CRAWFORD & CO - 10-Q Quarterly Report

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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended September 30, 2002

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from ____________________ to ____________________

Commission file number 1-10356

CRAWFORD & COMPANY
(Exact name of Registrant as specified in its charter)


Georgia		58-0506554
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5620 Glenridge Drive, N.E. Atlanta, Georgia		30342
(Address of principal executive offices)		(Zip Code)

(404) 256-0830
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

The number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2002 was as follows:

Class A Common Stock, $1.00 par value: 23,925,383
Class B Common Stock, $1.00 par value: 24,697,172

TABLE OF CONTENTS


CONDENSED CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
SIGNATURES
CERTIFICATIONS
INDEX TO EXHIBITS
EX-15.1 LETTER FROM ERNST & YOUNG LLP
EX-99.1 CERTIFICATION OF THE CEO
EX-99.2 CERTIFICATION OF THE CFO

PART I — Financial Information

Item 1. Financial Statements

CRAWFORD & COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands, except per share data)


				Nine months ended

				September 30,			September 30,
				2002			2001

Revenues:
	Revenues before reimbursements			$	525,668		$	547,394
	Reimbursements				25,688			27,563

			Total revenues		551,356			574,957

Costs and Expenses:
	Cost of services provided, before reimbursements				398,420			409,630
	Reimbursements				25,688			27,563

	Cost of services				424,108			437,193
	Selling, general, and administrative expenses				100,326			93,204
	Nonrecurring credit (1)				(6,000	)		—
	Corporate interest, net				3,565			3,584
	Amortization of goodwill				—			2,605

			Total costs and expenses		521,999			536,586

Income Before Income Taxes					29,357			38,371
Provision for Income Taxes					10,686			14,734

Net Income				$	18,671		$	23,637

Net Income Per Share:
		Basic		$	0.38		$	0.49
		Diluted		$	0.38		$	0.49

Weighted-Average Shares Outstanding:
		Basic			48,565			48,476
		Diluted			48,625			48,542

Cash Dividends Per Share:
		Class A Common Stock		$	0.34		$	0.42
		Class B Common Stock		$	0.34		$	0.42

(1) Nonrecurring credit related to a payment from a former vendor in full settlement of a business dispute.

(See accompanying notes to condensed consolidated financial statements)

CRAWFORD & COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands, except per share data)


				Quarter ended

				September 30,		September 30,
				2002		2001

Revenues:
	Revenues before reimbursements			$	175,912	$	181,412
	Reimbursements				8,880		9,346

			Total revenues		184,792		190,758

Costs and Expenses:
	Cost of services provided, before reimbursements				132,725		135,690
	Reimbursements				8,880		9,346

	Cost of services				141,605		145,036
	Selling, general, and administrative expenses				33,078		32,970
	Corporate interest, net				1,246		1,088
	Amortization of goodwill				—		858

			Total costs and expenses		175,929		179,952

Income Before Income Taxes					8,863		10,806
Provision for Income Taxes					3,226		4,149

Net Income				$	5,637	$	6,657

Net Income Per Share:
		Basic		$	0.11	$	0.14
		Diluted		$	0.11	$	0.14

Weighted-Average Shares Outstanding:
		Basic			48,607		48,476
		Diluted			48,649		48,566

Cash Dividends Per Share:
		Class A Common Stock		$	0.06	$	0.14
		Class B Common Stock		$	0.06	$	0.14

(See accompanying notes to condensed consolidated financial statements)

CRAWFORD & COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)


			(Unaudited)
			September 30,			December 31,
			2002			2001

ASSETS
Current Assets:
	Cash and cash equivalents		$	22,052		$	21,966
	Accounts receivable, less allowance for doubtful accounts of $16,784 in 2002 and $16,755 in 2001			141,347			139,380
	Unbilled revenues, at estimated billable amounts			100,456			88,399
	Prepaid expenses and other current assets			14,261			11,539

		Total current assets		278,116			261,284

Property and Equipment:
	Property and equipment, at cost			145,589			146,626
	Less accumulated depreciation			(107,974	)		(107,898	)

		Net property and equipment		37,615			38,728

Other Assets:
	Intangible assets arising from acquisitions, net			97,089			86,239
	Prepaid pension cost			7,803			7,138
	Capitalized software costs, net			22,431			16,402
	Deferred income tax asset			11,758			11,817
	Other			12,690			9,807

		Total other assets		151,771			131,403

TOTAL ASSETS			$	467,502		$	431,415

(See accompanying notes to condensed consolidated financial statements)

CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS — CONTINUED
(In thousands)


			(Unaudited)
			September 30,			December 31,
			2002			2001

LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current Liabilities:
	Short-term borrowings		$	41,516		$	36,440
	Accounts payable			30,164			31,275
	Accrued compensation and related costs			27,139			25,771
	Deferred revenues			22,356			20,543
	Self-insured risks			16,384			12,833
	Accrued income taxes			20,536			16,001
	Other accrued liabilities			12,953			13,118
	Current installments of long-term debt			859			326

		Total current liabilities		171,907			156,307

Noncurrent Liabilities:
	Long-term debt, less current installments			47,360			36,378
	Deferred revenues			13,232			12,707
	Self-insured risks			10,269			11,249
	Minimum pension liability			13,154			10,328
	Postretirement medical benefit obligation			6,639			6,645
	Other			10,129			9,501

		Total noncurrent liabilities		100,783			86,808

Shareholders’ Investment:
	Class A Common Stock, $1.00 par value; 50,000 shares authorized; 23,925 and 23,843 shares issued and outstanding in 2002 and 2001, respectively			23,925			23,843
	Class B Common Stock, $1.00 par value; 50,000 shares authorized; 24,697 shares issued and outstanding in 2002 and 2001			24,697			24,697
	Additional paid-in capital			523			27
	Retained earnings			188,843			186,683
	Accumulated other comprehensive loss			(43,176	)		(46,950	)

		Total shareholders’ investment		194,812			188,300

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT			$	467,502		$	431,415

(See accompanying notes to condensed consolidated financial statements)

CRAWFORD & COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)


				Nine months ended

				September 30,			September 30,
				2002			2001

Cash Flows From Operating Activities:
	Net income			$	18,671		$	23,637
	Reconciliation of net income to net cash provided by operating activities:
		Depreciation and amortization			13,145			15,382
		Deferred income taxes			(287	)		(18	)
		(Gain) loss on sales of property and equipment			(39	)		187
		Changes in operating assets and liabilities, net of effects of acquisitions:
			Accounts receivable, net		1,596			(9,565	)
			Unbilled revenues		(7,662	)		(4,368	)
			Accrued or prepaid income taxes		4,300			11,634
			Accounts payable and accrued liabilities		179			1,203
			Deferred revenues		1,534			(1,212	)
			Prepaid and accrued pension costs		2,161			3,249
			Prepaid expenses and other assets		(6,423	)		(4,605	)

Net cash provided by operating activities					27,175			35,524

Cash Flows From Investing Activities:
	Acquisitions of property and equipment				(6,769	)		(6,580	)
	Acquisition of businesses, net of cash acquired				(12,798	)		(8,634	)
	Capitalization of computer software costs				(8,704	)		(3,984	)
	Proceeds from sales of property and equipment				157			221

Net cash used in investing activities					(28,114	)		(18,977	)

Cash Flows From Financing Activities:
	Dividends paid				(16,510	)		(20,350	)
	Proceeds from exercise of stock options				578			836
	Increase in short-term borrowings				18,712			11,433
	Payments on short-term borrowings				(13,905	)		(15,000	)
	Increase in long-term borrowings				11,226			88
	Payments on long-term debt				(118	)		(226	)

Net cash used in financing activities					(17	)		(23,219	)

Effect of exchange rate changes on cash and cash equivalents					1,042			(681	)

Increase (decrease) in cash and cash equivalents					86			(7,353	)
Cash and cash equivalents at beginning of period					21,966			22,136

Cash and cash equivalents at end of period				$	22,052		$	14,783

(See accompanying notes to condensed consolidated financial statements)

CRAWFORD & COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain previously reported amounts have been reclassified to conform to the current presentation. These condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2001.

2. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results to be expected during the balance of the year ending December 31, 2002.

3. During the quarter and nine months ended September 30, 2002, the Company’s restructuring reserve increased $76,000 and decreased $132,000, respectively, due to exchange rate fluctuations and payments related to employee separations and lease terminations. As of September 30, 2002, remaining restructuring reserves were $1.8 million, $1.5 million of which is included in other noncurrent liabilities. The noncurrent portion of accrued restructuring costs consists of long-term lease obligations related to various United Kingdom offices, which the Company has vacated and is currently attempting to sublease. Management periodically reviews the restructuring reserves and believes the remaining reserves are adequate to complete its plan.

4. During the quarter ended June 30, 2002, the Company made additional payments of $2.9 million to the former owners of the Garden City Group pursuant to the 1999 purchase agreement. There are no additional contingent payments due under this agreement. During the quarter ended September 30, 2002, the Company made additional payments of $142,000 to Greentree Investigations, Inc. pursuant to the 2000 purchase agreement. Additional contingent payments due under this agreement may be made through the second quarter of 2005. On July 3, 2002, in order to expand its presence in the Australian market, the Company acquired the operations of the Robertson & Company Group (“Robertson”) in Australia for an initial cash purchase price of $10.2 million. The Company acquired assets with an approximate fair value of $12.7 million and assumed liabilities of approximately $2.5 million. The strength of the going concern, the established locations, and the assembled workforce of Robertson supported a premium above the fair value of the separately identifiable net assets. This premium is reported as goodwill of approximately $7.7 million. The purchase price of this acquisition may be increased based on future earnings through 2008. Robertson’s operating results are included in the consolidated statements of income from September 1, 2002, due to a two-month lag in reporting international results. These transactions were accounted for by the purchase method of accounting.

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5. The Company normally structures its acquisitions to include earnout payments which are contingent upon the acquired entity reaching certain revenue and operating earnings targets. The amount of the contingent payments and length of the earnout period varies for each acquisition, and the ultimate payments when made will vary, as they are dependent on future events. Based on current levels of revenues and operating earnings, additional payments under existing earnout agreements would approximate $3.8 million through 2008, as follows:


2002	2003		2004		2005		2006		2007		2008

$162,000	$	580,000	$	445,000	$	142,000	$	0	$	0	$	2,500,000

6. Basic net income per share was computed based on the weighted-average number of total common shares outstanding during the respective periods. Diluted net income per share was computed based on the weighted-average number of total common shares outstanding plus the dilutive effect of outstanding stock options using the “treasury stock” method.

Below is the calculation of basic and diluted net income per share for the quarter and nine months ended September 30, 2002 and 2001:


	Quarter ended				Nine months ended

	September 30,		September 30,		September 30,		September 30,
(In thousands, except per share data)	2002		2001		2002		2001

Net income available to common shareholders	$	5,637	$	6,657	$	18,671	$	23,637

Weighted-average common shares outstanding –
Basic		48,607		48,476		48,565		48,476
Dilutive effect of stock options		42		90		60		66

Weighted-average common shares outstanding –
Diluted		48,649		48,566		48,625		48,542

Basic net income per share	$	0.11	$	0.14	$	0.38	$	0.49

Diluted net income per share	$	0.11	$	0.14	$	0.38	$	0.49

Additional options to purchase 5,765,668 shares of Class A Common Stock at $8.82 to $19.50 per share were outstanding at September 30, 2002, but were not included in the computation of diluted net income per share because the options’ exercise prices were greater than the average market price of the common shares; to include them would have been antidilutive.

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7. Comprehensive income for the Company consists of the total of net income and foreign currency translation adjustments. Below is the calculation of comprehensive income for the quarter and nine months ended September 30, 2002 and 2001:


	Quarter ended					Nine months ended

	September 30,		September 30,			September 30,		September 30,
(In thousands)	2002		2001			2002		2001

Net income	$	5,637	$	6,657		$	18,671	$	23,637
Foreign currency translation adjustment		2,572		(2,019	)		3,774		(3,347	)

Comprehensive income	$	8,209	$	4,638		$	22,445	$	20,290

8. The Company has two reportable segments, one which provides claims services through branch offices located in the United States (“U.S. Operations”) and the other which provides similar services through branch or representative offices located in 66 other countries (“International Operations”). Intersegment sales are recorded at cost and are not material. The Company measures segment profit based on operating earnings, defined as earnings before nonrecurring credit, amortization of goodwill, net corporate interest, and income taxes.

Financial information for the quarter and nine months ended September 30, 2002 and 2001 covering the Company’s reportable segments is presented below:


			Quarter ended				Nine months ended

			September 30,		September 30,		September 30,		September 30,
(In thousands)			2002		2001		2002		2001

Revenues:
	U.S.		$	128,795	$	134,200	$	387,074	$	404,849
	International			47,117		47,212		138,594		142,545

		Total Revenues before Reimbursements	$	175,912	$	181,412	$	525,668	$	547,394

Operating Earnings:
	U.S.		$	9,237	$	9,883	$	21,420	$	33,241
	International			872		2,869		5,502		11,319

		Total Operating Earnings	$	10,109	$	12,752	$	26,922	$	44,560

9. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 144, “Accounting for the Impairment of Long-Lived Assets.” SFAS 144 supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets to be Disposed Of”, and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion 30, “Reporting Extraordinary, Unusual and Infrequently Occurring Events and Transactions” and amends APB Opinion 51, “Consolidated Financial Statements.” The statement

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

retains the fundamental provisions in SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. This statement did not have an impact on the Company’s consolidated results of operations, financial position, or cash flows, because the impairment assessment under SFAS 144 is largely unchanged from SFAS 121 and no assets met the criteria for impairment.

The Company adopted SFAS 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. SFAS 142 changes the accounting for goodwill and intangible assets from an amortization method to an impairment-only approach. The amortization of goodwill, including goodwill recorded in past business combinations, ceased when the Company adopted SFAS 142 on January 1, 2002. The Company does not currently have any intangible assets requiring disclosure under SFAS 142. The adoption of SFAS 142 requires a transitional goodwill impairment test be performed on all reportable segments. Step one of the transitional goodwill impairment test was performed on the U.S. and International segments. Based on the results of step one, the U.S. and International segments do not have an impairment of goodwill.

The following table presents the effect of adopting SFAS 142 on net income and basic and diluted net income per share:


	Quarter ended				Nine months ended

	September 30,		September 30,		September 30,		September 30,
(in thousands, except per share data)	2002		2001		2002		2001

Reported net income	$	5,637	$	6,657	$	18,671	$	23,637
Add: Goodwill amortization		0		705		0		2,145

Adjusted net income	$	5,637	$	7,362	$	18,671	$	25,782

Basic net income per share:
Reported net income per share	$	0.11	$	0.14	$	0.38	$	0.49
Goodwill amortization per share		0.00		0.01		0.00		0.04

Adjusted net income per share	$	0.11	$	0.15	$	0.38	$	0.53

Diluted net income per share:
Reported net income per share	$	0.11	$	0.14	$	0.38	$	0.49
Goodwill amortization per share		0.00		0.01		0.00		0.04

Adjusted net income per share	$	0.11	$	0.15	$	0.38	$	0.53

Also effective January 1, 2002, the Company adopted Emerging Issues Task Force Issue 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred.” The EITF Issue requires that reimbursed out-of-pocket expenses be classified as revenues in the income statement. Historically, the Company has netted such reimbursements against its costs in the consolidated statements of income. The adoption of this EITF Issue had no effect on the Company’s consolidated results of operations, financial position, or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated net income was $5,637,000 and $6,657,000 for the quarters ended September 30, 2002 and 2001, respectively, and $18,671,000 and $23,637,000 for the nine months ended September 30, 2002 and 2001, respectively.

The following is a discussion and analysis of the consolidated financial condition and results of operations reported by our two reportable segments: U.S. operations and international operations. Revenue amounts exclude reimbursements for out-of-pocket expenses. Expense amounts exclude the nonrecurring credit, amortization of goodwill, net corporate interest, and income taxes.

Results of Operations

Operating results for our U.S. and international operations for the quarter and nine months ended September 30, 2002 and 2001 were as follows:


			Quarter ended						Nine months ended

			September 30,			September 30,			September 30,			September 30,
(In thousands)			2002			2001			2002			2001

Revenues:
	U.S.		$	128,795		$	134,200		$	387,074		$	404,849
	International			47,117			47,212			138,594			142,545

		Total	$	175,912		$	181,412		$	525,668		$	547,394
Compensation & Fringe Benefits:
	U.S.		$	79,983		$	84,269		$	246,343		$	251,943
	% of Revenues			62.1	%		62.8	%		63.7	%		62.2	%
	International			32,966			31,245			95,973			93,961
	% of Revenues			69.9	%		66.2	%		69.2	%		65.9	%

		Total	$	112,949		$	115,514		$	342,316		$	345,904
		% of Revenues		64.3	%		63.7	%		65.1	%		63.2	%
Expenses Other than Reimbursements, Compensation &
Fringe Benefits:
	U.S.		$	39,575		$	40,048		$	119,311		$	119,665
	% of Revenues			30.7	%		29.8	%		30.8	%		29.6	%
	International			13,279			13,098			37,119			37,265
	% of Revenues			28.2	%		27.7	%		26.8	%		26.2	%

		Total	$	52,854		$	53,146		$	156,430		$	156,930
		% of Revenues		30.0	%		29.3	%		29.8	%		28.7	%

Operating Earnings (1):
	U.S.		$	9,237		$	9,883		$	21,420		$	33,241
	% of Revenues			7.2	%		7.4	%		5.5	%		8.2	%
	International			872			2,869			5,502			11,319
	% of Revenues			1.9	%		6.1	%		4.0	%		7.9	%

		Total	$	10,109		$	12,752		$	26,922		$	44,560
		% of Revenues		5.7	%		7.0	%		5.1	%		8.1	%

(1) Earnings before nonrecurring credit, amortization of goodwill, net corporate interest, and income taxes.

U.S. OPERATIONS

Revenues

U.S. revenues before reimbursements by market type for the quarter and nine months ended September 30, 2002 and 2001 were as follows:


		Quarter ended							Nine months ended

		September 30,		September 30,					September 30,		September 30,
(In thousands)		2002		2001		Variance			2002		2001		Variance

Insurance companies		$	65,673	$	72,696		(9.7	)%	$	198,692	$	218,176		(8.9	)%
Self-insured entities			47,379		48,806		(2.9	)%		146,855		147,986		(0.8	)%
Class action services			15,743		12,698		24.0	%		41,527		38,687		7.3	%

	Total U.S. Revenues before Reimbursements	$	128,795	$	134,200		(4.0	)%	$	387,074	$	404,849		(4.4	)%

Revenues from insurance companies decreased 9.7% to $65.7 million for the 2002 third quarter, due to a continued softening in our referrals for high frequency, low severity claims and a decrease in catastrophic claim referrals. Revenues from self-insured clients decreased 2.9% to $47.4 million in the quarter. Class action revenues, which can fluctuate based on the timing of project awards, increased 24.0% to $15.7 million in the current quarter.

Case Volume Analysis

Excluding the impact of class action services, U.S. unit volume, measured principally by cases received, decreased 18.0% in the third quarter of 2002 compared to the same period in 2001. This decrease was partially offset by an 11.7% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 6.3% decrease in U.S. revenues in the third quarter of 2002, excluding revenues from class action services. Growth in class action services increased domestic revenues by 2.3% in the 2002 third quarter compared to the prior year period.

U.S. unit volume, measured principally by cases received, and excluding the impact of class action services, decreased 17.8% in the first nine months of 2002 compared to the 2001 period. This decrease was partially offset by a 12.7% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 5.1% decrease in U.S. revenues for the first nine months of 2002, excluding revenues from class action services. Our U.S. insurance company referrals for high frequency, low severity claims have declined during the year resulting in an increase in the average revenue per claim. Growth in class action services increased domestic revenues by 0.7% in the nine months ended September 30, 2002, compared to the prior year period.

Excluding the impact of class action services, U.S. unit volume by major product line, as measured by cases received, for the quarter and nine months ended September 30, 2002 and 2001 was as follows:


		Quarter ended							Nine months ended

		September 30,		September 30,					September 30,		September 30,
		2002		2001		Variance			2002		2001		Variance

Casualty			58,832		60,519		(2.8	)%		172,234		184,376		(6.6	)%
Property			55,628		78,849		(29.4	)%		165,941		234,174		(29.1	)%
Vehicle			62,293		78,962		(21.1	)%		197,712		246,441		(19.8	)%
Workers’ Compensation			63,735		68,491		(6.9	)%		188,512		203,596		(7.4	)%
Other			6,374		14,271		(55.3	)%		28,022		46,803		(40.1	)%

	Total Cases Received		246,862		301,092		(18.0	)%		752,421		915,390		(17.8	)%

The decline in property and vehicle claims for the current quarter and year-to-date period was primarily due to the decline we are experiencing related to U.S. insurance company referrals for high frequency, low severity claims. Conservative underwriting, increases in policy deductibles, and mild weather during 2002 contributed to an industry-wide decline in property and casualty claims frequency. Our decline in workers’ compensation and casualty claim referrals was primarily due to the loss of two major fronting company accounts due to bankruptcy and declines in U.S. employment levels and associated injury rates which have contributed to a reduction in workers’ compensation claims.

Compensation and Fringe Benefits

Our most significant expense was the compensation of employees, including related payroll taxes and fringe benefits. U.S. compensation expense as a percent of revenues decreased to 62.1% in the third quarter of 2002 as compared to 62.8% in the 2001 quarter, and increased to 63.7% for the nine months ended September 30, 2002 as compared to 62.2% in the 2001 period. The decrease in the 2002 third quarter was due to the positive effect of cost cutting initiatives which were implemented during the quarter resulting in a sequential improvement in our U.S. operating margin from 4.5% in the 2002 second quarter to 7.2% in the current quarter. There were an average of 5,338 full-time equivalent employees in the first nine months of 2002, compared to an average of 5,680 in the 2001 period.

U.S. salaries and wages of $65.9 million and $200.2 million for the quarter and nine months ended September 30, 2002, respectively, decreased 7.6% and 5.9%, from $71.3 million and $212.7 million in the comparable 2001 periods, reflecting the 6% reduction in full-time equivalent employees during 2002. Payroll taxes and fringe benefits for U.S. operations of $14.1 million and $46.1 million in the third quarter and nine months of 2002, respectively, increased 8.5% and 17.5% from costs of $13.0 million and $39.3 million for the comparable 2001 periods. These increases were primarily due to higher defined benefit pension costs which resulted from a decline in the fair market value of our pension investments and a decrease in interest rates during 2001. We benefited in the 2002 third quarter from favorable experience in our self-insured workers’ compensation program.

Expenses Other than Reimbursements, Compensation and Fringe Benefits

U.S. expenses other than reimbursements, compensation and related payroll taxes and fringe benefits were 30.7% of revenues for the quarter ended September 30, 2002, up from 29.8% for the same period in 2001. U.S. expenses other than compensation and related payroll taxes and fringe benefits approximated 30.8% and 29.6% of revenues for the nine-month periods ended September 30, 2002 and 2001, respectively. These increases were due primarily to higher professional indemnity costs, legal fees, bad debt expense, and costs related to our ongoing technology initiatives.

Reimbursements

Reimbursements in our U.S. operations decreased to $4.5 million and $13.3 million for the quarter and nine months ended September 30, 2002, respectively, from $4.8 million and $15.1 million in the comparable 2001 periods, reflecting the decline in case volume.

INTERNATIONAL OPERATIONS

Revenues

Revenues before reimbursements from our international operations decreased slightly, from $47.2 million in the third quarter of 2001 to $47.1 million in the third quarter of 2002. Revenues before reimbursements for the first nine months of 2002 totaled $138.6 million, a 2.8% decrease from $142.5 million reported in the first nine months of 2001.

Case Volume Analysis

Excluding the impact of acquisitions, international unit volume, measured principally by cases received, decreased 6.9% in the current quarter and 5.4% in the nine months ended September 30, 2002, compared to the same periods in 2001. Small strategic acquisitions in Australia and Canada increased international revenues by 3.5% for the quarter and nine months ended September 30, 2002. Third quarter 2002 revenues were net of a 3.1% increase due to the weakening of the U.S. dollar against the British Pound and the Euro. Year-to-date 2002 revenues were net of a 1.1% decline due to the overall strength of the U.S. dollar during the 2002 period.

Excluding the impact of acquisitions, international unit volume by region for the quarter and nine months ended September 30, 2002 and 2001 was as follows:


		Quarter ended							Nine months ended

		September 30,		September 30,					September 30,		September 30,
		2002		2001		Variance			2002		2001		Variance

Americas			32,216		34,021		(5.3	)%		92,517		85,328		8.4	%
Continental Europe			19,579		18,726		4.6	%		54,972		53,016		3.7	%
United Kingdom			21,733		27,295		(20.4	)%		66,433		88,586		(25.0	)%
Asia/Pacific			5,467		4,799		13.9	%		15,627		15,629		0.0	%

	Total Cases Received		78,995		84,841		(6.9	)%		229,549		242,559		(5.4	)%

The decline in cases received in our United Kingdom operation during the 2002 quarter and nine-month period was due to reduced claim referrals from two major accounts and fewer weather-related claims. The increase in our Asia/ Pacific operation during the 2002 quarter was due to the receipt of flood related claims. Our increase in the Americas for the nine months ended September 30, 2002 was due to the receipt of approximately 15,000 product liability claims in Canada during the 2002 second quarter.

Compensation and Fringe Benefits

As a percent of revenues, compensation expense, including related payroll taxes and fringe benefits, increased to 69.9% for the quarter ended September 30, 2002, from 66.2% for the same period in 2001. For the nine-month period, compensation, payroll taxes and fringe benefits increased as a percentage of revenues to 69.2% in 2002 from 65.9% in 2001. These increases were primarily due to an increase in capacity in the United Kingdom due to the decline in case volume. There were an average of 2,976 full-time equivalent employees in the first nine months of 2002, compared to an average of 2,873 in the 2001 period. The acquisitions in Australia and Canada added approximately 220 full-time equivalent employees in the first nine months of 2002.

Salaries and wages of international personnel increased 5.2% to $28.6 million in the quarter ended September 30, 2002, from $27.2 million in the comparable 2001 period. For the nine-month period, salaries and wages increased 1.4% to $82.6 million in 2002 from $81.4 million in 2001. Payroll taxes and fringe benefits for international operations totaled $4.4 and $13.4 million for the quarter and nine months ended September 30, 2002, respectively, compared to $4.0 and $12.6 for the same periods in 2001. These increases were primarily due to the recent acquisitions in Australia and Canada.

Expenses Other than Reimbursements, Compensation and Fringe Benefits

Expenses other than compensation and related payroll taxes and fringe benefits were 28.2% and 26.8% of international revenues for the quarter and nine months ended September 30, 2002, respectively, up from 27.7% and 26.2% for the same periods in 2001. These increases were primarily related to higher bad debt expense and foreign currency exchange losses.

Reimbursements

Reimbursements in the international operations decreased slightly to $4.4 million and $12.4 million for the quarter and nine months ended September 30, 2002, respectively, from $4.5 million and $12.5 million in the comparable 2001 periods.

NONRECURRING CREDIT, AMORTIZATION OF GOODWILL, NET CORPORATE INTEREST, AND INCOME TAXES

During the 2002 first quarter, we received a one-time cash payment of $6.0 million from a former vendor in full settlement of a business dispute. This nonrecurring credit, net of related income tax expense, increased net income per share by $0.08 during the 2002 first quarter.

On January 1, 2002 we adopted SFAS 142 “Goodwill and Other Intangible Assets”. The adoption of this statement increased our year-to-date 2002 net income by approximately $2.1 million, or $0.04 per share.

Net corporate interest totaled $1.2 million and $3.6 million for the quarter and nine months ended September 30, 2002, respectively, compared to $1.1 million and $3.6 million for the comparable 2001 period. The effect on net corporate interest from increases in short-term borrowings and long-term debt during 2002 was offset by declines in interest rates in 2002.

Taxes on income totaled $3.2 million and $10.7 million, or 36.4% of pretax income, for the quarter and nine months ended September 30, 2002, as compared to $4.1 million and $14.7 million, or 38.4% of pretax income, for the comparable 2001 periods. This decline in the effective tax rate was primarily due to the adoption of SFAS 142 during 2002.

FINANCIAL CONDITION

At September 30, 2002 current assets exceeded current liabilities by approximately $106.2 million, an increase of $1.2 million from the working capital balance at December 31, 2001. Cash and cash equivalents at September 30, 2002 totaled $22.1 million, an increase of $86,000 from the balance at the end of 2001. Cash was generated primarily from operating activities, and short-term and long-term borrowings, while the principal uses of cash were for dividends paid to shareholders, payments on short-term borrowings, acquisitions of businesses, investments in computer software, and acquisitions of property and equipment. Cash generated from operating activities was net of a $6.9 million contribution made to our U.S. defined benefit pension plan during the 2002 third quarter. Cash dividends to shareholders approximated 88% of net income in the first nine months of 2002, compared to 86% for the same period in 2001. The Board of Directors declares cash dividends to shareholders each quarter based on an assessment of current and projected earnings and cash flows. In view of the lack of significant improvement in our earnings in the second quarter, in its July 2002 meeting, the Board of Directors reduced the dividend payout ratio, declaring quarterly dividends of $0.06 per share on each share of Class A and Class B Common Stock, down from $0.14 per share declared in the previous quarter.

During the first nine months of 2002, we did not repurchase any Class A or Class B Common Stock. As of September 30, 2002, 705,863 shares remain to be repurchased under the share repurchase program authorized by the Board of Directors.

We maintain credit lines with banks in order to meet seasonal working capital requirements and other financing needs that may arise. Short-term borrowings outstanding as of September 30, 2002 totaled $41.5 million, which increased from $36.4 million at the end of 2001. Long-term borrowings outstanding, excluding current installments, as of September 30, 2002 totaled $47.4 compared to $36.4 million at the end of 2001. We believe that our current financial resources, together with funds generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations.

We do not engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the operating results of our foreign subsidiaries. Foreign currency denominated debt is maintained primarily to hedge the currency exposure of our net investment in foreign operations.

Shareholders’ investment at September 30, 2002 was $194.8 million, compared with $188.3 million at December 31, 2001.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Forward Looking Statements

Certain information presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations may include forward-looking statements, the accuracy of which is subject to a number of risks and assumptions. Our Form 10-K for the year ended December 31, 2001, discusses such risks and assumptions and other key factors that could cause actual results to differ materially from those expressed in such forward-looking statements.

Government Investigation

We have received and are responding to federal grand jury subpoenas requesting certain business and financial records. For a discussion of this matter see Part II, Item I “Legal Proceedings” below. We cannot predict when the government’s investigation will be completed, its ultimate outcome or its effect on our financial condition or results of operations. However, the investigation could cause disruption in the delivery of our services, and ultimately result in the imposition of civil, administrative or criminal fines or sanctions, as well as potential reimbursements to clients and loss of existing or prospective clients or business opportunities. Any such result could have a material adverse effect on our financial condition and results of operations. Expenses associated with the investigation, before related tax benefits, were $414,000 and $2.6 million, or $0.00 and $0.03 per share for the quarter and nine months ended September 30, 2002, compared to $1.1 million and $2.0 million, or $0.02 and $0.03 per share, for the comparable 2001 periods.

Non-renewal of Material Contract

Our contract to provide medical bill review services for a large U.S. insurer was not renewed as of December 1, 2001. The month-to-month services we have been providing since that time were substantially all transitioned to a new service provider by the end of the 2002 third quarter. Revenues associated with these services totaled $8.1 million through September 30, 2002.

Cost Reduction Initiative

We have taken aggressive steps to reduce our annual operating costs from their level at the end of the 2002 second quarter, including a freeze on salary increases and new hires. The targeted cost reductions of $1.0 million per month were achieved during the 2002 third quarter.

Outsourcing Arrangement

We have contracted with a large U.S. property and casualty insurer to provide approximately 130 dedicated adjusting personnel under a cost plus billing arrangement. Services under this arrangement began late in the 2002 third quarter and are projected to generate incremental revenues of $6.0 million on an annualized basis.

Pension Expense

We use a September 30th measurement date to determine pension expense under Statement of Financial Accounting Standards (“SFAS”) 87, “Employers’ Accounting for Pensions.” Due to a significant decline in the fair market value of our pension investments at September 30, 2002, as well as a decline in interest rates during the year, pension expense is expected to increase by approximately $10 million in 2003.

In addition, during the 2002 fourth quarter, we expect to record a minimum pension liability adjustment as a charge to Accumulated Other Comprehensive Loss of approximately $33 million, net of related income tax benefits. This non-cash charge results primarily from a decline in the fair market value of our pension investments as of our September 30, 2002 measurement date.

Insurance Renewal

We negotiated the renewal of our various U.S. insurance coverages effective June 2002. Our insurance premiums remained at their current levels; however, we are subject to higher self-insured retentions for certain coverages.

Item 3. Quantitative and Qualitative Disclosure of Market Risk

Derivatives

We have not entered into any transactions using derivative financial instruments or derivative commodity instruments.

Foreign Currency Exchange

Our international operations expose us to foreign currency exchange rate changes that could impact translations of foreign-denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. The revenues from international operations were 26.4% and 26.0% of total revenues before reimbursements for the nine months ended September 30, 2002 and 2001, respectively. Except for borrowing in foreign currencies, we do not presently engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of our foreign subsidiaries.

We measure currency earnings risk related to international operations based on changes in foreign currency rates using a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings based on a hypothetical 10% change in currency exchange rates. Exchange rates and currency positions as of September 30, 2002 were used to perform the sensitivity analysis. Such analysis indicates that a hypothetical 10% change in foreign currency exchange rates would have decreased pretax income by approximately $416,000 during the first nine months of 2002, had the U.S. dollar exchange rate increased relative to the currencies with which we had exposure.

Interest Rates

We are exposed to interest rate fluctuations on certain variable rate borrowings. Depending on general economic conditions, we use variable rate debt for short-term borrowings and fixed rate debt for long-term borrowings. At September 30, 2002, we had $41.5 million in short-term loans outstanding with an average variable interest rate of 4.4%.

Credit Risk

We process payments for claims settlements, primarily on behalf of our self-insured clients. The liability for the settlement cost of claims processed, which is generally pre-funded, remains with the client. Accordingly, we do not incur significant credit risk in the performance of these services.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Our officers have concluded that the design and operation of our disclosure controls and procedures are effective.

Changes in Internal Controls

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Stockholders and Board of Directors of
Crawford & Company:

We have reviewed the accompanying condensed consolidated balance sheet of CRAWFORD & COMPANY (a Georgia corporation) AND SUBSIDIARIES as of September 30, 2002, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2002, and the condensed consolidated statement of cash flows for the nine-month period ended September 30, 2002. These financial statements are the responsibility of the Company’s management. The condensed consolidated balance sheet as of December 31, 2001, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2001, and the condensed consolidated statement of cash flows for the nine-month period ended September 30, 2001 were reviewed by other accountants whose report (dated November 13, 2001) stated that they were not aware of any material modifications that should be made to those statements for them to be in conformity with accounting principles generally accepted in the United States.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements at September 30, 2002 and for the three-month and nine-month periods then ended for them to be in conformity with accounting principles generally accepted in the United States.


		/s/ Ernst & Young LLP

Atlanta, Georgia
November 7, 2002

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In 2000, we received federal grand jury subpoenas requesting certain business and financial records dating back to 1992. Additional document requests and grand jury subpoenas were received in 2001 and continue to be received in 2002. We have been advised by the U.S. Department of Justice Fraud Section that the subpoenas issued by the Fraud Section and local U.S. Attorney offices were issued in connection with a nationwide investigation into the billings for services in some of the U.S. Claims Management and Healthcare Management Services branch offices. One of the subpoenas relates to a matter that was the subject of a billing dispute between us and a client. We have settled this dispute with the client, but the Justice Department’s investigation regarding the dispute is continuing. We are cooperating fully with the government’s inquiry and have retained outside counsel to conduct an internal investigation into our billing practices under the direction of the Board of Directors. In addition, we have issued written corporate billing policies in order to clarify our billing practices and eliminate inconsistencies in their application, and are continuing to strengthen our internal audit and branch inspection procedures.

Item 5. Other Information

The Audit Committee of the Board of Directors, at its meeting on April 22, 2002, selected Ernst & Young LLP as independent auditors for the 2002 fiscal year and approved the provision by Ernst & Young of both audit and audit related services, as well as additional income tax consulting and compliance services. At its meeting on October 29, 2002, the Committee approved additional tax consulting services to be performed by Ernst & Young.

Item 6. Exhibits and Reports on Form 8-K.


(a)		Exhibits:

15.1		Letter from Ernst & Young LLP

99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)		Reports on Form 8-K:

The Company did not file any reports on Form 8-K during the period covered by this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Crawford & Company (Registrant)

Date: November 7, 2002		/s/ Grover L. Davis

		Grover L. Davis Chief Executive Officer (Principal Executive Officer)

Date: November 7, 2002		/s/ John F. Giblin

		John F. Giblin Executive Vice President — Finance (Principal Financial Officer)

Date: November 7, 2002		/s/ W. Bruce Swain

		W. Bruce Swain Senior Vice President and Controller (Principal Accounting Officer)

CERTIFICATIONS

I, Grover L. Davis, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Crawford & Company;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 7, 2002		/s/ Grover L. Davis

		Grover L. Davis Chief Executive Officer (Principal Executive Officer)

I, John F. Giblin, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Crawford & Company;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a.)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c.)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a.)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 7, 2002		/s/ John F. Giblin

		John F. Giblin Executive Vice President — Finance (Principal Financial Officer)

INDEX TO EXHIBITS

Exhibit No.

Description

Sequential Page No.

Letter from Ernst & Young LLP

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002