Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 7
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, 1997.
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
September 30, 1998, the results of its operations for the three- and nine-month
periods ended September 30, 1998 and 1997, and its cash flows for the nine-
month periods then ended.
2. The results of operations for the three- and nine-month periods ended
September 30, 1998, are not necessarily indicative of the results to be
expected during the balance of the year ending December 31, 1998.
3. In June 1998, the Company acquired the portion of Crawford-THG which it did
not already own. In exchange for 1.9 million restricted shares of Crawford &
Company Class A Common Stock, the Company acquired Swiss Reinsurance Group's
forty percent (40%) minority interest in Crawford-THG. Crawford-THG, now a
wholly owned subsidiary of Crawford & Company, provides all of Crawford's
services outside of the United States. This transaction was accounted for by
the purchase method of accounting. The restricted shares were valued at $33.1
million, which approximated the minority interest book value. Accordingly,
no goodwill was recorded related to this transaction.
On July 31, 1998, the Company also acquired all of the outstanding shares
of A.C.I. Adjusters Canada Incorporated ("ACI") for $16.1 million. The Company
acquired assets with a fair value of $28.8 million and assumed liabilities of
approximately $12.7 million. This transaction was accounted for by the
purchase method of accounting. Goodwill related to the purchase was $12.2
million. The initial purchase price may be increased based on future earnings
of the acquired entity.
4. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128 effective December 31, 1997. Basic earnings per share is computed
based on the weighted average number of total common shares outstanding of
Class A and Class B Common Stock during the respective years. Diluted
earnings per share is computed based on the weighted
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 8
average number of total common shares outstanding of Class A and Class B
Common Stock, adjusted for dilutive common stock equivalents. All prior period
earnings per share amounts have been restated to comply with SFAS No. 128.
The following reconciliation illustrates the numerators and denominators
of the basic and diluted net income per share computations shown on the
consolidated statements of income for the nine-months ended September 30, 1998
and 1997:
1998 1997
(In thousands, except per share data)
Basic net income per share computation
Numerator
Income available to common shareholders $21,317 $34,633
Denominator
Weighted-average common shares outstanding 50,142 49,737
Basic net income per share $ 0.43 $ 0.70
Diluted net income per share computation
Numerator
Income available to common shareholders $21,317 $34,633
Denominator
Weighted-average common shares outstanding 50,142 49,737
Option shares outstanding 635 1,193
Shares issuable under convertible debt --- 778
50,777 51,708
Diluted net income per share $ 0.42 $ 0.67
Options to purchase 1,120,500 shares of Class A Common Stock at prices
ranging from $18.125 to $19.50 per share were outstanding at September 30,
1998 but were not included in the computation of diluted net income per share
because they were antidilutive.
5. The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for the reporting and display of "comprehensive
income" and its components. Comprehensive income for the Company consists of
net income and foreign currency translation adjustments. Total comprehensive
income (in thousands of dollars) for the
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 9
nine-month periods ended September 30, 1998 and 1997 was $21,602 and $28,679,
respectively. Total comprehensive (loss) income (in thousands of dollars) for
the three-month periods ended September 30, 1998 and 1997 was ($3,665) and
$13,706, respectively.
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Financial Condition
At September 30, 1998, current assets exceeded current liabilities by
approximately $104.3 million, a decrease of $45.1 million from the working
capital balance at December 31, 1997. Cash and cash equivalents at September
30, 1998 totaled $11.0 million, decreasing $44.4 million from the balance at
the end of 1997. Cash was generated primarily from operating activities,
while the principal uses of cash were for dividends, repurchases of common
stock, the acquisition of ACI, acquisitions of property and equipment, and
the development of the Company's new claims management system.
During 1997, 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 September 30, 1998, the Company has reacquired
1,194,800 shares of its Class A Common Stock and 349,700 shares of its Class B
Common Stock at an average cost of $19.30 and $18.71 per share, respectively.
The Company maintains credit lines with banks in order to meet seasonal working
capital requirements of its foreign subsidiaries and other financing needs that
may arise. Short-term borrowings outstanding as of September 30, 1998 totaled
$30.0 million, as compared to $19.8 million at the end of 1997. Long-term debt
totaled $2.0 million at September 30, 1998. 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 the Company's net investment in foreign
operations.
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 11
Results of Operations
Operating results for the Company's domestic and international operations for
the nine- and three-month periods ended September 30, 1998 and 1997 are as
follows:
Nine-month Periods Ended September 30, 1998 and 1997
Domestic International Total
1998 1997 1998 1997 1998 1997
(In thousands of dollars, except percentages)
Revenues $381,193 $418,781 $120,084 $108,635 $501,277 $527,416
Compensation &
Benefits 236,603 260,972 76,963 68,453 313,566 329,425
% of Revenues 62.1% 62.3% 64.1% 63.0% 62.6% 62.5%
Expenses Other
than Compensation
& Benefits 88,490 94,109 46,416 36,382 134,906 130,491
% of Revenues 23.2% 22.5% 38.7% 33.5% 26.9% 24.7%
Pretax Income Before
Year 2000 Expenses,
Restructuring Charge
and Minority
Interest $ 56,100 $ 63,700 ($ 3,295) $ 3,800 $ 52,805 $ 67,500
% of Revenues 14.7% 15.2% (2.7%) 3.5% 10.5% 12.8%
Three-month Periods Ended September 30, 1998 and 1997
Domestic International Total
1998 1997 1998 1997 1998 1997
(In thousands of dollars, except percentages)
Revenues $124,632 $137,842 $ 40,484 $ 41,054 $165,116 $178,896
Compensation &
Benefits 78,024 84,568 26,041 25,397 104,065 109,965
% of Revenues 62.6% 61.4% 64.3% 61.9% 63.0% 61.5%
Expenses Other
than Compensation
& Benefits 32,505 29,171 15,960 14,205 48,465 43,376
% of Revenues 26.1% 21.2% 39.4% 34.6% 29.4% 24.2%
Pretax Income Before
Year 2000 Expenses,
Restructuring Charge
and Minority
Interest $ 14,103 $ 24,103 ($ 1,517) $ 1,452 $ 12,586 $ 25,555
% of Revenues 11.3% 17.5% (3.7%) 3.5% 7.6% 14.3%
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 12
Revenues for the first nine months and third quarter of 1998 were $501.3
million and $165.1 million, respectively, decreasing 5.0% and 7.7% from the
$527.4 million and $178.9 million for the same periods in 1997. Consolidated
pretax income before restructuring charge, Year 2000 expenses, and minority
interest decreased 21.8% and 50.8%, to $52.8 million and $12.6 million in the
first nine months and third quarter of 1998, compared to the same periods in
1997.
DOMESTIC OPERATIONS
Revenues
Domestic revenues from insurance companies and self-insured entities totaled
$381.2 million for the nine months ended September 30, 1998, decreasing 9.0%
from the $418.8 million for the same period in 1997. Third quarter 1998
revenues totaled $124.6 million, a decrease of 9.6% from related 1997 revenues
of $137.8 million.
Domestic unit volume, measured principally by chargeable hours, decreased
approximately 12.5% and 9.8% in the first nine months and third quarter of
1998, respectively, compared to the same periods in 1997. These declines were
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 3.5% and 0.2% in the first nine months and third quarter of
1998, respectively, compared to the comparable periods in 1997.
Revenues from domestic operations include $26.3 million in revenue from
services provided by the Company's catastrophe adjusters during the first
nine months of 1998, principally to clients affected by natural or man-made
disasters, including hurricanes, floods, hail storms and oil spills. During
the same period in 1997, such revenue approximated $19.6 million. These
increases are due to an increase in weather-related claims. In the third
quarter of 1998, revenues produced by the Company's catastrophe adjusters
totaled $11.4 million, as compared to $6.4 million in the third quarter of
1997.
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 62.3% in the nine months ended
September 30, 1997 to 62.1% for the same period in 1998. Conversely, domestic
compensation expense increased slightly as a percent of revenues in the third
quarter of 1998 to 62.6% from 61.4% for the comparable period in 1997. The
decline in the year-to-date period is primarily due to a reduction in full-time
equivalent employees, and a reduction in retirement expense, resulting from
favorable investment returns. The increase in the third quarter is primarily
due to the decline in revenues during the quarter.
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 13
Payroll taxes and fringe benefits for domestic operations totaled $33.7
million and $10.4 million in the first nine months and third quarter of 1998,
respectively, decreasing 15.3% and 9.6% from 1997 costs of $39.8 million and
$11.5 million for the comparable periods in 1997. These declines are due
primarily to fewer full-time equivalent employees and the reduction in
retirement expense.
Expenses Other than Compensation and Fringe Benefits
Domestic expenses other than compensation and related payroll taxes and fringe
benefits approximated 23.2% and 26.1% of revenues for the nine- and three-month
periods ended September 30, 1998, respectively, up from 22.5% and 21.2% of
revenues for the same periods in 1997. These increases are due primarily to
the decline in revenues in the 1998 periods.
INTERNATIONAL OPERATIONS
Revenues
Revenues from the Company's international operations totaled $120.1 million
for the first nine months of 1998, a 10.6% increase from $108.6 million in the
first half of 1997. This increase is primarily due to the acquisition of the
Thomas Howell Group ("THG"), with only seven months' results included in the
first nine months of 1997, due to an acquisition effective date of January 1,
1997, and a two-month delay in reporting international results. Third quarter
revenues declined slightly from $41.1 million in 1997 to $40.5 million in 1998.
Revenues in 1998 are net of approximately 12% and 7% declines, respectively,
for the quarter and year-to-date periods due to the negative effect of a
relatively strong U.S. dollar.
Compensation and Fringe Benefits
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, increased as a percentage of revenues, from 63.0% and
61.9% for the nine- and three-month periods ended September 30, 1997, to 64.1%
and 64.3% for the comparable periods in 1998. These increases are due
primarily to a decline in revenues (excluding the impact of the THG
acquisition). The Company initiated a restructuring of its United Kingdom
operations in the third quarter, resulting in approximately 150 staff
reductions (see "Restructuring Charges" below).
Salaries and wages of international personnel increased from 53.2% and 51.9%
of revenue for the nine- and three-month periods ended September 30, 1997,
respectively, to 54.9% and 55.7% for the comparable periods in 1998. Payroll
taxes and fringe benefits decreased as a percent of revenues, from 9.8% and
10.0% in the nine- and three-month periods ended September 30, 1997, to 9.2%
and 8.6% for the same periods in 1998.
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 14
Expenses Other than Compensation and Fringe Benefits
Expenses other than compensation and related payroll taxes and fringe benefits
approximated 38.7% of international revenues for the first nine months of 1998,
compared to 33.5% of revenues for the same period in 1997. Third quarter
amounts were 39.4% and 34.6% of international revenues for 1998 and 1997,
respectively. 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. Increases in these
expenses as a percent of revenues for the nine- and three-month periods were
due to higher professional fees associated with the restructuring of the
Company's United Kingdom operations and increased bad debt expenses.
Minority Interest
Minority interest benefit of $1.2 million was recorded for the first nine
months of 1998, compared to a benefit of $1.8 million for the same period in
1997. In the current quarter, a benefit of $0.7 million was recorded, compared
to an expense of $0.7 million in the third quarter of 1997. The minority
interest expense or benefit reflects Swiss Re's 40% minority interest in
Crawford-THG Limited, which was acquired by the Company in June 1998.
Euro
On January 1, 1999, the euro will be introduced as the official currency in
eleven European countries in which the Company operates. Companies and
individuals in those countries may from that date enter into transactions
either in euros or in the local currency. Management does not believe the
introduction of the euro will materially affect the Company's financial
position or results of operations.
RESTRUCTURING CHARGES
During the third quarter of 1998, the Company recorded charges related to the
restructuring of its United Kingdom and Canadian operations and the
restructuring of senior management following the resignation of its former
chairman and chief executive officer. The Company recorded a pretax
restructuring charge of $9.1 million related to its United Kingdom operations.
This restructuring program, designed to streamline the claims handling process,
resulted in the elimination of approximately 150 staff positions and the
closing of 16 offices. After reflecting income tax benefits of $2.8 million,
this charge reduced the Company's net income for the quarter ended September
30, 1998, by $6.3 million, or $0.12 per share.
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 15
In connection with the July 1998 acquisition of A.C.I. Adjusters Canada
Incorporated ("ACI"), a pretax restructuring charge of $2.9 million was
recorded during the third quarter for personnel, facilities and other costs
associated with integration of the Company's existing Canadian operations with
those of ACI. After reflecting income tax benefits of $1.3 million, this
charge reduced the Company's net income for the quarter ended September 30,
1998 by $1.6 million, or $0.03 per share.
Additionally, the Company recorded a pretax charge of $2.8 million related to
the restructuring of senior management following the resignation of its former
chief executive officer in September 1998. After reflecting income tax
benefits of $1.1 million, this charge reduced the Company's net income for the
third quarter by $1.7 million, or $0.03 per share.
In connection with the THG acquisition, the Company recorded a pretax charge of
$13 million in the first quarter of 1997 for personnel, facilities and other
costs associated with integration of the Company's international businesses.
After reflecting income tax benefits of $4.3 million and minority interest
share of $3.5 million, this charge reduced Crawford's net income for the nine
months ended September 30, 1997, by $5.2 million, or $0.10 per share.
YEAR 2000
The Company's project to remediate its computer systems to address the Year
2000 problem is proceeding on schedule. The Year 2000 problem, which is common
to most organizations, concerns the inability of information systems, including
embedded chips, to properly distinguish the year 2000 from the year 1900.
This could result in a system failure or a temporary inability to process
claims, to make claims payments, or to transact similar normal business
activities.
The Company's Year 2000 project contains five primary remediation phases:
identification, assessment, repair, testing, and contingency planning.
Additionally, the Company prioritizes each application or non-IT system (e.g.
security systems) according to its criticality to the Company's operations. As
of October 31, 1998, the Company has completed the remediation of and placed
into production approximately 25% (determined on the basis of lines of code) of
its systems identified as critical. For the remainder of the critical systems,
the Company is either in the repair or testing phase. The Company plans to have
all of these critical systems repaired and tested by March 31, 1999. During
the third quarter of 1998, the Company began its contingency planning efforts
for the business functions dependent upon these critical systems. The Company
expects to complete these contingency plans by June 30, 1999. With respect to
non-critical systems, the Company expects to complete remediation (including
development of contingency plans, where appropriate) by June 30, 1999.
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 16
The Company is also corresponding with vendors and business partners regarding
their Year 2000 readiness. Two requests for verification of Year 2000
compliance have been sent to key vendors, and the Company is actively
soliciting responses from external parties identified as critical (e.g.
telecommunications providers). For critical external parties for which the
Company is unable to obtain satisfactory assurances of compliance, the Company
intends to either change suppliers or develop detailed contingency plans. The
Company plans to complete this process by June 30, 1999.
The Company has engaged an independent expert to evaluate its Year 2000 project
and to report on its findings to the Company's Board of Directors.
The Company believes the most significant risks related to the project are the
ability to effectively remediate its claims management systems. The worst-case
scenario, a complete failure of these systems, would require the Company to
shift temporarily to a manual processing mode. Such a scenario could
significantly delay the processing, payment, and reporting of claims and, thus,
the Company's revenue from such services. If the Company were forced to
operate in such a mode for an extended length of time, the adverse impact on
the Company's financial position and results of operations would likely be
material. However, the Company believes that its remediation efforts will
reduce the risk of such an occurrence to a very low level.
The total cost associated with the Year 2000 project is not expected to be
material to the Company's financial position. The Company estimates the total
cost of its Year 2000 compliance efforts to be approximately $12.5 million,
with approximately $6 million having been incurred through September 30, 1998.
The Company expects to incur $2 million in such costs in the 4th quarter of
1998, $4 million in 1999 and $0.5 million in 2000.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
large part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain information presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations may include forward-looking
statements, the accuracy of which is subject to a number of risks and
assumptions. The Company's Form 10-K for the year ended December 31, 1997,
discusses such risks and assumptions and other key factors that could cause
actual results to differ materially from those expressed in such forward-
looking statements. An additional risk factor is the Company's ability to
timely and efficiently address the Year 2000 problem.
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 17
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 18).
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 18
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 September
30, 1998 and the related condensed consolidated statements of income for the
nine- and three-month periods ended September 30, 1998 and 1997 and the related
condensed consolidated statements of cash flows for the nine-month periods
ended September 30, 1998 and 1997. 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 conducted 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, 1997 (not presented separately herein), and
in our report dated January 30, 1998, 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, 1997 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
November 6, 1998
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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 September 30, 1998 Page 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Crawford & Company
(Registrant)
Date: 11/13/98 /s/F. L. Minix
F. L. Minix
Chairman of the Board and
Chief Executive Officer
Date: 11/13/98 /s/J. F. Giblin
J. F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: 11/13/98 /s/W. L. Hudson
W. L. Hudson
Senior Vice President and Controller
(Principal Accounting Officer)
Form 10-Q Crawford & Company
Quarter Ended September 30, 1998 Page 21
INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
15.1 Letter from Arthur Andersen LLP 22
27.1 Financial Data Schedule (for SEC use only)