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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 March 31, 2003
OR
| | 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 (I.R.S. Employer
incorporation or organization) 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 | |
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |X| NO | |
The number of shares outstanding of each of the issuer's classes of common
stock, as of April 30, 2003 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
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
----------------------
MARCH 31, MARCH 31,
2003 2002
-------- --------
REVENUES:
Revenues before reimbursements $ 167,258 $ 171,767
Reimbursements 9,615 8,634
--------- ---------
TOTAL REVENUES 176,873 180,401
--------- ---------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 127,792 130,591
Reimbursements 9,615 8,634
--------- ---------
Cost of Services 137,407 139,225
Selling, general, and administrative expenses 33,079 33,157
Special credit (1) -- (6,000)
Corporate interest, net 1,279 1,178
--------- ---------
TOTAL COSTS AND EXPENSES 171,765 167,560
--------- ---------
INCOME BEFORE INCOME TAXES 5,108 12,841
PROVISION FOR INCOME TAXES 1,859 4,674
--------- ---------
NET INCOME $ 3,249 $ 8,167
========= =========
NET INCOME PER SHARE:
Basic $ 0.07 $ 0.17
Diluted $ 0.07 $ 0.17
========= =========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,622 48,541
Diluted 48,689 48,644
========= =========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.06 $ 0.14
Class B Common Stock $ 0.06 $ 0.14
========= =========
(1) Special credit related to a payment from a former vendor in full
settlement of a business dispute.
(See accompanying notes to condensed consolidated financial statements)
2
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,097 $ 31,091
Accounts receivable, less allowance for doubtful
accounts of $19,935 in 2003 and $19,633 in 2002 135,437 135,174
Unbilled revenues, at estimated billable amounts 101,919 93,792
Prepaid expenses and other current assets 10,889 11,968
--------- ---------
TOTAL CURRENT ASSETS 280,342 272,025
--------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 147,249 144,706
Less accumulated depreciation (111,157) (108,607)
--------- ---------
NET PROPERTY AND EQUIPMENT 36,092 36,099
--------- ---------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 100,103 97,798
Capitalized software costs, net 25,801 23,977
Deferred income tax asset 31,996 31,899
Other 13,905 12,978
--------- ---------
TOTAL OTHER ASSETS 171,805 166,652
--------- ---------
TOTAL ASSETS $ 488,239 $ 474,776
========= =========
(See accompanying notes to condensed consolidated financial statements)
3
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 34,293 $ 30,019
Accounts payable 30,743 31,956
Accrued compensation and related costs 25,800 26,454
Deferred revenues 19,733 18,516
Self-insured risks 16,991 15,833
Accrued income taxes 9,236 9,594
Other accrued liabilities 14,999 14,384
Current installments of long-term debt 1,704 1,493
--------- ---------
TOTAL CURRENT LIABILITIES 153,499 148,249
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 50,803 49,976
Deferred revenues 12,082 12,127
Self-insured risks 12,062 11,819
Minimum pension liability 79,044 76,747
Postretirement medical benefit obligation 6,201 6,289
Other 10,063 10,138
--------- ---------
TOTAL NONCURRENT LIABILITIES 170,255 167,096
--------- ---------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $1.00 par value; 50,000 shares authorized; 23,925
shares issued and
outstanding in 2003 and 2002 23,925 23,925
Class B Common Stock, $1.00 par value; 50,000 shares authorized; 24,697
shares issued and
outstanding in 2003 and 2002 24,697 24,697
Additional paid-in capital 523 523
Retained earnings 192,099 191,767
Accumulated other comprehensive loss (76,759) (81,481)
--------- ---------
TOTAL SHAREHOLDERS' INVESTMENT 164,485 159,431
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 488,239 $ 474,776
========= =========
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
QUARTER ENDED
------------------------
MARCH 31, MARCH 31,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,249 $ 8,167
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 4,055 4,335
Deferred income taxes 221 (287)
Loss on sales of property and equipment 71 7
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net 3,056 (1,005)
Unbilled revenues (5,986) (3,512)
Accrued or prepaid income taxes (1,012) 433
Accounts payable and accrued liabilities (2,961) (3,561)
Deferred revenues 1,039 (1,174)
Prepaid and accrued pension costs 3,946 3,485
Prepaid expenses and other assets 788 (3,592)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,466 3,296
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (2,270) (2,611)
Capitalization of computer software costs (3,167) (2,609)
Proceeds from sales of property and equipment 42 56
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (5,395) (5,164)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,918) (6,796)
Proceeds from exercise of stock options -- 55
Increase in short-term borrowings 4,063 11,490
Payments on short-term borrowings (1,923) (8,507)
Increase in long-term debt 172 8
Payments on long-term debt (247) (38)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (853) (3,788)
-------- --------
-------- --------
Effect of exchange rate changes on cash and cash equivalents 788 (197)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,006 (5,853)
Cash and cash equivalents at beginning of period 31,091 21,966
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,097 $ 16,113
======== ========
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited condensed consolidated financial statements of Crawford &
Company (the "Company") 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. Such reclassifications had no effect on net income as
previously reported.
The results of operations for the quarter ended March 31, 2003 are not
necessarily indicative of the results to be expected during the balance of the
year ending December 31, 2003. These condensed financial statements should be
read in conjunction with the audited financial statements and related notes
contained in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2002.
The Company accounts for stock-based compensation utilizing the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no compensation expense has been recognized for
the option plans because the exercise prices of the stock options equal the
market prices of the underlying stock on the dates of grant. Had compensation
cost for these plans been determined based on the fair value at the grant dates
for awards under those plans consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
Quarter ended
----------------------
March 31, March 31,
(in thousands, except per share data) 2003 2002
-------- ---------
Net income as reported $ 3,249 $ 8,167
Less: compensation expense using the
fair value method, net of tax 348 456
------- -------
Pro forma net income $ 2,901 $ 7,711
======= =======
Net income per share - basic:
As reported $ 0.07 $ 0.17
======= =======
Pro forma $ 0.06 $ 0.16
======= =======
Net income per share - diluted:
As reported $ 0.07 $ 0.17
======= =======
Pro forma $ 0.06 $ 0.16
======= =======
6
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair value of options is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Quarter ended
--------------------
March 31, March 31,
2003 2002
Expected dividend yield 3.6% 3.6%
Expected volatility 33% 33%
Risk-free interest rate 3.6% 3.7%
Expected life of options 7 years 7 years
2. During the quarter ended March 31, 2003, the Company utilized $57,362 of its
restructuring reserves for payments related to lease terminations. As of March
31, 2003, remaining restructuring reserves were $1.5 million, $1.3 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.
3. Basic net income per share is computed based on the weighted-average number
of total common shares outstanding during the respective periods. Diluted net
income per share is 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
quarters ended March 31, 2003 and 2002:
Quarter ended
----------------------
March 31, March 31,
(in thousands, except per share data) 2003 2002
Net income available to common
shareholders $ 3,249 $ 8,167
======= =======
Weighted-average common shares
outstanding - Basic 48,622 48,541
Dilutive effect of stock options 67 103
------- -------
Weighted-average common shares
outstanding - Diluted 48,689 48,644
======= =======
Basic net income per share $ 0.07 $ 0.17
======= =======
Diluted net income per share $ 0.07 $ 0.17
======= =======
7
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Additional options to purchase 5,573,363 shares of Class A Common Stock at
exercise prices ranging from $4.20 to $19.50 per share were outstanding at March
31, 2003, 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.
4. 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 quarters ended March 31, 2003 and 2002:
Quarter ended
-----------------------
March 31, March 31,
(in thousands) 2003 2002
Net income $ 3,249 $ 8,167
Foreign currency translation adjustment 4,722 (1,797)
------- -------
Comprehensive income $ 7,971 $ 6,370
======= =======
5. 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"). The Company's
reportable segments represent components of the business for which separate
financial information is available that is evaluated regularly by the chief
decision maker in deciding how to allocate resources and in assessing
performance. Intersegment sales are recorded at cost and are not material. The
Company measures segment profit based on operating earnings, defined as earnings
before special credit, net corporate interest, and income taxes.
Financial information for the quarters ended March 31, 2003 and 2002 covering
the Company's reportable segments is presented below:
Quarter ended
-----------------------
March 31, March 31,
(in thousands) 2003 2002
-------- ---------
Revenues before Reimbursements:
U.S. $115,073 $126,610
International 52,185 45,157
-------- --------
Total Revenues $167,258 $171,767
======== ========
Operating Earnings:
U.S. $ 4,049 $ 6,279
International 2,338 1,740
-------- --------
Total Operating Earnings $ 6,387 $ 8,019
======== ========
8
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. During the quarter ended March 31, 2003, the Company made additional payments
of $166,000 to the former owner of Greentree Investigations, Inc. pursuant to
the 2000 purchase agreement. Additional contingent payments due under this
agreement may be made through April of 2005.
7. 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 $3.4 million through 2008, as follows:
2003 2004 2005 2006 2007 2008
- -------------------------------------------------------------------
$269,000 $356,000 $279,000 $0 $0 $2,500,000
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated net income was $3,249,000 and $8,167,000 for the quarters ended
March 31, 2003 and 2002, respectively. Consolidated net income for the 2002
period includes a payment received from a former vendor in full settlement of a
business dispute of $3.8 million, net of related income tax expense. There were
no such payments received in 2003.
Operating earnings is one of the key performance measures used by our senior
management and chief decision maker to evaluate the performance of our business
and make resource allocation decisions. We believe this measure is useful to
investors in that it allows them to evaluate our performance using the same
criteria our management uses. Operating earnings (earnings before special
credit, net corporate interest and taxes) in the 2003 first quarter totaled $6.4
million compared with $8.0 million in the comparable 2002 quarter. Following is
a reconciliation of consolidated net income to operating earnings for the
quarters ended March 31, 2003 and 2002 and the related margin as a percentage of
revenues before reimbursements:
Quarter ended
-------------------------------------------
March 31, % March 31, %
(in thousands) 2003 Margin 2002 Margin
-------- ------ -------- ------
Net income $ 3,249 1.9% $ 8,167 4.8%
Add/(deduct):
Special credits -- -- (6,000) (3.5)
Net corporate interest 1,279 0.8 1,178 0.7
Income taxes 1,859 1.1 4,674 2.7
------- --- ------- ---
Operating earnings $ 6,387 3.8% $ 8,019 4.7%
======= === ======= ===
The following is a discussion and analysis of the consolidated financial
condition and results of operations of our two reportable segments: U.S.
operations and international operations. Our reportable segments represent
components of our business for which separate financial information is available
that is evaluated regularly by our chief decision maker in deciding how to
allocate resources and in assessing performance. Revenue amounts discussed
exclude reimbursements for out-of-pocket expenses. Expense amounts discussed
exclude the special credit, net corporate interest, and income taxes.
Our discussion and analysis of operating expenses is comprised of two
components. Compensation and fringe benefits include all compensation, payroll
taxes, and benefits provided to our employees which, as a service company,
represents our most significant and variable expense. Expenses other than
reimbursements, compensation and fringe benefits include office rent and
occupancy costs, other office operating expenses, and depreciation. This
discussion should be read in conjunction with our unaudited condensed
consolidated financial statements and the accompanying footnotes.
10
RESULTS OF OPERATIONS
Operating results for our U.S. and international operations for the quarters
ended March 31, 2003 and 2002 are as follows:
Quarter ended
------------------------
March 31, March 31,
(In thousands) 2003 2002
-------- ---------
REVENUES BEFORE REIMBURSEMENTS:
U.S. $115,073 $126,610
International 52,185 45,157
-------- --------
TOTAL $167,258 $171,767
COMPENSATION & FRINGE BENEFITS:
U.S. $ 74,344 $ 81,759
% of Revenues 64.6% 64.5%
International 35,493 31,400
% of Revenues 68.0% 69.5%
-------- --------
TOTAL $109,837 $113,159
% of Revenues 65.7% 65.9%
EXPENSES OTHER THAN REIMBURSEMENTS,
COMPENSATION & FRINGE BENEFITS:
U.S. $ 36,680 $ 38,572
% of Revenues 31.9% 30.5%
International 14,354 12,017
% of Revenues 27.5% 26.6%
-------- --------
TOTAL $ 51,034 $ 50,589
% of Revenues 30.5% 29.4%
-------- --------
OPERATING EARNINGS (1):
U.S. $ 4,049 $ 6,279
% of Revenues 3.5% 5.0%
International 2,338 1,740
% of Revenues 4.5% 3.9%
-------- --------
TOTAL $ 6,387 $ 8,019
% of Revenues 3.8% 4.7%
(1) Earnings before special credit, net corporate interest, and income taxes.
11
U.S. OPERATIONS
REVENUES
U.S. revenues before reimbursements, by market type, for the quarters ended
March 31, 2003 and 2002 are as follows:
Quarter ended
-------------------------------------
March 31, March 31,
(In thousands) 2003 2002 Variance
--------- --------- --------
Insurance companies $ 58,651 $ 64,763 (9.4%)
Self-insured entities 42,484 50,349 (15.6%)
Class action services 13,938 11,498 21.2%
-------- --------
TOTAL U.S. REVENUES BEFORE REIMBURSEMENTS $115,073 $126,610 (9.1%)
======== ========
Revenues from insurance companies decreased 9.4% to $58.7 million, due largely
to continued softening in our referrals for high-frequency, low-severity claims
and a decrease in catastrophic claim referrals. Lower medical bill auditing
revenues associated with the previously reported non-renewal of a contract with
a major domestic insurer contributed $3.1 million of this decline. Revenues from
self-insured clients decreased 15.6% to $42.5 million in the quarter, due
primarily to a decline in workers' compensation claim referrals. Class action
revenues, which can fluctuate based on the timing of project awards, increased
21.2% to $13.9 million in the quarter.
Case Volume Analysis
Excluding the impact of class action services, U.S. unit volume, measured
principally by cases received, decreased 13.6% in the first quarter of 2003
compared to the same period in 2002. This decrease was partially offset by a
2.6% revenue increase from changes in the mix of services provided and in the
rates charged for those services, resulting in a net 11.0% decrease in U.S.
revenues in the first quarter of 2003, excluding revenues from class action
services. Growth in class action services increased U.S. revenues by 1.9% in the
first quarter of 2003.
Excluding the impact of class action services, U.S. unit volume by major product
line, as measured by cases received, for the quarter ended March 31, 2003 and
2002 is as follows:
Quarter ended
-----------------------------------
March 31, March 31,
(whole numbers) 2003 2002 Variance
-------- --------- --------
Casualty 55,578 57,354 (3.1%)
Workers' Compensation 48,915 61,196 (20.1%)
Property 51,168 46,304 10.5%
Vehicle 49,065 65,626 (25.2%)
Other 5,383 12,765 (57.8%)
------- -------
Total U.S. Cases Received 210,109 243,245 (13.6%)
======= =======
Our decline in workers' compensation claim referrals has been primarily due to
declines in U.S. employment levels and associated injury rates. The decline in
vehicle claims for the quarter is primarily due to the decline we are
experiencing related to U.S. insurance company referrals for
12
high-frequency, low- severity claims. Conservative underwriting, increases in
policy deductibles, and mild weather during the first quarter of 2003
contributed to an industry-wide decline in property and casualty claims
frequency. The increase in property claims is primarily related to increases in
referrals to our Contractor Connection(SM) direct repair network.
COMPENSATION AND FRINGE BENEFITS
Our most significant expense is the compensation of employees, including related
payroll taxes and fringe benefits. U.S. compensation expense as a percent of
revenues increased slightly to 64.6% in the first quarter of 2003 as compared to
64.5% in 2002. In response to the ongoing decline in U.S. claims volume, we have
reduced our level of U.S. full-time equivalent employees by nearly 11% as
compared to first quarter 2002 levels. There were an average of 4,852 full-time
equivalent employees in the 2003 first quarter, compared to an average of 5,451
in the 2002 period.
U.S. salaries and wages decreased to $59.8 million for the quarter ended March
31, 2003, from $65.8 million in the comparable 2002 period. Payroll taxes and
fringe benefits for U.S. operations totaled $14.5 million in the first quarter
of 2003, decreasing 9.4% from 2002 costs of $16.0 million for the comparable
period. These decreases reflect the reduction in full-time equivalent employees
during the current quarter.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits were 31.9% of revenues for the quarter ended March 31, 2003,
up from 30.5% for the same period in 2002. This increase is due to higher
professional indemnity self-insurance cost.
REIMBURSEMENTS
Reimbursements in our U.S. operations decreased to $3.7 million for the quarter
ended March 31, 2003, from $4.5 million in the comparable 2002 period,
reflecting the decline in case volume during 2003.
INTERNATIONAL OPERATIONS
REVENUES
Revenues before reimbursements from our international operations increased
15.6%, from $45.2 million in the first quarter of 2002 to $52.2 million in the
first quarter of 2003. Excluding acquisitions, international unit volume,
measured principally by cases received, increased 10.3% in the first quarter of
2003 compared to the same period in 2002. Our third quarter 2002 acquisition of
the loss adjusting business of Robertson and Company in Australia increased
international revenues by 4.6% for the quarter ended March 31, 2003. Revenues
reflect a 9.1% increase during the quarter ended March 31, 2003, due to the
positive effect of a weak U.S. dollar, primarily as compared to the British
Pound and Euro.
13
Excluding the impact of acquisitions, international unit volume by region for
the quarters ended March 31, 2003 and 2002 was as follows:
Quarter ended
---------------------------------
March 31, March 31,
(whole numbers) 2003 2002 Variance
Americas 30,619 25,594 19.6%
Continental Europe 19,664 18,897 4.1%
Asia/Pacific 5,327 5,298 0.5%
United Kingdom 22,644 21,188 6.9%
------ ------
Total International Cases Received 78,254 70,977 10.3%
The increase in cases received in our Americas operation is primarily due to an
increase in low-value property claims in Brazil. Our increase in the United
Kingdom ("U.K.") is due to the receipt of claims from agreements entered into
during the 2002 fourth quarter. The increase in Continental Europe is due to a
large flood-related project in Central Europe during the 2003 first quarter.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, decreased to 68.0% for the quarter ended March 31, 2003
from 69.5% for the same period in 2002, primarily due to a decrease in capacity
in our U.K. and Canadian operating units due to an increase in case volume.
There were an average of 3,112 full-time equivalent employees in the 2003 first
quarter (including approximately 110 full-time equivalent employees added by our
third quarter 2002 acquisition in Australia), compared to an average of 2,941 in
the 2002 period.
Salaries and wages of international personnel increased to $29.8 million for the
quarter ended March 31, 2003, from $26.8 million in the comparable 2002 period.
Payroll taxes and fringe benefits for international operations totaled $5.7
million in the first quarter of 2003, increasing from 2002 costs of $4.6 million
for the comparable period.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than compensation and related payroll taxes and fringe benefits
were 27.5% of international revenues for the quarter ended March 31, 2003, up
from 26.6% for the same period in 2002, primarily due to higher automobile
expenses and increased insurance expense.
REIMBURSEMENTS
Reimbursements in our international operations increased to $5.9 million for the
quarter ended March 31, 2003, from $4.1 million in the comparable 2002 period.
This increase is due to an increase in claims volume and a large flood-related
project in Central Europe that required the extensive use of outside experts.
14
SPECIAL CREDIT, NET CORPORATE INTEREST, AND INCOME TAXES
During the 2002 first quarter, we received a cash payment of $6.0 million from a
former vendor in full settlement of a business dispute. This special credit, net
of related income tax expense, increased net income per share by $0.08 during
the 2002 first quarter.
Net corporate interest increased to $1.3 million for the quarter ended March 31,
2003, from $1.2 million in the comparable 2002 period. The effect on net
corporate interest from increases in total borrowings over the 2002 first
quarter was partially offset by declines in interest rates in the 2003 first
quarter, as compared to the 2002 period.
Our effective tax rate was 36.4% of pretax income for the quarters ended March
31, 2003 and 2002. Taxes on income totaled $1.9 million for the quarter ended
March 31, 2003, as compared to $4.7 million for the comparable 2002 period.
FINANCIAL CONDITION
At March 31, 2003, current assets exceeded current liabilities by approximately
$126.8 million, an increase of $3.1 million from the working capital balance at
December 31, 2002. Cash and cash equivalents at March 31, 2003 totaled $32.1
million, an increase of $1.0 million from the balance at December 31, 2002. Cash
was generated primarily from operating activities and short-term borrowings,
while the principal uses of cash were for investments in computer software,
dividends paid to shareholders, acquisitions of property and equipment, and
payments on short-term borrowings. Cash dividends to shareholders approximated
90% of net income in the first quarter of 2003, compared to 83% for the same
period in 2002. The Board of Directors declares cash dividends to shareholders
each quarter based on an assessment of current and projected earnings and cash
flows. If we are able to achieve the cost reductions we have targeted for the
2003 second quarter (see Expense Reduction Initiative below), we believe that we
will be able to preserve our current level of dividends for the remainder of
2003.
During the first quarter of 2003, we did not repurchase any Class A or Class B
Common Stock. As of March 31, 2003, 705,863 shares remain to be repurchased
under the share repurchase program authorized by the Board of Directors. We
believe it is unlikely that we will repurchase shares under this program in 2003
due to the decline in the funded status of our defined benefit pension plans.
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 March 31, 2003 totaled $34.3 million, increasing from $30.0
million at December 31, 2002. Long-term borrowings outstanding, excluding
current installments, as of March 31, 2003 totaled $50.8 million compared to
$50.0 million at the end of 2002. 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.
15
Shareholders' investment at March 31, 2003 was $164.5 million, compared with
$159.4 million at December 31, 2002. This increase is primarily due to foreign
currency translation adjustments in the 2003 first quarter.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates these
estimates and judgements based upon historical experience and on various other
factors that are believed to be reasonable under the circumstances. The results
of these evaluations form the basis for making judgements about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
For a complete discussion regarding the application of our critical accounting
policies, see our Form 10-K, for the year ended December 31, 2002 filed with the
Securities and Exchange Commission, under the heading "Application of Critical
Accounting Policies" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section.
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, uncertainties
and assumptions. Our Form 10-K for the year ended December 31, 2002, discusses
such risks, uncertainties and assumptions and other key factors that could cause
actual results to differ materially from those expressed in such forward-looking
statements.
LEGAL PROCEEDINGS
In the normal course of the claims administration services business, we are
named as a defendant in suits by insureds or claimants contesting decisions made
by us or our clients with respect to the settlement of claims. Additionally, our
clients have brought actions for indemnification on the basis of alleged
negligence on our part, our agents, or our employees in rendering service to
clients. The majority of these claims are of the type covered by insurance we
maintain; however, we are self-insured for the deductibles under various
insurance coverages. In our opinion, adequate reserves have been provided for
such self-insured risks.
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 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. We are
cooperating fully with the government's inquiry and have retained outside
counsel to conduct an
16
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.
We are currently attempting to negotiate a settlement with the Department of
Justice, but we cannot predict when the government's investigation or the
settlement discussions will be completed, their ultimate outcome or their effect
on our financial condition or results of operations. However, the investigation
and its ultimate resolution 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. While we
believe that we will have cash flows from operating activities and borrowing
capabilities sufficient to pay any fine or other penalty imposed, any such
result could have a material adverse effect on our financial condition and
results of operations. Expenses associated with the investigation, net of
related tax benefits, were $441,000 and $747,000, or $0.01 and $0.02 per share
for the first quarter of 2003 and 2002, respectively.
EXPENSE REDUCTION INITIATIVE
We are currently taking aggressive steps to reduce our U.S. annual operating
costs from their current level. We have targeted cost reductions of
approximately $1.3 million per month to be achieved during the 2003 second
quarter.
INSURANCE RENEWAL
We are currently negotiating the renewal of our various insurance coverages
effective June 2003. We will likely incur increased premiums and higher
self-insured retentions upon renewal. It is not possible at this time to
determine the impact this will have on our consolidated results of operations,
financial position, or cash flows.
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. Revenues from our international operations
were 31.2% and 26.3% of total revenues at March 31, 2003 and 2002, 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 our international operations based
on changes in foreign currency rates using a sensitivity analysis. The
sensitivity analysis measures the potential
17
loss in earnings based on a hypothetical 10% change in currency exchange rates.
Exchange rates and currency positions as of March 31, 2003 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 $184,000 during the first three months of 2003, 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 March
31, 2003, we had $34.3 million in short-term loans outstanding with an average
variable interest rate of 4.9%. If the average interest rate were to change by
1%, the impact to first quarter 2003 pretax income would be approximately
$343,000.
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. Based upon that evaluation, the
chief executive officer and chief financial officer 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.
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Crawford & Company:
We have reviewed the accompanying condensed consolidated balance sheet of
CRAWFORD & COMPANY (a Georgia corporation) as of March 31, 2003, and the related
condensed consolidated statements of income and cash flows for the three-month
periods ended March 31, 2003 and 2002. These financial statements are the
responsibility of the Company's management.
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 March
31, 2003 and for the three-month period then ended for them to be in conformity
with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of CRAWFORD &
COMPANY as of December 31, 2002, and the related consolidated statements of
income and cash flows for the year then ended and in our report dated January
27, 2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 2002, is fairly stated,
in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 24, 2003
19
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 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. 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.
We are currently attempting to negotiate a settlement with the Department of
Justice, but we cannot predict when the government's investigation or the
settlement discussions will be completed, their ultimate outcome or their effect
on our financial condition or results of operations. However, the investigation
and its ultimate resolution 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. While we
believe that we will have cash flows from operating activities and borrowing
capabilities sufficient to pay any fine or other penalty imposed, any such
result could have a material adverse effect on our financial condition and
results of operations.
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.
20
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: May 13, 2003 /s/ Grover L. Davis
----------------------------------------
Grover L. Davis
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2003 /s/ John F. Giblin
----------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: May 13, 2003 /s/ W. Bruce Swain
----------------------------------------
W. Bruce Swain
Senior Vice President and Controller
(Principal Accounting Officer)
21
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: May 13, 2003 /s/ Grover L. Davis
---------------------------------
Grover L. Davis
Chief Executive Officer
(Principal Executive Officer)
22
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: May 13, 2003 /s/ John F. Giblin
------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
23
INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
15.1 Letter from Ernst & Young LLP 25
99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 26
99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 27
24