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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 June 30, 2004
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 July 31, 2004 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 24,026,903
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)
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
2004 2003
-------- --------
REVENUES:
Revenues before reimbursements $341,871 $343,568
Reimbursements 29,398 28,602
-------- --------
TOTAL REVENUES 371,269 372,170
-------- --------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 263,260 261,314
Reimbursements 29,398 28,602
-------- --------
Cost of Services 292,658 289,916
Selling, general, and administrative expenses 67,786 65,174
Corporate interest, net 803 2,458
-------- --------
TOTAL COSTS AND EXPENSES 361,247 357,548
-------- --------
INCOME BEFORE INCOME TAXES 10,022 14,622
PROVISION FOR INCOME TAXES 2,093 5,322
-------- --------
NET INCOME $ 7,929 $ 9,300
======== ========
NET INCOME PER SHARE:
Basic $ 0.16 $ 0.19
Diluted $ 0.16 $ 0.19
======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,724 48,623
Diluted 48,836 48,670
======== ========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.12 $ 0.12
Class B Common Stock $ 0.12 $ 0.12
======== ========
(See accompanying notes to condensed consolidated financial statements)
2
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
-------------------------------
JUNE 30, JUNE 30,
2004 2003
--------- ---------
REVENUES:
Revenues before reimbursements $ 172,016 $ 176,310
Reimbursements 14,517 13,895
--------- ---------
TOTAL REVENUES 186,533 190,205
--------- ---------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 132,135 133,522
Reimbursements 14,517 13,895
--------- ---------
Cost of Services 146,652 147,417
Selling, general, and administrative expenses 34,150 32,095
Corporate interest, net (534) 1,179
--------- ---------
TOTAL COSTS AND EXPENSES 180,268 180,691
--------- ---------
INCOME BEFORE INCOME TAXES 6,265 9,514
PROVISION FOR INCOME TAXES 725 3,463
--------- ---------
NET INCOME $ 5,540 $ 6,051
========= =========
NET INCOME PER SHARE:
Basic $ 0.11 $ 0.12
Diluted $ 0.11 $ 0.12
========= =========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,724 48,623
Diluted 48,796 48,671
========= =========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.06 $ 0.06
Class B Common Stock $ 0.06 $ 0.06
========= =========
(See accompanying notes to condensed consolidated financial statements)
3
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,090 $ 45,805
Accounts receivable, less allowance for doubtful
accounts of $22,178 in 2004 and $20,832 in 2003 154,806 142,273
Unbilled revenues, at estimated billable amounts 105,494 101,557
Prepaid expenses and other current assets 13,761 13,028
--------- ---------
TOTAL CURRENT ASSETS 297,151 302,663
--------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 152,705 154,786
Less accumulated depreciation (117,099) (117,618)
--------- ---------
NET PROPERTY AND EQUIPMENT 35,606 37,168
--------- ---------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 106,383 104,523
Capitalized software costs, net 31,753 31,540
Deferred income tax asset 28,736 28,505
Other 12,083 12,840
--------- ---------
TOTAL OTHER ASSETS 178,955 177,408
--------- ---------
TOTAL ASSETS $ 511,712 $ 517,239
========= =========
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 41,546 $ 43,007
Accounts payable 32,924 36,685
Accrued compensation and related costs 32,265 37,870
Deferred revenues 22,131 19,172
Self-insured risks 17,975 18,040
Accrued income taxes 7,213 7,406
Other accrued liabilities 22,111 22,418
Current installments of long-term debt 2,620 3,106
--------- ---------
TOTAL CURRENT LIABILITIES 178,785 187,704
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 50,841 50,664
Deferred revenues 10,403 10,559
Self-insured risks 10,780 11,920
Minimum pension liability 70,159 67,846
Postretirement medical benefit obligation 6,077 6,077
Other 10,377 9,875
--------- ---------
TOTAL NONCURRENT LIABILITIES 158,637 156,941
--------- ---------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $1.00 par value; 50,000 shares authorized; 24,027
shares issued and outstanding in 2004 and 2003 24,027 24,027
Class B Common Stock, $1.00 par value; 50,000 shares authorized; 24,697
shares issued and outstanding in 2004 and 2003 24,697 24,697
Additional paid-in capital 840 840
Retained earnings 189,829 187,747
Accumulated other comprehensive loss (65,103) (64,717)
--------- ---------
TOTAL SHAREHOLDERS' INVESTMENT 174,290 172,594
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 511,712 $ 517,239
========= =========
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
SIX MONTHS ENDED
---------------------------
JUNE 30, JUNE 30,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,929 $ 9,300
Reconciliation of net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 9,044 8,123
Deferred income taxes (90) 245
Loss on sales of property and equipment 40 76
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (11,716) (7,215)
Unbilled revenues (4,118) (1,658)
Accrued or prepaid income taxes (86) 1,226
Accounts payable and accrued liabilities (9,324) (64)
Deferred revenues 2,626 4,830
Prepaid and accrued pension costs (1,403) 7,884
Prepaid expenses and other assets 2,167 2,456
-------- --------
Net cash (used in) provided by operating activities (4,931) 25,203
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (4,685) (5,365)
Capitalization of computer software costs (3,652) (6,458)
Acquisitions of businesses, net of cash acquired (479) (166)
Proceeds from sales of property and equipment 85 161
-------- --------
Net cash used in investing activities (8,731) (11,828)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (5,847) (5,835)
Increase in short-term borrowings 4,642 2,224
Payments on short-term borrowings (8,045) (1,923)
Increase in long-term debt 404 218
Payments on long-term debt (704) (621)
Capitalized loan costs 61 -
-------- --------
Net cash used in financing activities (9,489) (5,937)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 436 921
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (22,715) 8,359
Cash and cash equivalents at beginning of period 45,805 34,934
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,090 $ 43,293
======== ========
(See accompanying notes to condensed consolidated financial statements)
6
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. Costs associated with the Company's claims management
systems totaling $699,000 and $1.5 million for the quarter and six months ended
June 30, 2003, respectively, were reclassified from selling, general, and
administrative expenses to cost of services provided in the accompanying
Consolidated Statements of Income in order to consistently reflect the cost of
these systems.
Client collateral deposits in the amount of $4.2 million as of December 31, 2003
were reclassified to other accrued liabilities in the accompanying Consolidated
Balance Sheet in order to consistently report these deposits which were
previously reported as a reduction to cash and cash equivalents.
The Company receives reimbursements from clients for pass-through expenses
related to the cost of media advertising and postage incurred during advertising
and noticing campaigns related to class action settlements administered by the
Company. The Company previously recorded certain of these reimbursements as a
reduction of cost of services rather than as reimbursements revenue.
Accordingly, the Company revised the accompanying Consolidated Statements of
Income for the quarter and six-month periods ended June 30, 2003 in order to
correctly reflect total reimbursements. The impact of this revision was to
increase reimbursement revenues and expenses by $3.6 million and $8.7 million
for the quarter and six-month periods ended June 30, 2003, respectively. The
following table reconciles the Company's total revenues as previously reported
in each quarter of 2003 to total revenues after reflecting the effects of the
revisions:
Quarter Ended
---------------------------------------------------------
March 31, June 30, September 30, December 31,
(in thousands) 2003 2003 2003 2003 Total
- -------------- --------- -------- ------------- ------------ --------
Total revenues, as
previously reported $176,873 $186,627 $184,084 $185,297 $732,881
Effect of revision 5,093 3,578 15,225 11,233 35,129
-------- -------- -------- -------- --------
Total revenues, revised $181,966 $190,205 $199,309 $196,530 $768,010
======== ======== ======== ======== ========
7
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table reconciles the Company's costs of services as previously
reported in each quarter of 2003 to costs of services after reflecting the
effects of the revisions:
Quarter Ended
---------------------------------------------------------
March 31, June 30, September 30, December 31,
(in thousands) 2003 2003 2003 2003 Total
- -------------- --------- -------- ------------- ------------ --------
Costs of services, as
previously reported $137,407 $143,839 $143,537 $135,090 $559,873
Effect of revision 5,093 3,578 15,225 11,233 35,129
-------- -------- -------- -------- --------
Costs of services, revised $142,500 $147,417 $158,762 $146,323 $595,002
======== ======== ======== ======== ========
These revisions had no effect on revenues before reimbursements or net
income as previously reported.
The results of operations for the six months ended June 30, 2004 are not
necessarily indicative of the results to be expected during the balance of the
year ending December 31, 2004. 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/A for the fiscal year
ended December 31, 2003.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
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. Actual results could differ from those estimates. There have
been no material changes to the Company's critical accounting policies and
estimates, as disclosed on Form 10-K/A for the fiscal year ended December 31,
2003.
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 Company's 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:
8
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quarter ended Six months ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
(in thousands, except per share data) 2004 2003 2004 2003
- ------------------------------------- --------- --------- --------- ---------
Net income as reported $ 5,540 $ 6,051 $ 7,929 $ 9,300
Less: compensation expense using the
fair value method, net of tax 142 281 345 629
--------- --------- --------- ---------
Pro forma net income $ 5,398 $ 5,770 $ 7,584 $ 8,671
========= ========= ========= =========
Net income per share - basic:
As reported $ 0.11 $ 0.12 $ 0.16 $ 0.19
========= ========= ========= =========
Pro forma $ 0.11 $ 0.12 $ 0.15 $ 0.18
========= ========= ========= =========
Net income per share - diluted:
As reported $ 0.11 $ 0.12 $ 0.16 $ 0.19
========= ========= ========= =========
Pro forma $ 0.11 $ 0.12 $ 0.15 $ 0.18
========= ========= ========= =========
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 Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------- ------- ------- -------
Expected dividend yield 3.4% 3.6% 3.4% 3.6%
Expected volatility 35% 34% 34% 34%
Risk-free interest rate 3.8% 3.6% 3.8% 3.6%
Expected life of options 7 years 7 years 7 years 7 years
2. During the quarter and six months ended June 30, 2004, the Company
utilized $122,000 and $207,000, respectively, of its restructuring reserves for
payments related to lease terminations. As of June 30, 2004, remaining
restructuring reserves were $1.1 million, $904,000 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,
if any, using the "treasury stock" method.
Below is the calculation of basic and diluted net income per share for the
quarters and six months ended June 30, 2004 and 2003:
9
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quarter ended Six months ended
----------------------- -------------------------
June 30, June 30, June 30, June 30,
(in thousands, except per share data) 2004 2003 2004 2003
- ------------------------------------- -------- -------- -------- --------
Net income available to common shareholders $ 5,540 $ 6,051 $ 7,929 $ 9,300
======= ======= ======= =======
Weighted-average common shares outstanding - Basic 48,724 48,623 48,724 48,623
Dilutive effect of stock options 72 48 112 47
------- ------- ------- -------
Weighted-average common shares outstanding - Diluted 48,796 48,671 48,836 48,670
======= ======= ======= =======
Basic net income per share $ 0.11 $ 0.12 $ 0.16 $ 0.19
======= ======= ======= =======
Diluted net income per share $ 0.11 $ 0.12 $ 0.16 $ 0.19
======= ======= ======= =======
Additional options to purchase 4,830,048 shares of Class A Common Stock at
exercise prices ranging from $5.42 to $19.50 per share were outstanding at June
30, 2004, 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 during the 2004 six-month period. 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 and six months ended June 30, 2004 and
2003:
Quarter ended Six months ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
(in thousands) 2004 2003 2004 2003
- -------------- -------- -------- -------- --------
Net income $ 5,540 $ 6,051 $ 7,929 $ 9,300
Foreign currency translation adjustment (3,442) 2,066 (386) 6,788
------- ------- ------- -------
Comprehensive income $ 2,098 $ 8,117 $ 7,543 $16,088
======= ======= ======= =======
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
net corporate interest and income taxes.
Financial information for the quarters and six months ended June 30, 2004 and
2003 covering the Company's reportable segments is presented below:
10
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quarter ended Six months ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
(in thousands) 2004 2003 2004 2003
- -------------- -------- -------- -------- --------
REVENUES:
U.S. $109,593 $121,858 $218,906 $236,931
International 62,423 54,452 122,965 106,637
-------- -------- -------- --------
TOTAL REVENUES BEFORE REIMBURSEMENTS $172,016 $176,310 $341,871 $343,568
======== ======== ======== ========
OPERATING EARNINGS:
U.S. $ 3,826 $ 10,131 $ 6,718 $ 14,180
International 1,905 562 4,107 2,900
-------- -------- -------- --------
TOTAL OPERATING EARNINGS $ 5,731 $ 10,693 $ 10,825 $ 17,080
======== ======== ======== ========
6. During the quarter ended March 31, 2004, the Company made additional
payments of $106,000 to the former owner of Greentree Investigations, Inc.
pursuant to a purchase agreement entered into in 2000. Additional contingent
payments due under this agreement may be made through April of 2005. During June
2004, the Company acquired the net assets of Cabinet Mayoussier, Cabinet
Tricaud, and TMA, France-based loss adjusting firms for an initial purchase
price of $1.4 million, including deferred consideration of $828,000. This
acquisition was made to strengthen the Company's position in the French loss
adjusting market. The Company acquired assets with a fair value of $3.3 million,
including goodwill of $1.7 million, and assumed liabilities of $1.9 million.
Additional contingent payments due under this agreement may be made through
October of 2009.
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 projected
levels of revenues and operating earnings, additional payments under existing
earnout agreements would approximate $3.4 million through 2009, as follows:
2004 2005 2006 2007 2008 2009
- ---- ---- ---- ---- ---- ----
$106,000 $541,000 $79,000 $79,000 $2,300,000 $267,000
8. The Company and its subsidiaries sponsor various defined benefit and
defined contribution retirement plans covering substantially all employees.
Effective December 31, 2002, the Company elected to freeze its U.S. defined
benefit plan and replace it with a discretionary, non-contributory defined
contribution plan. Net periodic benefit cost related to the U.S. defined benefit
pension plan for the quarters and six months ended June 30, 2004 and 2003
included the following components:
11
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quarter ended Six months ended
------------- ----------------
June 30, June 30, June 30, June 30,
(in thousands) 2004 2003 2004 2003
- -------------- -------- -------- -------- --------
Interest cost $ 5,337 $ 5,383 $ 10,674 $ 10,766
Expected return on assets (5,960) (5,357) (11,920) (10,714)
Net amortization -- 334 -- 668
Recognized net actuarial loss 1,386 1,980 2,772 3,960
-------- -------- -------- --------
Net periodic benefit cost $ 763 $ 2,340 $ 1,526 $ 4,680
======== ======== ======== ========
The Company is not required to make any contributions to its frozen U.S. defined
benefit pension plan during 2004.
In December 2003, a law was passed which expands Medicare, primarily by adding a
prescription drug benefit for Medicare-eligible retirees starting in 2006. The
Company anticipates that the benefits paid after 2006 will be lower as a result
of the new Medicare provision; however, the retiree medical obligations and
costs reported do not reflect the impact of this legislation. The Company
intends to recognize the new Medicare provision's impact by adopting Financial
Accounting Standards Board Staff Position 106-2 during the 2004 third quarter.
Adoption of this Staff Position is not expected to have a material effect on the
Company's financial position, results of operations, or cash flows.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
Crawford & Company provides claims management services to insurance companies,
self-insured entities and class action settlement funds. Major service lines
include workers' compensation claims administration and healthcare management
services, property and casualty claims management, class action services and
risk management information services.
Insurance companies, which represent the major source of our revenues,
customarily manage their own claims administration function but require limited
services which we provide, primarily field investigation and evaluation of
property and casualty insurance claims. Self-insured entities typically require
a broader range of services from us. In addition to field investigation and
evaluation of their claims, we may also provide initial loss reporting services
for their claimants, loss mitigation services such as medical case management
and vocational rehabilitation, risk management information services, and
administration of the trust funds established to pay their claims. Finally, we
also perform the administrative functions related to securities, product
liability, bankruptcy and other class action settlements, including identifying
and qualifying class members, determining and dispensing settlement payments,
and administering the settlement funds.
The claims management services market, both in the U.S. and internationally, is
highly competitive and comprised of a large number of companies of varying size
and scope of services. The demand from insurance companies and self-insured
entities for services provided by independent claims service firms like us is
largely dependent on industry-wide claims volumes, which are affected by the
insurance underwriting cycle, weather-related events, general economic activity,
and overall employment levels and associated injury rates.
We generally earn our revenues on an individual fee per claim basis.
Accordingly, the volume of claim referrals to us is a key driver of our
revenues. During a hard insurance underwriting market, as we have experienced
since the September 11, 2001 terrorist attacks, insurance companies become very
selective in the risks they underwrite, and insurance premiums and policy
deductibles increase, sometimes quite dramatically. This results in a reduction
in industry-wide claims volumes, which reduces claims referrals to us unless we
can offset the decline in claim referrals with growth in our share of the
overall claims services market. Our ability to grow our market share in such a
highly fragmented, competitive market is primarily dependent on the delivery of
superior quality service and effective, properly focused sales efforts.
RESULTS OF OPERATIONS
Consolidated net income was $5.5 million and $6.1 million for the quarters ended
June 30, 2004 and 2003, respectively, and $7.9 million and $9.3 million for the
six months ended June 30, 2004 and 2003, respectively. During the 2004 second
quarter, we settled a tax credit refund claim with the Internal Revenue Service
which increased net income by $2.8 million. There was no such tax refund
settlement 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
13
performance using the same criteria our management uses. Operating earnings
(earnings before net corporate interest and taxes) during the quarter and six
months ended June 30, 2004, totaled $5.7 million and $10.8 million,
respectively, compared with $10.7 million and $17.1 in the comparable 2003
periods. Following is a reconciliation of consolidated net income to operating
earnings for the quarters and six months ended June 30, 2004 and 2003 and the
related margins as a percentage of revenues before reimbursements:
Quarter ended Six months ended
-------------------------------------- --------------------------------------
June 30, % June 30, % June 30, % June 30, %
(in thousands) 2004 Margin 2003 Margin 2004 Margin 2003 Margin
-------------- ------- ------ ------- ------ -------- ------ ------- ------
Net income $ 5,540 3.2% $ 6,051 3.4% $ 7,929 2.3% $ 9,300 2.7%
Add (deduct):
Net corporate interest (534) (0.3) 1,179 0.7 803 0.3 2,458 0.7
Income taxes 725 0.4 3,463 2.0 2,093 0.6 5,322 1.6
------- ---- ------- --- ------- ---- ------- ---
Operating earnings $ 5,731 3.3% $10,693 6.1% $10,825 3.2% $17,080 5.0%
======= === ======= === ======= === ======= ===
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 pass-through expenses. Expense amounts discussed
exclude 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.
14
Operating results for our U.S. and international operations for the quarters and
six months ended June 30, 2004 and 2003 are as follows:
Quarter ended Six months ended
---------------------- ---------------------
June 30, June 30, June 30, June 30,
(in thousands) 2004 2003 2004 2003
-------------- ---- ---- ---- ----
REVENUES BEFORE REIMBURSEMENTS:
U.S. $109,593 $121,858 $218,906 $236,931
International 62,423 54,452 122,965 106,637
-------- -------- -------- --------
TOTAL $172,016 $176,310 $341,871 $343,568
COMPENSATION & FRINGE BENEFITS:
U.S. $ 67,834 $ 75,302 $137,201 $149,646
% of Revenues 61.9% 61.8% 62.6% 63.1%
International 42,849 38,324 85,269 73,817
% of Revenues 68.6% 70.4% 69.4% 69.2%
-------- -------- -------- --------
TOTAL $110,683 $113,626 $222,470 $223,463
% of Revenues 64.4% 64.4% 65.0% 65.0%
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION &
FRINGE BENEFITS:
U.S. $ 37,933 $ 36,425 $ 74,987 $ 73,105
% of Revenues 34.6% 29.9% 34.3% 30.9%
International 17,669 15,566 33,589 29,920
% of Revenues 28.3% 28.6% 27.3% 28.1%
-------- -------- -------- --------
TOTAL $ 55,602 $ 51,991 $108,576 $103,025
% of Revenues 32.3% 29.5% 31.8% 30.0%
-------- -------- -------- --------
OPERATING EARNINGS (1):
U.S. $ 3,826 $ 10,131 $ 6,718 $ 14,180
% of Revenues 3.5% 8.3% 3.1% 6.0%
International 1,905 562 4,107 2,900
% of Revenues 3.1% 1.0% 3.3% 2.7%
-------- -------- -------- --------
TOTAL $ 5,731 $ 10,693 $ 10,825 $ 17,080
% of Revenues 3.3% 6.1% 3.2% 5.0%
(1) Earnings before net corporate interest and income taxes.
U.S. OPERATIONS
REVENUES
U.S. revenues before reimbursements, by market type, for the quarters and six
months ended June 30, 2004 and 2003 are as follows:
Quarter ended Six months ended
--------------------------------- ----------------------------------
June 30, June 30, June 30, June 30,
(in thousands) 2004 2003 Variance 2004 2003 Variance
-------------- ---- ---- -------- ---- ---- --------
Insurance companies $ 48,369 $ 62,175 (22.2%) $ 98,822 $120,825 (18.2%)
Self-insured entities 40,353 42,057 (4.1%) 80,762 84,542 (4.5%)
Class action services 20,871 17,626 18.4% 39,322 31,564 24.6%
-------- -------- -------- --------
TOTAL U.S. REVENUES
BEFORE REIMBURSEMENTS $109,593 $121,858 (10.1%) $218,906 $236,931 (7.6%)
======== ======== ======== ========
15
Revenues from insurance companies decreased 22.2% from the 2003 period second
quarter to $48.4 million in the 2004 second quarter, reflecting a continued
softening in the Company's U.S. insurance company referrals for high-frequency,
low-severity claims. Revenues from self-insured clients decreased 4.1% from the
2003 second quarter to $40.4 million in the 2004 due primarily to a decline in
workers' compensation claim referrals. See the following analysis of U.S. cases
received. Class action revenues, which can fluctuate based on the timing of
project awards, increased 18.4% from the 2003 second quarter to $20.9 million in
the current quarter. This increase is primarily the result of work performed on
major projects which were awarded in 2003 and 2004.
Case Volume Analysis
U.S. unit volume, measured principally by cases received, and excluding the
impact of class action services, decreased 19.6% in the second quarter of 2004
compared to the 2003 period. This decrease was partially offset by a 6.8%
revenue increase from changes in the mix of services provided and in the rates
charged for those services, resulting in a net 12.8% decrease in U.S. revenues
for the second quarter of 2004, excluding revenues from class action services.
Our U.S. referrals for high-frequency, low-severity claims have declined during
the year resulting in an increase in our average revenue per claim. Growth in
class action services increased U.S. revenues by 2.7% in the quarter ended June
30, 2004, 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 quarters and six months ended June
30, 2004 and 2003 is as follows:
Quarter ended Six months ended
------------------------------- --------------------------------
June 30, June 30, June 30, June 30,
(whole numbers) 2004 2003 Variance 2004 2003 Variance
--------------- ---- ---- -------- ---- ---- --------
Casualty 49,653 51,518 (3.6%) 101,679 107,096 (5.1%)
Property 49,085 65,718 (25.3%) 90,058 116,886 (23.0%)
Vehicle 34,109 51,016 (33.1%) 68,049 100,081 (32.0%)
Workers' Compensation 38,230 45,432 (15.9%) 77,820 94,347 (17.5%)
Other 4,886 5,249 (6.9%) 9,574 10,632 (10.0%)
------- ------- -------- -------
TOTAL U.S. CASES RECEIVED 175,963 218,933 (19.6%) 347,180 429,042 (19.1%)
======= ======= ======== =======
Our decline in workers' compensation claim referrals has been primarily due to
declines in U.S. employment levels and associated injury rates. Recently
reported gains in U.S. employment levels should benefit future workers'
compensation claim referrals. The decline in property and vehicle claims for the
quarter is due to a decline in referrals of high-frequency, low-severity claims
from our insurance company clients. Conservative underwriting by insurance
companies, including significant increases in policy deductibles, has
contributed to an industry-wide decline in property and casualty claims
frequency. The decline in casualty claims is primarily due to a reduction in
claims referred by our existing client base.
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 61.9% in the second quarter of 2004 as compared
to 61.8% in the 2003 quarter.
16
In response to the ongoing decline in U.S. claims volume, we have reduced our
level of U.S. full-time equivalent employees by 17% as compared to employment
levels through the 2003 second quarter. There were an average of 3,900 full-time
equivalent employees in the first six months of 2004, compared to an average of
4,702 in the 2003 period.
U.S. salaries and wages totaled $56.4 million and $111.5 million for the quarter
and six months ended June 30, 2004, respectively, decreasing 7.5% and 7.7%, from
$61.0 million and $120.7 million in the comparable 2003 periods. Payroll taxes
and fringe benefits for U.S. operations totaled $11.4 million and $25.7 million
in the second quarter and first six months of 2004, respectively, decreasing
20.4% and 11.1% from 2003 costs of $14.3 million and $28.9 million for the
comparable periods. These decreases reflect the reduction in full-time
equivalent employees during the current quarter and year-to-date period.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits were 34.6% of revenues for the quarter ended June 30, 2004,
up from 29.9% for the same period in 2003. U.S. expenses other than
reimbursements, compensation and related payroll taxes and fringe benefits
approximated 34.3% of revenues for the six-month period ended June 30, 2004, up
from 30.9% for the same period in 2003. These increases primarily relate to
higher professional fees associated with growth in our class action services
unit during the 2004 periods.
REIMBURSEMENTS
Reimbursements in our U.S. operations increased to $8.1 million and $17.0
million for the quarter and six months ended June 30, 2004, respectively, from
$7.1 million and $15.9 million in the comparable 2003 period, reflecting the
increase in revenues from our class action services unit.
INTERNATIONAL OPERATIONS
REVENUES
Substantially all international revenues are derived from the insurance company
market. Revenues before reimbursements from our international operations
increased 14.6%, from $54.5 million in the second quarter of 2003 to $62.4
million in the 2004 second quarter. Revenues before reimbursements for the first
six months of 2004 totaled $123.0 million, a 15.3% increase from $106.6 million
reported in the first six months of 2003. International unit volume, measured
principally by cases received, increased 3.0% and 2.0% in the current quarter
and six months ended June 30, 2004, respectively, compared to the same periods
in 2003. Revenues reflect an 11.1% and 12.5% increase during the quarter and six
months ended June 30, 2004, due to the positive effect of a weak U.S. dollar,
primarily as compared to the British pound and the euro.
17
International unit volume by region for the quarters and six months ended June
30, 2004 and 2003 was as follows:
Quarter ended Six months ended
---------------------------- ------------------------------
June 30, June 30, June 30, June 30,
(whole numbers) 2004 2003 Variance 2004 2003 Variance
--------------- ---- ---- -------- ---- ---- --------
United Kingdom 26,937 22,944 17.4% 51,309 45,588 12.5%
Americas 24,532 27,208 (9.8%) 52,667 57,827 (8.9%)
CEMEA 21,269 19,396 9.7% 42,311 39,060 8.3%
Asia/Pacific 9,205 9,992 (7.9%) 19,043 19,654 (3.1%)
------ ------ ------- -------
TOTAL INTERNATIONAL CASES RECEIVED 81,943 79,540 3.0% 165,330 162,129 2.0%
====== ====== ======= =======
The increase in the United Kingdom (U.K.) is largely due to an increase in
claims received from new contracts entered into in late 2003 and during 2004.
The decrease in the Americas is primarily due to the receipt of approximately
3,200 low-value property claims in Brazil during the 2003 second quarter. There
was no such intake of claims in the 2004 period. The increase in Continental
Europe, Middle East, & Africa ("CEMEA") is largely due to an increase in
high-frequency, low-value claims in Holland, Spain, France and Germany. The
decrease in Asia/Pacific is primarily due to a decrease in weather related
claims in Australia.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, decreased to 68.6% for the quarter ended June 30, 2004 from
69.4% for the same period in 2003, primarily due to a reduction of capacity
within our U.K. unit. For the six-month period, compensation, payroll taxes and
fringe benefits increased slightly as a percentage of revenues to 70.0% in 2004
from 69.2% in 2003. There were an average of 3,116 full-time equivalent
employees in the first six months of 2004 compared to an average of 3,125 in the
2003 period.
Salaries and wages of international personnel increased to $36.0 million for the
quarter ended June 30, 2004, from $32.6 million in the comparable 2003 period.
For the six-month period, salaries and wages increased to $71.5 million in 2004
from $62.3 million in 2003. Payroll taxes and fringe benefits for international
operations totaled $6.8 million and $13.8 million for the quarter and six months
ended June 30, 2004, respectively, compared to $5.7 million and $11.5 million
for the same periods in 2003. The increases in these costs are largely the
result of a decline in the value of the U.S. dollar against other major
currencies, primarily the British pound and the euro.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than compensation and related payroll taxes and fringe benefits
were 28.3% and 27.3% of international revenues for the quarter and six months
ended June 30, 2004, respectively, down from 28.6% and 28.1% for the same period
in 2003, primarily due to a reduction of capacity within our U.K. unit.
18
REIMBURSEMENTS
Reimbursements in our international operations decreased to $6.4 million and
$12.4 million for the quarter and six months ended June 30, 2004, respectively,
from $6.8 million and $12.7 million in the comparable 2003 period. This decrease
is due to a decline in the number of claims requiring the use of outside experts
during the current year periods.
NET CORPORATE INTEREST AND INCOME TAXES
During June 2004, we settled a tax credit refund claim with the Internal Revenue
Service and recorded a receivable of $3.5 million which is comprised of a tax
refund of $1.7 million and associated interest of $1.8 million. The receipt of
this refund is expected by December 31, 2004.
Including interest of $1.8 million associated with the tax credit refund claim,
net corporate interest decreased to ($534,000) and $803,000 for the quarter and
six months ended June 30, 2004, respectively, from $1.2 million and $2.5 million
in the comparable 2003 periods.
Excluding the tax refund of $1.7 million mentioned above, our effective tax rate
was 39.4% and 38.4% of pretax income for the quarter and six months ended June
30, 2004, respectively, compared to 36.4% of pretax income for the quarter and
six months ended June 30, 2003. Taxes on income, including the expected tax
refund, totaled $725,000 and $2.1 million for the quarter and six months ended
June 30, 2004, respectively, as compared to $3.5 million and $5.3 million for
the comparable 2003 periods. We perform a quarterly evaluation of our effective
tax rate expected for the year. Based on operating results through the first six
months of 2004 and a projection of operating results for the remainder of the
year, we estimate that our effective tax rate will be 38.4% for the calendar
year 2004, before considering the tax credit. The change in our estimated
effective tax rate was primarily due to a change in the mix of income expected
from our various international operations.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At June 30, 2004, current assets exceeded current liabilities by approximately
$118.4 million, an increase of $3.4 million from the working capital balance at
December 31, 2003. Cash and cash equivalents at June 30, 2004 totaled $23.1
million, a decrease of $22.7 million from the balance at December 31, 2003. Cash
used in operations during the period totaled $4.9 million, which was used to
fund growth in our class action services and international operations and a $6.1
million annual contribution to our U.S. defined contribution pension plan. Other
significant uses of cash during the period included dividends paid to
shareholders, investments in computer software, net payments on short-term
borrowings and acquisitions of property and equipment.
Cash dividends to shareholders approximated 73.7% of net income in the first six
months of 2004, compared to 62.7% for the same period in 2003. The Board of
Directors declares cash dividends to shareholders each quarter based on an
assessment of current and projected earnings and cash flows.
During the first six months of 2004, we did not repurchase any Class A or Class
B Common Stock. As of June 30, 2004, 705,863 shares are eligible to be
repurchased under the discretionary 1999 share repurchase program authorized by
the Board of Directors. We believe it is unlikely that we will repurchase shares
under this program in the foreseeable future due to the decline in the funded
status of our defined benefit pension plans.
19
We maintain committed revolving credit lines with banks in order to meet
seasonal working capital requirements and other financing needs that may arise.
Our short-term debt obligations typically peak during the first quarter and
generally decline during the balance of the year. The balance of unused lines of
credit totaled $24.2 million at June 30, 2004. Short-term borrowings
outstanding, including bank overdraft facilities, as of June 30, 2004 totaled
$41.5 million, decreasing from $43.0 million at December 31, 2003. Long-term
borrowings outstanding, excluding current installments, as of June 30, 2004
totaled $50.8 million compared to $50.7 million at December 31, 2003. Please
refer to the debt covenants discussion under the "Factors that May Affect Future
Results" section of this report for a further discussion of our borrowing
capabilities. 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 June 30, 2004 was $174.3 million, compared with
$172.6 million at December 31, 2003. This increase is primarily the result of
net income less dividends paid to shareholders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
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/A for the year ended December 31, 2003 filed with
the Securities and Exchange Commission, under the heading "Critical Accounting
Policies and Estimates" 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/A for the year ended December 31, 2003, discusses
such risks, uncertainties and assumptions and other key
20
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 that
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.
We have received two related federal grand jury subpoenas which we understand
have been issued as part of a possible conflicts of interest investigation
involving a public entity client of our Melville, New York office for Risk
Management Services and Healthcare Management. We have completed our responses
to both of these subpoenas. For a complete discussion regarding legal
proceedings, see our Form 10-K/A for the year ended December 31, 2003 filed with
the Securities and Exchange Commission, under the heading "Factors that May
Affect Future Results" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section.
CONTINGENT PAYMENTS
We normally structure 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 projected levels of
revenues and operating earnings, additional payments under existing earnout
agreements would approximate $3.4 million through 2009, as follows: 2004 -
$106,000; 2005 - $541,000; 2006 - $79,000; 2007 - $79,000; 2008 - $2,300,000;
and 2009 - $267,000.
We maintain letters of credit to satisfy certain contractual requirements. At
June 30, 2004, there was $12.2 million committed under these letters of credit.
POSTRETIREMENT MEDICAL BENEFITS
In December 2003, a law was passed which expands Medicare, primarily by adding a
prescription drug benefit for Medicare-eligible retirees starting in 2006. We
anticipate that the benefits we pay after 2006 will be lower as a result of the
new Medicare provision; however, the retiree medical obligations and costs
reported do not reflect the impact of this legislation. The Company intends to
recognize the new Medicare provision's impact by adopting Financial Accounting
Standards Board Staff Position 106-2 during the 2004 third quarter. The adoption
of this Staff Position is not expected to have a material effect on our
financial position, results of operations, or cash flows.
PENDING SALE OF UNDEVELOPED REAL ESTATE
We have signed a contract to sell an undeveloped parcel of real estate for a
sales price of $10.4 million, consisting of $2.25 million due at closing and a
6% promissory note for $8.15 million payable in its entirety 180 days after
closing. The sale is subject to certain contingencies but we expect to close
this transaction in the third quarter of 2004 and recognize a pretax gain of
approximately $9.2 million.
DEBT COVENANTS
In October 2003, we entered into a committed $70.0 million revolving credit line
pursuant to a revolving credit agreement (the "Revolving Credit Agreement") and
issued $50.0 million in 6.08% senior notes due October 2010 pursuant to a notes
purchase agreement (the "Notes Purchase Agreement"). As of June 30,
2004, there was $33.6 million outstanding on the revolving credit line with an
average variable interest rate of 5.3%. In
21
addition, letters of credit of $12.2 million were also outstanding under this
revolving credit line. The stock of Crawford & Company International, Inc. is
pledged as security under the Revolving Credit Agreement and the Notes Purchase
Agreement and the Company's domestic subsidiaries have guaranteed the Company's
obligations under these agreements.
Both of these agreements contain various provisions which require us to maintain
defined leverage ratios, fixed charge coverage ratios, and minimum net worth
thresholds. We must maintain, on a rolling four quarter basis, a leverage ratio
of consolidated debt to earnings before interest, income taxes, depreciation,
amortization, certain non-recurring charges, and the capitalization of
internally developed software costs ("EBITDA") of no more than 2.75 times
EBITDA. This ratio is reduced to a maximum allowable of 2.50 times EBITDA at
September 30, 2004 and 2.25 times EBITDA at September 30, 2005 and thereafter.
We must also maintain a fixed charge coverage ratio of EBITDA less depreciation
and amortization plus lease expense ("EBITR") to total fixed charges, consisting
of interest expense and lease expense, of no less than 1.25 times fixed charges.
This ratio is increased to a minimum allowable of 1.50 times fixed charges at
September 30, 2004 and thereafter. Additionally, we are required to maintain a
minimum net worth equal to $135,516,350 plus 50% of our cumulative positive
consolidated net income earned after December 31, 2002 plus 100% of the net
proceeds from any equity offering subject to certain terms and conditions. For
purposes of determining minimum net worth, any non-cash adjustments after
December 31, 2002 related to our pension fund liabilities, goodwill, or foreign
currency translations are excluded.
We were in compliance with these debt covenants as of June 30, 2004. However,
based upon our operating results for the next six months of 2004, continued
compliance with the covenant to maintain a certain fixed charge coverage ratio
for the quarter ended September 30, 2004 may depend upon the successful
closing, during that quarter, of the transaction to sell undeveloped real
estate, discussed above. If we were not to meet the covenant requirement, we
would be in default under these agreements. In such an event, we would need to
obtain a waiver of the default or repay the outstanding indebtedness under the
agreements. If we were unable to obtain a waiver on satisfactory terms, we may
be required to renegotiate this indebtedness. Any such renegotiations could
result in less favorable terms, including higher interest rates and accelerated
payments. Once the sale of the real estate discussed above is complete, our
current operating results indicate that we will be in compliance with the
financial covenants contained in the Revolving Credit Agreement and the Notes
Purchase Agreement throughout 2004. However, there can be no assurance that our
actual financial results will match our current results or that we will not
violate the covenants.
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 during the 2004 second quarter or six months
ended June 30, 2004.
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 36.0% and 31.0% of total revenues for the six months ended June 30, 2004
and 2003, 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.
22
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 loss in earnings based on a
hypothetical 10% change in currency exchange rates. Exchange rates and currency
positions as of June 30, 2004 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 $316,000, or
less than $0.01 per share, during the first six months of 2004, 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 June
30, 2004, we had $41.5 million in short-term loans outstanding, including bank
overdraft facilities, with an average variable interest rate of 5.0%. If the
average interest rate were to change by 1%, the impact to pretax income for the
six months ended June 30, 2004 would be approximately $208,000, or less than
$0.01 per share.
Changes in the projected benefit obligations of our defined benefit pension
plans are largely dependent on changes in prevailing interest rates as of the
measurement dates we use to value these obligations under SFAS 87. If our
assumption for the discount rate were to change by 0.25%, representing either an
increase or decrease in the rate, the projected benefit obligation of our frozen
U.S. defined benefit plan would change by approximately $10.8 million. The
impact of this change to pretax income for the six months ended June 30, 2004
would have been approximately $562,000, or $0.01 per share.
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 of the end of the period covered by this report, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. 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 on this 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
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
There have been no significant changes in our internal controls over financial
reporting during the period covered by this report that materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Crawford & Company:
We have reviewed the condensed consolidated balance sheet of CRAWFORD & COMPANY
(a Georgia corporation) as of June 30, 2004, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 2004 and 2003, and the condensed consolidated statements of cash
flows for the six-month periods ended June 30, 2004 and 2003. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 condensed consolidated financial statements, referred to above,
for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of CRAWFORD & COMPANY as of December 31, 2003, and the related
consolidated statements of income and cash flows for the year then ended (not
presented herein) and in our report dated February 2, 2004, except for Note 1,
as to which the date is July 28, 2004, 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, 2003, 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
August 3, 2004
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have received two related federal grand jury subpoenas which we understand
have been issued as part of a possible conflicts of interest investigation
involving a public entity client of our Melville, New York office for Risk
Management Services and Healthcare Management. We have completed our responses
to both of these subpoenas. For a complete discussion regarding legal
proceedings, see our Form 10-K/A for the year ended December 31, 2003 filed with
the Securities and Exchange Commission, under the heading "Factors that May
Affect Future Results" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation of the Registrant, as
Amended (incorporated by reference to Exhibit 19.1 to the
Registrant's Quarterly report on form 10-Q for the quarter
ended June 31, 1991).
3.2 Restated By-Laws of the Registrant, as amended (incorporated
by reference to the Registrant's Annual Report on form 10-K
for the year ended December 31, 2003).
10.1 Supplemental Executive Retirement Plan
15.1 Letter from Ernst & Young
31.1 Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of principal executive officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of principal financial officer 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:
Current Report on Form 8-K dated April 22, 2004 containing a copy of
the Registrant's press release dated April 22, 2004 titled "Crawford
& Company Announces Resignation of Grover. L. Davis as Chairman and
Chief Executive Officer."
Current Report on Form 8-K dated April 26, 2004 containing a copy of
the Registrant's press release dated April 26, 2004 titled "Crawford
Reports First Quarter 2004 Results."
25
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: August 3, 2004 /s/ Marshall G. Long
---------------------------------------
Marshall G. Long
Chief Executive Officer
(Principal Executive Officer)
Date: August 3, 2004 /s/ John F. Giblin
---------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: August 3, 2004 /s/ W. Bruce Swain
---------------------------------------
W. Bruce Swain
Senior Vice President and Controller
(Principal Accounting Officer)
26
INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
10.1 Supplemental Executive Retirement Plan 28
15.1 Letter from Ernst & Young LLP 35
31.1 Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 36
31.2 Certification of principal financial officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 37
32.1 Certification of principal executive officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 38
32.2 Certification of principal financial officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 39
27