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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 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 October 31, 2004 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 24,146,740
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)
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
REVENUES:
Revenues before reimbursements $ 527,741 $ 515,802
Reimbursements 61,036 55,677
--------- ---------
TOTAL REVENUES 588,777 571,479
--------- ---------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 407,599 395,272
Reimbursements 61,036 55,677
--------- ---------
Cost of Services 468,635 450,949
Selling, general, and administrative expenses 100,946 95,332
Special (credit)/charge (1) (8,573) 8,000
Corporate interest, net 2,269 3,855
--------- ---------
TOTAL COSTS AND EXPENSES 563,277 558,136
--------- ---------
INCOME BEFORE INCOME TAXES 25,500 13,343
PROVISION FOR INCOME TAXES 8,046 7,769
--------- ---------
NET INCOME $ 17,454 $ 5,574
--------- ---------
NET INCOME PER SHARE:
Basic $ 0.36 $ 0.11
Diluted $ 0.36 $ 0.11
========= =========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,748 48,649
Diluted 48,829 48,701
========= =========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.18 $ 0.18
Class B Common Stock $ 0.18 $ 0.18
========= =========
(1) Special credit is a pretax gain related to the sale of an undeveloped
parcel of real estate. Special charge is an after-tax fine related to the
settlement of a Department of Justice investigation.
(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
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
REVENUES:
Revenues before reimbursements $ 185,870 $ 172,234
Reimbursements 31,638 27,075
--------- ----------
TOTAL REVENUES 217,508 199,309
--------- ----------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 144,339 132,501
Reimbursements 31,638 27,075
--------- ----------
Cost of Services 175,977 159,576
Selling, general, and administrative expenses 33,160 31,615
Special (credit)/charge (1) (8,573) 8,000
Corporate interest, net 1,466 1,397
--------- ----------
TOTAL COSTS AND EXPENSES 202,030 200,588
--------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 15,478 (1,279)
PROVISION FOR INCOME TAXES 5,953 2,447
--------- ----------
NET INCOME (LOSS) $ 9,525 ($ 3,726)
========= ==========
NET INCOME (LOSS) PER SHARE:
Basic $ 0.20 ($ 0.08)
Diluted $ 0.20 ($ 0.08)
========= ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,796 48,700
Diluted 48,917 48,700
========= ==========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.06 $ 0.06
Class B Common Stock $ 0.06 $ 0.06
========= ==========
(1) Special credit is a pretax gain related to the sale of an undeveloped
parcel of real estate. Special charge is an after-tax fine related to the
settlement of a Department of Justice investigation.
(See accompanying notes to condensed consolidated financial statements)
3
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,888 $ 45,805
Accounts receivable, less allowance for doubtful
accounts of $23,329 in 2004 and $20,832 in 2003 172,735 142,273
Unbilled revenues, at estimated billable amounts 108,772 101,557
Prepaid expenses and other current assets 20,410 13,028
--------- ---------
TOTAL CURRENT ASSETS 329,805 302,663
--------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 154,344 154,786
Less accumulated depreciation (119,500) (117,618)
--------- ---------
NET PROPERTY AND EQUIPMENT 34,844 37,168
--------- ---------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 107,409 104,523
Capitalized software costs, net 32,569 31,540
Deferred income tax asset 28,750 28,505
Other 11,708 12,840
--------- ---------
TOTAL OTHER ASSETS 180,436 177,408
--------- ---------
TOTAL ASSETS $ 545,085 $ 517,239
========= =========
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(In thousands)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 38,012 $ 43,007
Accounts payable 37,015 36,152
Accrued compensation and related costs 38,302 37,870
Deferred revenues 26,817 19,172
Self-insured risks 19,702 18,040
Accrued income taxes 17,409 7,406
Other accrued liabilities 23,178 22,418
Current installments of long-term debt 2,313 3,106
--------- ---------
TOTAL CURRENT LIABILITIES 202,748 187,171
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 50,830 50,664
Deferred revenues 10,291 10,559
Self-insured risks 8,604 11,920
Minimum pension liability 70,306 67,846
Postretirement medical benefit obligation 5,913 6,077
Other 10,611 10,408
--------- ---------
TOTAL NONCURRENT LIABILITIES 156,555 157,474
--------- ---------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $1.00 par value; 50,000
shares authorized; 24,147 and 24,027 shares issued and outstanding
at September 30, 2004 and December 31, 2003, respectively 24,147 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 1,403 840
Retained earnings 196,425 187,747
Accumulated other comprehensive loss (60,890) (64,717)
--------- ---------
TOTAL SHAREHOLDERS' INVESTMENT 185,782 172,594
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 545,085 $ 517,239
========= =========
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,454 $ 5,574
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 13,512 12,290
Deferred income taxes (28) 271
(Gain) loss on sales of property and equipment (8,472) 100
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (28,984) (1,246)
Unbilled revenues (3,655) 603
Accrued or prepaid income taxes 9,827 3,017
Accounts payable and accrued liabilities (118) 10,203
Deferred revenues 7,160 1,302
Prepaid and accrued pension costs (1) 1,788
Prepaid expenses and other assets 3,155 (3,175)
-------- --------
Net cash provided by operating activities 9,850 30,727
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (7,582) (8,205)
Capitalization of computer software costs (5,946) (9,390)
Proceeds from sale of undeveloped land 2,028 -
Acquisitions of businesses, net of cash acquired (617) (551)
Proceeds from sales of property and equipment 178 251
-------- --------
Net cash used in investing activities (11,939) (17,895)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (8,776) (8,760)
Proceeds from exercise of stock options 683 419
Increase in short-term borrowings 1,928 4,530
Payments on short-term borrowings (9,327) (2,901)
Increase in long-term debt 335 434
Payments on long-term debt (1,176) (1,510)
Capitalized loan costs 61 -
-------- --------
Net cash used in financing activities (16,272) (7,788)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 444 1,269
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,917) 6,313
-------- --------
Cash and cash equivalents at beginning of period 45,805 34,934
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,888 $ 41,247
======== ========
(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 $814,000 and $2.3 million for the quarter and nine months ended
September 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. The Company
revised the accompanying Consolidated Statements of Income for the quarter and
nine-month periods ended September 30, 2003 in order to correctly reflect total
reimbursements. The impact of this revision was to increase reimbursement
revenues and expenses by $15.2 million and $23.9 million for the quarter and
nine-month periods ended September 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 $ 138,164 $144,538 $ 144,351 $ 145,257 $ 572,310
Effect of revision 5,093 3,578 15,225 11,233 35,129
--------- --------- --------- ---------- ---------
Costs of services, revised $ 143,257 $148,116 $ 159,576 $ 156,490 $ 607,439
========= ======== ========= ========== =========
These revisions had no effect on revenues before reimbursements or net income as
previously reported.
The results of operations for the nine months ended September 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 Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
(in thousands, except per share data) 2004 2003 2004 2003
- ---------------------------------------- ------------- ------------- ------------- -------------
Net income (loss) as reported $9,525 $(3,726) $ 17,454 $ 5,574
Less: compensation expense using the
fair value method, net of tax 253 364 649 1,029
------ ------- -------- -------
Pro forma net income (loss) $9,272 $(4,090) $ 16,805 $ 4,545
====== ======= ======== =======
Net income (loss) per share - basic:
As reported $ 0.20 $ (0.08) $ 0.36 $ 0.11
====== ======= ======== =======
Pro forma $ 0.19 $ (0.09) $ 0.34 $ 0.09
====== ======= ======== =======
Net income (loss) per share - diluted:
As reported $ 0.20 $ (0.08) $ 0.36 $ 0.11
====== ======= ======== =======
Pro forma $ 0.19 $ (0.09) $ 0.34 $ 0.09
====== ======= ======== =======
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 Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Expected dividend yield 3.6% 3.6% 3.6% 3.6%
Expected volatility 35% 34% 35% 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 nine months ended September 30, 2004, the Company
utilized $64,000 and $271,000, respectively, of its restructuring reserves for
payments related to lease terminations. As of September 30, 2004, remaining
restructuring reserves were $996,000, $818,000 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 nine months ended September 30, 2004 and 2003:
9
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quarter ended Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
(in thousands, except per share data) 2004 2003 2004 2003
- --------------------------------------- ------------- ------------- ------------- -------------
Net income (loss) available to common
shareholders
$ 9,525 $ (3,726) $17,454 $ 5,574
======== ======== ======= =======
Weighted-average common shares outstanding -
Basic 48,796 48,700 48,748 48,649
Dilutive effect of stock options 121 - 81 52
-------- -------- ------- -------
Weighted-average common shares outstanding -
Diluted 48,917 48,700 48,829 48,701
======== ======== ======= =======
Basic net income (loss) per share $ 0.20 $ (0.08) $ 0.36 $ 0.11
======== ======== ======= =======
Diluted net income (loss) per share $ 0.20 $ (0.08) $ 0.36 $ 0.11
======== ======== ======= =======
Additional options to purchase 4,679,898 shares of Class A Common Stock at
exercise prices ranging from $5.32 to $19.50 per share were outstanding at
September 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 nine-month period. To
include them would have been antidilutive.
4. Comprehensive income (loss) for the Company consists of the total of net
income (loss) and foreign currency translation adjustments. Below is the
calculation of comprehensive income (loss) for the quarters and nine months
ended September 30, 2004 and 2003:
Quarter ended Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
(in thousands) 2004 2003 2004 2003
- ---------------------------------- ------------- ------------- ------------- -------------
Net income (loss) $ 9,525 $ (3,726) $ 17,454 $ 5,574
Foreign currency translation adjustment 4,213 914 3,827 7,702
-------- -------- --------- ---------
Comprehensive income (loss) $ 13,738 $ (2,812) $ 21,281 $ 13,276
======== ======== ========= =========
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.
10
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Intersegment sales are recorded at cost and are not material. The Company
measures segment profit based on operating earnings, defined as earnings before
special credits/charges, net corporate interest and income taxes.
Financial information for the quarters and nine months ended September 30, 2004
and 2003 covering the Company's reportable segments is presented below:
Quarter ended Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
(in thousands) 2004 2003 2004 2003
- ------------------------------- ------------- ------------- ------------- -------------
REVENUES:
U.S. $123,466 $117,653 $342,372 $354,584
International 62,404 54,581 185,369 161,218
-------- -------- -------- --------
TOTAL REVENUES BEFORE
REIMBURSEMENTS $185,870 $172,234 $527,741 $515,802
======== ======== ======== ========
OPERATING EARNINGS:
U.S. $ 7,023 $ 6,638 $ 13,741 $ 20,818
International 1,348 1,480 5,455 4,380
-------- -------- -------- --------
TOTAL OPERATING EARNINGS $ 8,371 $ 8,118 $ 19,196 $ 25,198
======== ======== ======== ========
6. During the quarters ended March 31, 2004 and September 30, 2004, the Company
made additional payments of $106,000 and $97,000, respectively, 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 2005. During the quarter ended September 30, 2004, the
Company made an additional payment of $41,000 to the former owners of SVS
Experts B.V. pursuant to a purchase agreement entered into in 2001. There are no
additional contingent payments due under this agreement. 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 2009. The results
of operations of the acquired company are included in the Company's consolidated
results as of the acquisition date.
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, which would result in additional goodwill when paid, would
approximate $3.2 million through 2009, as follows:
2005 2006 2007 2008 2009
- -------- ------- ------- ---------- --------
$445,000 $80,000 $80,000 $2,347,000 $270,000
11
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine months ended September 30, 2004 and 2003 included the
following components:
Quarter ended Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
(in thousands) 2004 2003 2004 2003
- ------------------------- ------------ ------------- ------------- -------------
Interest cost $ 5,337 $ 5,383 $ 16,011 $ 16,149
Expected return on assets (5,960) (5,357) (17,880) (16,071)
Net amortization - 334 - 1,002
Recognized net actuarial loss 1,386 1,980 4,158 5,940
------- ------- -------- --------
Net periodic benefit cost $ 763 $ 2,340 $ 2,289 $ 7,020
======= ======= ======== ========
The Company was not required to make any contributions to its frozen U.S.
defined benefit pension plan during 2004, but elected to contribute $1.0 million
during the quarter ended September 30, 2004, which represented the minimum
contribution required to avoid the imposition of Pension Benefit Guarantee
Corporation variable rate insurance premiums.
9. On May 19, 2004, the Financial Accounting Standards Board ("FASB") issued
Staff Position 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." The
referenced legislation was passed in December 2003, and provides for a federal
subsidy to employers who offer retiree prescription drug benefits that are at
least actuarially equivalent to those offered under the government sponsored
Medicare Part D. The Company adopted the provisions of FASB Staff Position 106-2
during the third quarter of 2004, which reduced its accumulated post-retirement
benefit obligation by approximately $2.0 million, resulting in an unrecognized
net gain to the Company's post-retirement medical plan ("the Plan"). This
unrecognized net gain is being amortized over the remaining life expectancy of
the Plan participants and through September 30, 2004, such amortization reduced
the Company's post retirement liability and expense by $145,000.
On October 13, 2004, the FASB concluded that Statement 123R, "Share Based
Payment," which would require companies to measure compensation cost for all
share-based payments, including employee stock options, would be effective for
public companies for interim or annual periods beginning after June 15, 2005.
For those companies that elect the modified prospective transition alternative,
retroactive application of the requirements of Statement 123 (not Statement
123R) to the beginning of the fiscal year that includes the effective date would
be permitted, but not required. Early adoption of Statement 123R is encouraged.
The FASB is expected to issue the final Statement during the 2004 fourth
quarter. Based on employee stock options issued through September 30, 2004,
adoption of the Statement in the 2005 third quarter, and use of the modified
12
prospective transition method, the Company expects the adoption of this
Statement, when issued in its final form, to reduce net income by approximately
$475,000 in the year of adoption.
10. On September 29, 2004, the Company completed the sale of an undeveloped
parcel of real estate to a limited liability company wholly owned and controlled
by Mr. John Williams, a member of the Company's Board of Directors, for a
purchase price of $9.7 million. This purchase price represented a premium over
an independent appraised value of the property. The Company received cash of
$2.1 million and a $7.6 million first lien mortgage note receivable, at an
effective interest rate of 4% per annum, due in its entirety in 270 days. A
pretax gain of $8.6 million was recognized on the sale.
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 (loss) was $9.5 million and ($3.7) million for the
quarters ended September 30, 2004 and 2003, respectively, and $17.5 million and
$5.6 million for the nine months ended September 30, 2004 and 2003,
respectively. During the 2004 third quarter, we recognized a gain of $5.2
million, net of related income taxes, on the sale of an undeveloped parcel of
real estate. For the nine months ended September 30, 2004 consolidated net
income
13
includes a tax credit refund claim and associated interest with the Internal
Revenue Service which increased net income by $2.8 million. For the quarter and
nine months ended September 30, 2003, consolidated net income (loss) includes an
after-tax charge of $8.0 million under an agreement reached with the Department
of Justice to resolve an investigation of our billing practices.
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/charge, net corporate interest, and taxes) during the quarter and nine
months ended September 30, 2004, totaled $8.4 million and $19.2 million,
respectively, compared with $8.1 million and $25.2 million in the comparable
2003 periods. Following is a reconciliation of consolidated net income (loss) to
operating earnings for the quarters and nine months ended September 30, 2004 and
2003 and the related margins as a percentage of revenues before reimbursements:
Quarter ended Nine months ended
--------------------------------------- -------------------------------------
September % September % September % September %
(in thousands) 30, 2004 Margin 30, 2003 Margin 30, 2004 Margin 30, 2003 Margin
- ---------------------- --------- ------ --------- ------ --------- ------ --------- ------
Net income (loss) $ 9,525 5.1% $ (3,726) (2.2)% $ 17,454 3.3% $ 5,574 1.1%
Add/(deduct):
Special credit/charge (8,573) (4.6) 8,000 4.7 (8,573) (1.6) 8,000 1.6
Net corporate interest 1,466 0.8 1,397 0.8 2,269 0.4 3,855 0.7
Income taxes 5,953 3.2 2,447 1.4 8,046 1.5 7,769 1.5
------- --- -------- --- -------- --- -------- ----
Operating earnings $ 8,371 4.5% $ 8,118 4.7% $ 19,196 3.6% $ 25,198 4.9%
======= === ======== === ======== === ======== ===
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 reimbursements, special credit/charge, net corporate interest, and
income taxes. Revenues and expense amounts relating to reimbursements for
pass-through expenses are discussed separately.
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
nine months ended September 30, 2004 and 2003 are as follows:
Quarter ended Nine months ended
------------- -----------------
September 30, September 30, September 30, September 30,
(in thousands) 2004 2003 2004 2003
- -------------------------- ------------- ------------- ------------- -------------
REVENUES BEFORE REIMBURSEMENTS:
U.S. $123,466 $117,653 $342,372 $354,584
International 62,404 54,581 185,369 161,218
-------- -------- -------- --------
TOTAL $185,870 $172,234 $527,741 $515,802
COMPENSATION & FRINGE BENEFITS:
U.S. $ 72,209 $ 71,725 $209,410 $221,371
% of Revenues 58.5% 61.0% 61.2% 62.4%
International 44,494 39,078 129,763 112,895
% of Revenues 71.3% 71.6% 70.0% 70.0%
-------- -------- -------- --------
TOTAL $116,703 $110,803 $339,173 $334,266
% of Revenues 62.8% 64.3% 64.3% 64.8%
EXPENSES OTHER THAN REIMBURSEMENTS,
COMPENSATION & FRINGE BENEFITS:
U.S. $ 44,234 $ 39,290 $119,221 $112,395
% of Revenues 35.8% 33.4% 34.8% 31.7%
International 16,562 14,023 50,151 43,943
% of Revenues 26.5% 25.7% 27.1% 27.3%
-------- -------- -------- --------
TOTAL $ 60,796 $ 53,313 $169,372 $156,338
% of Revenues 32.7% 31.0% 32.1% 30.3%
-------- -------- -------- --------
OPERATING EARNINGS (1):
U.S. $ 7,023 $ 6,638 $ 13,741 $ 20,818
% of Revenues 5.7% 5.6% 4.0% 5.9%
International 1,348 1,480 5,455 4,380
% of Revenues 2.2% 2.7% 2.9% 2.7%
-------- -------- -------- --------
TOTAL $ 8,371 $ 8,118 $ 19,196 $ 25,198
% of Revenues 4.5% 4.7% 3.6% 4.9%
(1) Earnings before special credit/charge, net corporate interest, and income
taxes.
15
U.S. OPERATIONS
REVENUES
U.S. revenues before reimbursements, by market type, for the quarters and nine
months ended September 30, 2004 and 2003 are as follows:
Quarter ended Nine months ended
-------------------------------------- ----------------------------------------
September 30, September 30, September 30, September 30,
(in thousands) 2004 2003 Variance 2004 2003 Variance
- ----------------------- ------------- ------------- -------- ------------- ------------- ---------
Insurance companies $ 58,000 $ 56,834 2.1% $156,822 $177,659 (11.7%)
Self-insured entities 39,483 40,875 (3.4%) 120,245 125,417 (4.1%)
Class action services 25,983 19,944 30.3% 65,305 51,508 26.8%
-------- -------- -------- --------
TOTAL U.S. REVENUES
BEFORE REIMBURSEMENTS $123,466 $117,653 4.9% $342,372 $354,584 (3.4%)
======== ======== ======== ========
Revenues from insurance companies increased 2.1% from $56.8 million in the 2003
third quarter to $58.0 million in the 2004 third quarter, reflecting a $4.0
million increase in revenues generated by the Company's catastrophe adjusters in
response to the recent hurricanes which struck the southeastern United States
during the 2004 third quarter. Revenues from self-insured clients decreased
3.4%, from $40.9 million in the 2003 third quarter to $39.5 million in the 2004
period, due primarily to a reduction in claim referrals from our existing
clients, only partially offset by new business gains. See the following analysis
of U.S. cases received. Class action revenues, which can fluctuate based on the
timing of project awards, increased 30.3%, from $19.9 million in the 2003 third
quarter to a new quarterly record of $26.0 million in the current quarter. This
increase is primarily the result of work commenced on several new projects
awarded during 2004.
Case Volume Analysis
U.S. unit volume, measured principally by cases received, and excluding the
impact of class action services, increased 7.6% in the third quarter of 2004
compared to the 2003 period. This increase was offset by a 7.8% revenue decrease
from changes in the mix of services provided and in the rates charged for those
services, resulting in a net 0.2% decrease in U.S. revenues for the third
quarter of 2004, excluding revenues from class action services. Growth in class
action services increased U.S. revenues by 5.1% in the quarter ended September
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 nine months ended
September 30, 2004 and 2003 is as follows:
Quarter ended Nine months ended
-------------------------------------- ----------------------------------------
September 30, September 30, September 30, September 30,
(whole numbers) 2004 2003 Variance 2004 2003 Variance
- ----------------------- ------------- ------------- -------- ------------- ------------- ---------
Casualty 53,760 52,987 1.5% 155,439 160,083 (2.9%)
Property 90,238 62,329 44.8% 180,296 179,215 0.6%
Vehicle 38,371 43,318 (11.4%) 106,420 143,399 (25.8%)
Workers' Compensation 37,388 45,980 (18.7%) 115,208 140,327 (17.9%)
Other 5,531 4,773 15.9% 15,105 15,405 (1.9%)
------- ------- ------- -------
TOTAL U.S. CASES RECEIVED 225,288 209,387 7.6% 572,468 638,429 (10.3%)
======= ======= ======= =======
16
The sharp increase in property claims for the quarter is due to the four
hurricanes that hit Florida and other southeastern states during August and
September of 2004. This influx in case referrals has created a strong backlog of
claims that we will handle in the 2004 fourth quarter and first half of 2005.
The decline in 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, exclusive of recent hurricane-related
claims. Our decline in workers' compensation claim referrals is due to a
reduction from our existing clients, only partially offset by new business
gains, and reflects a continued weakness in U.S. employment levels and
associated injury rates.
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 decreased to 58.5% in the third quarter of 2004 as compared to 61.0% in
the 2003 quarter, reflecting a usage of excess operating capacity due to the
increase in hurricane-related claims. In response to the year-to-date declines
in U.S. claims volume, we have reduced our level of U.S. full-time equivalent
employees by 8.7% as compared to employment levels through the 2003 third
quarter. There were an average of 4,200 full-time equivalent employees in the
first nine months of 2004, compared to an average of 4,602 in the 2003 period.
U.S. salaries and wages totaled $59.7 million for the quarter ended September
30, 2004, increasing 2.8% from $58.1 million in the 2003 period. This increase
reflects higher compensation expense in our catastrophe unit which is responding
to the recent hurricanes that struck the southeastern United States during the
2004 third quarter. U.S. salaries and wages totaled $171.3 million for the nine
months ended September 30, 2004, decreasing 4.3% from $178.9 million in the
comparable 2003 period. Payroll taxes and fringe benefits for U.S. operations
totaled $12.5 million and $38.1 million in the third quarter and first nine
months of 2004, respectively, decreasing 8.1% and 10.4% from 2003 costs of $13.6
million and $42.5 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 35.8% of revenues for the quarter ended September 30,
2004, up from 33.4% for the same period in 2003. U.S. expenses other than
reimbursements, compensation and related payroll taxes and fringe benefits
approximated 34.8% of revenues for the nine-month period ended September 30,
2004, up from 31.7% for the same period in 2003. These increases primarily
relate to higher outsourced administration fees associated with growth in our
class action services unit during the 2004 periods.
REIMBURSEMENTS
Reimbursements in our U.S. operations increased to $24.8 million and $41.8
million for the quarter and nine months ended September 30, 2004, respectively,
from $18.7 million and $34.6 million in the comparable 2003 period, reflecting
higher pass-through expenses relating to the increase in revenues from our class
action services unit.
17
INTERNATIONAL OPERATIONS
REVENUES
Substantially all international revenues are derived from the insurance company
market. Revenues before reimbursements from our international operations
increased 14.3%, from $54.6 million in the third quarter of 2003 to $62.4
million in the 2004 third quarter. Revenues before reimbursements for the first
nine months of 2004 totaled $185.4 million, a 15.0% increase from $161.2 million
reported in the first nine months of 2003. International unit volume, measured
principally by cases received, increased 1.4% and 1.8% in the current quarter
and nine months ended September 30, 2004, respectively, compared to the same
periods in 2003. Revenues increased by 5.8% and 2.3% in the current quarter and
nine months ended September 30, 2004, respectively, from changes in the mix of
services provided and in the rates charged for those services. Revenues reflect
a 7.1% and 10.9% increase during the quarter and nine months ended September 30,
2004, due to the positive effect of a weak U.S. dollar, primarily as compared to
the British pound and the euro.
International unit volume by region for the quarters and nine months ended
September 30, 2004 and 2003 was as follows:
Quarter ended Nine months ended
-------------------------------------- ----------------------------------------
September 30, September 30, September 30, September 30,
(whole numbers) 2004 2003 Variance 2004 2003 Variance
- ------------------------ ------------- ------------- -------- ------------- ------------- ---------
United Kingdom 27,075 24,675 9.7% 78,384 70,263 11.6%
Americas 31,820 29,373 8.3% 84,487 87,200 (3.1%)
CEMEA 20,329 22,715 (10.5%) 62,640 61,775 1.4%
Asia/Pacific 8,545 9,832 (13.1%) 27,588 29,486 (6.4%)
------ ------ ------- -------
TOTAL INTERNATIONAL CASES
RECEIVED 87,769 86,595 1.4% 253,099 248,724 1.8%
====== ====== ======= =======
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 increase in the Americas is primarily due to weather related claims in
Canada and the Caribbean during the 2004 third quarter. The decrease in
Continental Europe, Middle East, & Africa ("CEMEA") is primarily due to the loss
of a client in South Africa which referred approximately 2,800 high-frequency,
low-dollar claims to us during the 2003 third quarter. The decrease in
Asia/Pacific is primarily due to a decline in weather related claims in
Australia during 2004.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, decreased slightly to 71.3% for the quarter ended September
30, 2004 from 71.6% for the same period in 2003, primarily due to a reduction of
capacity within our U.K. unit. For the nine-month period, compensation, payroll
taxes and fringe benefits remained constant as a percentage of revenues at 70.0%
in 2004 and 2003. There were an average of 3,137 full-time equivalent employees
in the first nine months of 2004 compared to an average of 3,123 in the 2003
period.
Salaries and wages of international personnel increased to $37.5 million for the
quarter ended
18
September 30, 2004, up 13.6% from $33.0 million in the comparable 2003 period.
For the nine-month period, salaries and wages increased to $108.9 million in
2004, up 14.2% from $95.4 million in 2003. Payroll taxes and fringe benefits for
international operations totaled $7.0 million and $20.8 million for the quarter
and nine months ended September 30, 2004, respectively, increasing 14.8% and
18.9% compared to costs of $6.1 million and $17.5 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 26.5% and 27.1% of international revenues for the quarter and nine months
ended September 30, 2004, respectively, compared to 25.7% and 27.3% for the same
period in 2003.
REIMBURSEMENTS
Reimbursements in our international operations decreased to $6.8 million and
$19.2 million for the quarter and nine months ended September 30, 2004,
respectively, from $8.4 million and $21.1 million in the comparable 2003
periods. These declines are due to a decline in the number of claims requiring
the use of outside experts during the current year periods.
SPECIAL CREDIT/CHARGE, NET CORPORATE INTEREST, AND INCOME TAXES
During September 2004, we completed the sale of an undeveloped parcel of real
estate. We received cash of $2.1 million and a $7.6 million first lien mortgage
note receivable, at an effective interest rate of approximately 4% per annum,
due in its entirety in 270 days. This note is recorded in the accompanying
balance sheet under other current assets. A pretax gain of $8.6 million was
recognized on the sale. After reflecting income taxes, this special credit
increased net income by $5.2 million, or $0.11 per share, during the 2004 third
quarter.
During the 2003 third quarter, we recorded an after-tax $8.0 million charge, or
$0.17 per share, in connection with the settlement of a Department of Justice
investigation.
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.
Net corporate interest increased to $1.5 million for the quarter ended September
30, 2004 from $1.4 million in the 2003 period. Including interest income of $1.8
million associated with the tax refund claim discussed above, net corporate
interest decreased to $2.2 million for the 2004 year-to-date period from $3.9
million in the comparable 2003 period.
Excluding the tax refund of $1.7 million in 2004 and the $8.0 million after-tax
charge in 2003, our effective tax rate was 38.4% of pretax income for the
quarter and nine months ended September 30, 2004, compared to 36.4% of pretax
income for the quarter and nine months ended September 30, 2003. Taxes on
income, including the expected tax refund, totaled $6.0 million and $8.0 million
for the quarter and nine months ended September 30, 2004, respectively, as
compared to $2.4 million and $7.8 million for the comparable 2003 periods. We
perform a quarterly evaluation of our effective tax rate expected for the year.
Based on operating results
19
through the first nine 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 for 2004 was primarily due to a change in the mix
of income expected from our various international operations.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At September 30, 2004, current assets exceeded current liabilities by
approximately $127.1 million, an increase of $11.6 million from the working
capital balance at December 31, 2003. Cash and cash equivalents at September 30,
2004 totaled $27.9 million, a decrease of $17.9 million from the balance at
December 31, 2003. Cash provided by operations during the 2004 period totaled
$9.9 million, compared to $30.7 million for the same period in 2003. Our class
action services operations used cash in the current year-to-date period to fund
growth in its operations and capital expenditures of $12.1 million. We made a
$6.1 million annual contribution to our U.S. defined contribution pension plan
during the 2004 first quarter. There was no such contribution during 2003.
During the 2004 third quarter, we made a $1.0 million contribution to our frozen
U.S. defined benefit plan, as compared to a $10.0 million contribution during
the 2003 third quarter. Other significant uses of cash during the 2004 period
included dividends paid to shareholders, acquisitions of property and equipment,
investments in computer software, and net payments on short-term borrowings.
Cash dividends to shareholders approximated 50.3% of net income in the first
nine months of 2004, compared to 157.2% 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 nine months of 2004, we did not repurchase any Class A or Class
B Common Stock. As of September 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.
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 September 30, 2004. Short-term borrowings
outstanding, including bank overdraft facilities, as of September 30, 2004
totaled $38.0 million, decreasing from $43.0 million at December 31, 2003.
Long-term borrowings outstanding, excluding current installments, as of
September 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
for the next twelve months.
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.
20
Shareholders' investment at September 30, 2004 was $185.8 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. There have been no changes to our critical accounting
policies and estimates since December 31, 2003. 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 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 one of our New York offices 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
21
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.
We have received notice and anticipate that we will be the subject of an audit
under California Labor Code Sections 129 and 129.5 by the Audit Unit, Division
of Workers Compensation, Department of Industrial Relations, State of California
("Audit Unit"). The Audit Unit seeks to audit workers compensation files which
we handled on behalf of our clients in our El Segundo, California office in 2001
and 2002. This audit relates to a previous audit that we underwent in El Segundo
in 2000 wherein we agreed to the imposition of a civil penalty pursuant to
California Labor Code Section 129.5 and submission to this current follow-up
audit, among other items. With respect to this current audit, we cannot predict
when it will be completed, its ultimate outcome, its effect on our financial
condition, results of operations, or cash flows.
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 $3.2 million through 2009, as follows: 2005 -
$445,000; 2006 - $80,000; 2007 - $80,000; 2008 - $2,347,000; and 2009 -
$270,000.
We maintain letters of credit to satisfy certain contractual requirements. At
September 30, 2004, there was $12.2 million committed under these letters of
credit.
POSTRETIREMENT MEDICAL BENEFITS
On May 19, 2004, the Financial Accounting Standards Board ("FASB") issued Staff
Position 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." The referenced
legislation was passed in December 2003, and provides for a federal subsidy to
employers who offer retiree prescription drug benefits that are at least
actuarially equivalent to those offered under the government sponsored Medicare
Part D. We adopted the provisions of FASB Staff Position 106-2 during the third
quarter of 2004, which reduced our accumulated post-retirement benefit
obligation by approximately $2.0 million, resulting in an unrecognized net gain
to the Company's post-retirement medical plan ("the Plan"). This unrecognized
net gain is being amortized over the remaining life expectancy of the Plan
participants and through September 30, 2004, such amortization reduced our
post-retirement liability and expense by $145,000. (See footnote 9 to the
condensed consolidated financial statements).
22
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 September 30, 2004,
there was $33.6 million outstanding on the revolving credit line with an average
variable interest rate of 5.3%. In 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 these agreements 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 2.50 times
EBITDA. This ratio is reduced to a maximum allowable of 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 1.50 times fixed charges. 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 September 30, 2004. If we
were not to meet the covenant requirements in the future, 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. 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.
PENDING ACCOUNTING PRONOUNCEMENTS
On October 13, 2004, the FASB concluded that Statement 123R, "Share Based
Payments" which would require companies to measure compensation cost for all
share-based payments, including employee stock options, would be effective for
public companies for interim or annual periods beginning after June 15, 2005.
For those companies that elect the modified prospective transition alternative,
retroactive application of the requirements of Statement 123 (not Statement
123R) to the beginning of the fiscal year that includes the effective date would
be permitted, but not required. Early adoption of Statement 123R is encouraged.
The FASB is expected to issue the final statement during the 2004 fourth
quarter. Based on employee stock options issued through September 30, 2004,
adoption of the Statement in the 2005 third quarter, and use of the modified
prospective transition method, we expect the adoption of this Statement, when
issued in its final
23
form, to reduce net income by approximately $475,000 in the year of adoption, or
$0.01 per share. (See footnote 9 to the condensed consolidated financial
statements).
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 third quarter or nine months
ended September 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 35.1% and 31.3% of total revenues for the nine months ended September 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.
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 September 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
$365,000, or less than $0.01 per share, during the first nine 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
September 30, 2004, we had $38.0 million in short-term loans outstanding,
including bank overdraft facilities, with an average variable interest rate of
5.3%. If the average interest rate were to change by 1%, the impact to pretax
income for the nine months ended September 30, 2004 would be approximately
$285,000, 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 nine months ended September 30,
2004 would have been approximately $843,000, 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
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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
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.
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
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.
25
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
as of September 30, 2004, and the related condensed consolidated statements of
income for the three-month and nine-month periods ended September 30, 2004 and
2003, and the condensed consolidated statements of cash flows for the nine-month
periods ended September 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
November 8, 2004
26
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 one of our New York offices 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.
We have received notice and anticipate that we will be the subject of an audit
under California Labor Code Sections 129 and 129.5 by the Audit Unit, Division
of Workers Compensation, Department of Industrial Relations, State of California
("Audit Unit"). The Audit Unit seeks to audit workers compensation files which
we handled on behalf of our clients in our El Segundo, California office in 2001
and 2002. This audit relates to a previous audit that we underwent in El Segundo
in 2000 wherein we agreed to the imposition of a civil penalty pursuant to
California Labor Code Section 129.5 and submission to this current follow-up
audit, among other items. With respect to this current audit, we cannot predict
when it will be completed, its ultimate outcome, or its effect on our financial
position, results of operations, or cash flows.
ITEM 6. EXHIBITS
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 30, 1991).
3.2 Restated By-Laws of the Registrant, as amended (incorporated
by reference to the Registrant's form 10-Q for the quarter
ended March 31, 2004).
10.1 Restated Supplemental Executive Retirement Plan, as amended
23.1 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
27
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
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAWFORD & COMPANY
(Registrant)
Date: November 8, 2004 /s/ Thomas W. Crawford
------------------------------------------
Thomas W. Crawford
Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2004 /s/ John F. Giblin
------------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: November 8, 2004 /s/ W. Bruce Swain
------------------------------------------
W. Bruce Swain
Senior Vice President and Controller
(Principal Accounting Officer)
29
INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
10.1 Restated Supplemental Executive Retirement Plan 31
23.1 Letter from Ernst & Young LLP 39
31.1 Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 40
31.2 Certification of principal financial officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 41
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 42
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 43
30