of service and selling, general and administration expenses, excluding depreciation and amortisation. EBITDA does not have a standard meaning prescribed by generally accepted accounting principles and may not be comparable to similar measures used by other companies.

(2) As at September 30, 2007, there are 19,919,968 subordinate voting shares and 2,172,829 multiple voting shares issued and outstanding.

About Cunningham Lindsey

Cunningham Lindsey Group Inc. is one of the leading insurance loss-adjusting groups worldwide. Through its operating subsidiaries, Cunningham Lindsey Group provides a wide range of independent insurance claims services, including claims adjusting, appraisal and claims and risk management. It has a global network of approximately 4,000 professionals located in 357 locations throughout Canada, the United States, the United Kingdom, continental Europe, the Far East, Latin America and the Middle East. Beyond its core loss adjusting services, Cunningham Lindsey provides engineering consultancy, risk management, risk surveys, environmental remediation, valuations and related services as well as claims appraisal training and education courses in the United States. Further information about Cunningham Lindsey is available on our website at 0 www.cunninghamlindsey.com.

Forward-Looking Information

The matters discussed in this release include certain forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future plans, intentions, levels of activity, results, performance or achievements. Forward-looking statements may be identified, without limitation, by the use of such words as "may", "will", "should", "would", "could", "anticipates", "estimates", "expects", "intends", "plans", "predicts", "projects", "believes", or words or phrases of similar meaning or negative derivations thereof. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or other future events. Readers should not rely on forward-looking statements as they involve known and unknown risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed, implied or anticipated in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to the following factors which are more fully described in our filings with the Canadian securities regulators on www.sedar.com: our substantial debt; vulnerability of revenue to weather conditions; general insurance market conditions; reduction in our potential customers; foreign currency fluctuations; the loss of key personnel; competition; reliance on key customers; changes to the regulatory environment; legal proceedings; access to cash; collections of accounts receivable; critical accounting estimates; controlling shareholder influence; and our outstanding debt may discourage a change of control. There are also risks arising from the proposed transaction, including the satisfaction of the conditions to consummate the proposed transaction, including the approval by shareholders; the occurrence of any event, change or other circumstance that could give rise to the termination of the agreement providing for the proposed transaction; the delay of the consummation of the proposed transaction or the failure to complete the proposed transaction for any other reason; and the amount of the costs, fees and expenses related to the proposed transaction. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks. We have no obligation, and do not intend, to update or alter such forward-looking statements as a result of new information, future events or otherwise, except as required by law.

Contact Information

  • Cunningham Lindsey Group Inc.
    Jan Christiansen
    Chief Executive Officer and President
    (847) 517-3300 Ext. 3333
    Website: www.cunninghamlindsey.com