Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The condensed financial statements included herein have been prepared by
the Registrant, without audit, 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. These condensed financial statements
should be read in conjunction with the financial statements and related notes
contained in the Registrant's annual report on Form 10-K for the fiscal year
ended December 31, 1996.
In the opinion of management, the condensed financial statements included
herein contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Registrant as of
March 31, 1997, and the results of its operations and cash flows for the
three-month period then ended.
2. The results of operations for the three-month period ended March 31, 1997,
are not necessarily indicative of the results to be expected during the
balance of the year ending December 31, 1997.
3. The Company completed the agreement signed December 19, 1996, with Swiss
Reinsurance Company (Swiss Re) to merge both companies' claims services firms
outside the United States into a new entity, Crawford-THG Limited, in which
the Company has a 60% controlling interest. The merger was accounted for as a
partial sale of the Company's 100% owned subsidiary, Crawford & Company
International (CCI), to Swiss Re and a partial acquisition of Swiss Re's 100%
owned subsidiary, Thomas Howell Group (THG), by the Company. Swiss Re's 40%
interest in the equity and net income/loss of the joint venture is reflected
in the accompanying financial statements as minority interest.
4. Net income per share is computed by dividing net income by the weighted
average number of shares outstanding during the respective periods. The
effect of common stock equivalents was less than 3% dilutive in both 1997
and 1996 and, therefore, the effect on primary earnings per share has not
been shown.
The Company plans to adopt SFAS No. 128 "Earnings per Share" effective
December 15, 1997. This statement will require dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and will require restatement of all prior-period
EPS data presented. If this statement had been effective January 1, 1997,
the basic EPS would be $0.126 per share and the diluted EPS would be $0.123
per share for the first quarter of 1997, compared to basic EPS of $0.203 per
share and diluted EPS of $0.199 per share for the first quarter of 1996.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 7
5. The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents for purposes of the
Statements of Cash Flows.
6. Certain reclassifications of prior year amounts have been made in the
accompanying balance sheets to conform to the current year presentation.
7. On February 4, 1997, the Board of Directors declared a three-for-two
stock split on both the Class A Common Stock and Class B Common Stock. The
split was effected in the form of a 50% stock dividend on the outstanding
shares of each class, paid on March 25, 1997 to stockholders of record on
March 11, 1997. All share and per share amounts in the accompanying financial
statements have been restated to give retroactive effect to the stock split.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Financial Condition
At March 31, 1997, current assets exceeded current liabilities by
approximately $154.6 million, an increase of $18.4 million from the working
capital balance at December 31, 1996. Cash and cash equivalents at March 31,
1997 totaled $64.6 million, increasing $9.2 million from the balance at the
end of 1996. The Company held no short-term investments at March 31, 1997 or
December 31, 1996. During the quarter, cash was generated primarily from
operating activities, while the principal uses of cash were for dividends
paid to shareholders, acquisitions of property and equipment, and repurchases
of common stock. At March 31, 1997, the ratio of current assets to current
liabilities was 2.0 to 1 compared with 2.2 to 1 at the end of 1996.
During 1996, the Company announced a share repurchase program to acquire up
to an aggregate of 3,000,000 shares of its Class A or Class B Common Stock
through open market purchases. Through March 31, 1997, the Company has
reacquired 1,423,200 shares of its Class A Common Stock and 369,350 shares of
its Class B Common Stock at an average cost of $13.16 and $13.15 per share,
respectively.
The Company maintains credit lines with banks in order to meet seasonal
working capital requirements of its foreign subsidiaries or other financing
needs that may arise. Short-term borrowings outstanding as of March 31, 1997,
totaled $19.0 million, as compared to $8.4 million at the end of 1996, due to
the acquisition of THG. The Company believes that its current financial
resources, together with funds generated from operations and existing and
potential long-term borrowing capabilities, will be sufficient to maintain
its current operations.
The Company does not engage in any hedging activities to compensate for the
effect of exchange rate fluctuations on the operating results of its foreign
subsidiaries. Foreign currency denominated debt is maintained primarily to
hedge the currency exposure of its net investment in foreign operations.
Shareholders' investment at March 31, 1997 was $215.7 million, compared with
$221.5 million at the end of 1996. Long-term debt totaled $4.3 million at
March 31, 1997, or approximately 2.0% of shareholders' investment.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 9
Results of Operations
Operating results for the Company's domestic and international operations for
the three-month periods ended March 31, 1997 and 1996 are as follows:
Domestic International Total
1997 1996 1997 1996 1997 1996
(In thousands of dollars, except percentages)
Revenues $139,907 $141,112 $ 26,044 $ 20,451 $165,951 $161,563
Compensation
& Benefits 89,433 92,751 16,424 12,166 105,857 104,917
% of Revenues 63.9% 65.7% 63.1% 59.5% 63.8% 64.9%
Expenses Other
than Compensation
& Benefits 31,653 32,870 9,159 6,298 40,812 39,168
% of Revenues 22.6% 23.3% 35.2% 30.8% 24.6% 24.2%
Pretax Income Before
Restructuring
Charge and
Minority Interest $ 18,821 $ 15,491 $ 461 $ 1,987 $ 19,282 $ 17,478
% of Revenues 13.5% 11.0% 1.8% 9.7% 11.6% 10.8%
For the first three months of 1997, revenues were $166.0 million, increasing
2.7% from the $161.6 million for the same period in 1996. Consolidated pretax
income before restructuring charge and minority interest increased 10.3%, or
$1.8 million, in first quarter 1997 compared to the same period in 1996. While
revenues increased 2.7%, costs increased only 1.8% due to efficiencies achieved
in operating and support activities throughout the Company.
DOMESTIC OPERATIONS
Revenues
Domestic revenues from insurance companies and self-insured clients benefited
from increased assignments arising from product liability claims, an area
which the Company has targeted for revenue growth. The generally mild 1997
winter, however, resulted in fewer weather-related property assignments than in
the 1996 period and that factor, together with lower workers compensation
claims, resulted in first quarter 1997 revenues of $139.9 million, off just
under 1% from the comparable quarter of 1996.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 10
Domestic unit volume, measured principally by chargeable hours and excluding
acquisitions, decreased approximately 4% in the first quarter of 1997 compared
to the first quarter of 1996. This decrease was partially offset by changes
in the mix of services provided and in the rates charged for those services,
the combined effects of which increased revenues by approximately 1.6% in the
first three months of 1997 compared to the comparable period in 1996. The
Company's acquisition of the Thomas Howell Group - Americas unit based in the
United States increased domestic revenues by 1.5% in the first quarter 1997
compared to first quarter 1996.
Revenues from domestic operations include $6.7 million in revenue from services
provided by the Company's catastrophe adjusters during the first quarter of
1997, principally to clients affected by natural or man-made disasters,
including hurricanes, floods, hail storms and oil spills. During the first
quarter of 1996, such revenue approximated $8.4 million. This decrease was
due to a decrease in weather-related claims in first quarter 1997 compared to
first quarter 1996.
Compensation and Fringe Benefits
The Company's most significant expense is the compensation of its employees,
including related payroll taxes and fringe benefits. Domestic compensation
expense decreased as a percent of revenues from 65.7% in the three months ended
March 31, 1996 to 63.9% in the same period in 1997. This decrease is due
primarily to a decline in administrative compensation expense.
Domestic salaries and wages of personnel other than contract managers decreased
by 3.6%, from $66.0 million in first quarter 1996 to $63.6 million in first
quarter 1997. Contract managers' compensation is based on the operating income
of the offices which they manage. Compensation of these managers totaled $10.4
million in the three-month period ended March 31, 1997, increasing 4.4% from
related 1996 costs of $10.0 million.
Payroll taxes and fringe benefits for domestic operations totaled $15.4 million
in first quarter 1997, decreasing 8.2% from first quarter 1996 costs of $16.8
million, due primarily to lower employee group medical costs.
Expenses Other than Compensation and Fringe Benefits
Domestic expenses other than compensation and related payroll taxes and fringe
benefits approximated 22.6% of revenues for the three months ended March 31,
1997, down from 23.3% of revenues for the same period in 1996. This decline is
largely due to lower rent and occupancy and automobile fleet costs.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 11
INTERNATIONAL OPERATIONS
Revenues
Revenues from the Company's international operations totaled $26.0 million for
the first quarter of 1997, a 27.3% increase from $20.5 million for the same
period in 1996. This increase is due to the THG acquisition, which contributed
international revenues of approximately $9 million in the quarter. Only one
month's results for THG's international operations were included in the first
quarter 1997, due to a two-month delay in reporting international results.
International revenues excluding acquired revenues declined by approximately
$3.5 million, due primarily to a decline in weather-related claims in the
United Kingdom and Canada and fewer disability management claim referrals
resulting from regulatory changes in the Canadian automobile liability market.
Compensation and Fringe Benefits
Compensation expense, including related payroll taxes and fringe benefits,
was also affected by the acquisition of THG, with the acquisition adding $5.2
million of compensation costs. Compensation expense exclusive of the
acquisition declined by $.9 million. As a percent of revenues, such expense
increased from 59.5% in the three months ended March 31, 1996 to 63.1% in the
comparable period in 1997. Salaries and wages of international personnel
increased from 48.9% of revenues in 1996 to 52.2% in 1997. Payroll taxes and
fringe benefits also increased as a percent of revenues, from 7.5% in 1996 to
9.3% in 1997, due primarily to more generous retirement programs maintained by
the acquired THG entities.
Expenses Other than Compensation and Fringe Benefits
Expenses other than compensation and related payroll taxes and fringe benefits
approximated 35.2% of international revenues for the first three months of
1997, compared to 30.8% of revenues for the same period in 1996. These
expenses comprise a higher percentage of revenues than the Company's domestic
operations due primarily to amortization of intangible assets and higher
automobile, occupancy and interest costs.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 12
Restructuring Charge
In connection with the THG acquisition, the Company recorded a pretax charge
of $13 million for personnel, facilities and other costs associated with
integration of the Company's international businesses. This one-time charge
will be recovered through lower operating costs within a year after the
restructuring is completed. After reflecting income tax benefits of $4.3
million and minority interest share of $3.5 million, this charge reduced
Crawford's first quarter 1997 net income by $5.2 million, or $0.10 per share.
Minority Interest
A minority interest benefit of $3.2 million was recorded in the first three
months of 1997, reflecting Swiss Re's 40% minority interest in the net loss
of Crawford-THG Limited.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 13
Review by Independent Public Accountants.
Arthur Andersen LLP, independent public accountants, has performed a review
of the interim financial information contained herein in accordance with
established professional standards and procedures for such a review and has
issued its report with respect thereto (see page 14).
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Crawford & Company:
We have made a review of the accompanying condensed consolidated balance sheet
of CRAWFORD & COMPANY (a Georgia corporation) AND SUBSIDIARIES as of March 31,
1997 and the related condensed consolidated statements of income for the
three-month periods ended March 31, 1997 and 1996 and the related condensed
consolidated statements of cash flows for the three-month periods ended
March 31, 1997 and 1996. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of obtaining an understanding of
the system for the preparation of interim financial information, 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 in accordance with generally accepted auditing standards,
the objective of which is the expression of 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 financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Crawford & Company and
subsidiaries as of December 31, 1996 (not presented separately herein), and
in our report dated January 28, 1997, we expressed an unqualified opinion on
that balance sheet. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1996 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Atlanta, Georgia
May 7, 1997
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated By-laws of the Registrant, as amended
15.1 Letter from Arthur Andersen LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the period
covered by this report.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Crawford & Company
(Registrant)
Date: May 9, 1997 /s/D. A. Smith
D. A. Smith
Chairman of the Board and
Chief Executive Officer
Date: May 9, 1997 /s/D. R. Chapman
D. R. Chapman
Executive Vice President - Finance
(Principal Financial Officer)
Date: May 9, 1997 /s/J. F. Giblin
J. F. Giblin
Vice President and Controller
(Principal Accounting Officer)
Form 10-Q Crawford & Company
Quarter Ended March 31, 1997 Page 17
INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
3.1 Restated By-laws of the Registrant,
as amended 18
15.1 Letter from Arthur Andersen LLP 29
27.1 Financial Data Schedule (for SEC use only)