United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the quarterly period
ended March 31, 2002
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
---
The number of shares outstanding of each of the issuer's classes of common
stock, as of April 30, 2002 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 23,848,880
CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,697,172
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
QUARTER ENDED
-------------
MARCH 31, MARCH 31,
2002 2001
---- ----
REVENUES:
Revenues before reimbursements $ 171,767 $179,455
Reimbursements 6,741 8,327
--------- --------
TOTAL REVENUES 178,508 187,782
--------- --------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 130,591 133,489
Reimbursements 6,741 8,327
--------- --------
Cost of Services 137,332 141,816
Selling, general, and administrative expenses 33,157 30,665
Nonrecurring credit (1) (6,000) --
Corporate interest, net 1,178 1,181
Amortization of goodwill -- 829
--------- --------
TOTAL COSTS AND EXPENSES 165,667 174,491
--------- --------
INCOME BEFORE INCOME TAXES 12,841 13,291
PROVISION FOR INCOME TAXES 4,674 5,104
--------- --------
NET INCOME $ 8,167 $ 8,187
========= ========
NET INCOME PER SHARE:
Basic $ 0.17 $ 0.17
Diluted $ 0.17 $ 0.17
========= ========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,541 48,452
Diluted 48,644 48,525
========= ========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.14 $ 0.14
Class B Common Stock $ 0.14 $ 0.14
========= ========
- ----------
(1) Nonrecurring credit related to a payment from a former vendor in full
settlement of a business dispute.
(See accompanying notes to condensed consolidated financial statements)
2
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,113 $ 21,966
Accounts receivable, less allowance for doubtful
accounts of $17,624 in 2002 and $16,755 in 2001 139,368 139,380
Unbilled revenues, at estimated billable amounts 91,304 88,399
Prepaid expenses and other current assets 14,692 11,539
--------- ---------
TOTAL CURRENT ASSETS 261,477 261,284
--------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 148,565 147,162
Less accumulated depreciation (109,253) (107,898)
--------- ---------
NET PROPERTY AND EQUIPMENT 39,312 39,264
--------- ---------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 86,257 86,239
Prepaid pension cost 7,024 7,138
Capitalized software costs, net 17,514 15,866
Deferred income tax asset 11,780 11,817
Other 10,433 9,807
--------- ---------
TOTAL OTHER ASSETS 133,008 130,867
--------- ---------
TOTAL ASSETS $ 433,797 $ 431,415
========= =========
(See accompanying notes to condensed consolidated financial statements)
3
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(In thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 39,014 $ 36,440
Accounts payable 31,011 31,275
Accrued compensation and related costs 23,016 25,771
Deferred revenues 19,321 20,543
Self-insured risks 12,961 12,833
Accrued income taxes 15,875 16,001
Other accrued liabilities 11,802 13,118
Current installments of long-term debt 293 326
--------- ---------
TOTAL CURRENT LIABILITIES 153,293 156,307
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 36,361 36,378
Deferred revenues 13,259 12,707
Self-insured risks 12,341 11,249
Minimum pension liability 13,700 10,328
Postretirement medical benefit obligation 6,639 6,645
Other 9,842 9,501
--------- ---------
TOTAL NONCURRENT LIABILITIES 92,142 86,808
--------- ---------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $1.00 par value; 50,000 shares
authorized; 23,849 and 23,843 shares issued
and outstanding in 2002 and 2001, respectively 23,849 23,843
Class B Common Stock, $1.00 par value; 50,000
shares authorized; 24,697 shares issued and
outstanding in 2002 and 2001 24,697 24,697
Additional paid-in capital 76 27
Retained earnings 188,052 186,683
Accumulated other comprehensive loss (48,312) (46,950)
--------- ---------
TOTAL SHAREHOLDERS' INVESTMENT 188,362 188,300
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 433,797 $ 431,415
========= =========
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,167 $ 8,187
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 4,335 5,047
Deferred income taxes (287) 6
Loss (gain) on sales of property and equipment 7 (14)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (745) 2,712
Unbilled revenues (3,512) (5,782)
Accrued or prepaid income taxes 433 4,214
Accounts payable and accrued liabilities (3,561) (2,667)
Deferred revenues (1,174) (1,790)
Prepaid and accrued pension costs 3,485 1,668
Prepaid expenses and other assets (3,852) (1,928)
-------- --------
Net cash provided by operating activities 3,296 9,653
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (2,611) (2,831)
Acquisition of businesses, net of cash acquired -- (723)
Capitalization of computer software costs (2,609) (1,216)
Proceeds from sales of property and equipment 56 83
-------- --------
Net cash used in investing activities (5,164) (4,687)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (6,796) (6,783)
Proceeds from exercise of stock options 55 --
Increase in short-term borrowings 11,490 2,787
Payments on short-term borrowings (8,507) --
Increase in long-term borrowings 8 --
Payments on long-term debt (38) (89)
-------- --------
Net cash used in financing activities (3,788) (4,085)
-------- --------
-------- --------
Effect of exchange rate changes on cash and cash equivalents (197) 242
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,853) 1,123
Cash and cash equivalents at beginning of period 21,966 22,136
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,113 $ 23,259
======== ========
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited condensed consolidated financial statements 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. These condensed financial statements should be read in
conjunction with the financial statements and related notes contained in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
2001.
2. The results of operations for the quarter ended March 31, 2002 are not
necessarily indicative of the results to be expected during the balance of the
year ending December 31, 2002.
3. During the quarter ended March 31, 2002, the Company utilized $95,000 of its
restructuring reserves for payments related to employee separations and lease
terminations. As of March 31, 2002, remaining restructuring reserves were $2.0
million, $1.7 million of which is included in other noncurrent liabilities. The
noncurrent portion of accrued restructuring costs consists primarily 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.
4. Basic net income per share is computed based on the weighted-average number
of total common shares outstanding during the respective periods. Diluted net
income per share is computed based on the weighted-average number of total
common shares outstanding plus the dilutive effect of outstanding stock options
using the "treasury stock" method.
6
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Below is the calculation of basic and diluted net income per share for the
quarter ended March 31, 2002 and 2001:
Quarter ended
-------------
March 31, March 31,
(In thousands, except per share data) 2002 2001
---- ----
Net income available to common
shareholders $ 8,167 $ 8,187
======= =======
Weighted-average common shares
outstanding - Basic 48,541 48,452
Dilutive effect of stock options 103 73
------- -------
Weighted-average common shares
outstanding - Diluted 48,644 48,525
======= =======
Basic net income per share $ 0.17 $ 0.17
======= =======
Diluted net income per share $ 0.17 $ 0.17
======= =======
Additional options to purchase 5,180,948 shares of Class A Common Stock at $9.70
to $19.50 per share were outstanding at March 31, 2002, but were not included in
the computation of diluted net income per share because the options' exercise
prices were greater than the average market price of the common shares; to
include them would have been antidilutive.
5. Comprehensive income for the Company consists of the total of net income and
foreign currency translation adjustments. Below is the calculation of
comprehensive income for the quarter ended March 31, 2002 and 2001:
Quarter ended
-------------
March 31, March 31,
(In thousands) 2002 2001
---- ----
Net income $ 8,167 $ 8,187
Foreign currency translation adjustment (1,797) (180)
------- -------
Comprehensive income $ 6,370 $ 8,007
======= =======
6. 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"). Intersegment sales
are recorded at cost and are not material. The Company measures segment profit
based on operating income, defined as income before nonrecurring credit,
amortization of goodwill, net corporate interest, and income taxes.
7
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial information for the quarter ended March 31, 2002 and 2001 covering the
Company's reportable segments is presented below:
Quarter ended
-------------
March 31, March 31,
(In thousands) 2002 2001
---- ----
Revenues before Reimbursements:
U.S $126,610 $131,470
International 45,157 47,985
-------- --------
Total Revenues $171,767 $179,455
======== ========
Operating Earnings:
U.S $ 6,279 $ 11,096
International 1,740 4,205
-------- --------
Total Operating Earnings $ 8,019 $ 15,301
======== ========
7. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 144, "Accounting for the Impairment of Long-Lived
Assets." SFAS 144 supercedes SFAS 121,"Accounting for the Impairment of
Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion 30, "Reporting
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and
amends APB Opinion 51, "Consolidated Financial Statements." The statement
retains the fundamental provisions in SFAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS 121. This statement did not have an impact on the Company's
consolidated results of operations, financial position, or cash flows, because
the impairment assessment under SFAS 144 is largely unchanged from SFAS 121 and
no assets met the criteria for impairment.
The Company adopted SFAS 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. SFAS 142 changes the accounting for goodwill and
intangible assets from an amortization method to an impairment-only approach.
The amortization of goodwill, including goodwill recorded in past business
combinations, ceased when the Company adopted SFAS 142 on January 1, 2002. The
Company does not currently have any intangible assets requiring disclosure under
SFAS 142. The adoption of SFAS 142, requires a transitional goodwill impairment
test be performed on all reportable segments. Step one of the transitional
goodwill impairment test was performed on the U.S. and International segments.
Based on the results of step one, the U.S. and International segments do not
have an impairment of goodwill.
8
The following table presents the effect of adopting SFAS 142 on net income and
basic and diluted earnings per share:
Quarter ended
-------------
March 31, March 31,
(in thousands, except per share data) 2002 2001
---- ----
Reported net income $ 8,167 $ 8,187
Add: Goodwill amortization 0 738
--------- ---------
Adjusted net income $ 8,167 $ 8,925
========= =========
Basic earnings per share:
Reported net income $ 0.17 $ 0.17
Goodwill amortization 0.00 0.01
--------- ---------
Adjusted net income $ 0.17 $ 0.18
========= =========
Diluted earnings per share:
Reported net income $ 0.17 $ 0.17
Goodwill amortization 0.00 0.01
--------- ---------
Adjusted net income $ 0.17 $ 0.18
========= =========
Also effective January 1, 2002, the Company adopted Emerging Issue Task Force
Issue 01-14, "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred." The EITF Issue requires that reimbursed
out-of-pocket expenses be classified as revenues in the income statement.
Historically, the Company has netted such reimbursements against its costs in
the consolidated statements of income. The adoption of this EITF Issue had no
effect on the Company's consolidated results of operations, financial position,
or cash flows.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated net income was $8,167,000 and $8,187,000 for the quarters ended
March 31, 2002 and 2001, respectively.
The following is a discussion and analysis of the consolidated financial
condition and results of operations of the Company's results reported by its two
reportable segments: U.S. operations and international operations. Revenue
amounts discussed are before reimbursements for out-of-pocket expenses. Expense
amounts discussed are excluding the nonrecurring credit, amortization of
goodwill, net corporate interest, and income taxes.
RESULTS OF OPERATIONS
Operating results for the Company's U.S. and international operations for the
quarter ended March 31, 2002 and 2001 are as follows:
Quarter ended
-------------
March 31, March 31,
(In thousands) 2002 2001
---- ----
REVENUES BEFORE REIMBURSEMENTS:
U.S. $126,610 $131,470
International 45,157 47,985
-------- --------
TOTAL $171,767 $179,455
COMPENSATION & FRINGE BENEFITS:
U.S. $ 81,759 $ 81,559
% of Revenues 64.5% 62.1%
International 31,400 31,126
% of Revenues 69.5% 64.9%
-------- --------
TOTAL $113,159 $112,685
% of Revenues 65.9% 62.8%
EXPENSES OTHER THAN REIMBURSEMENTS,
COMPENSATION & FRINGE BENEFITS:
U.S. $ 38,572 $ 38,815
% of Revenues 30.5% 29.5%
International 12,017 12,654
% of Revenues 26.6% 26.3%
-------- --------
TOTAL $ 50,589 $ 51,469
% of Revenues 29.4% 28.7%
-------- --------
OPERATING EARNINGS (1):
U.S. $ 6,279 $ 11,096
% of Revenues 5.0% 8.4%
International 1,740 4,205
% of Revenues 3.9% 8.8%
-------- --------
TOTAL $ 8,019 $ 15,301
% of Revenues 4.7% 8.5%
- ----------
(1) Earnings before nonrecurring credit, amortization of goodwill, net
corporate interest, and income taxes.
10
U.S. OPERATIONS
REVENUES
U.S. revenues before reimbursements, by market type for the quarter ended March
31, 2002 and 2001 are as follows:
Quarter ended
---------------------------------------
March 31, March 31,
(In thousands) 2002 2001 Variance
---- ---- --------
Insurance companies $ 64,763 $ 69,060 (6.2%)
Self-insured entities 50,349 50,138 0.4%
Class action services 11,498 12,272 (6.3%)
-------- --------
TOTAL U.S. REVENUES BEFORE REIMBURSEMENTS $126,610 $131,470 (3.7%)
======== ========
Revenues from insurance companies decreased 6.2% to $64.8 million, due largely
to an extraordinarily mild winter, which produced the lowest level of
first-quarter catastrophe losses since the 1992 first quarter. In addition,
insurance carriers continue to focus on reducing operating costs by handling
high frequency, low severity claims in-house, further contributing to the
Company's revenue decline. Revenues from self-insured clients increased 0.4% to
$50.3 million in the quarter, reflecting the continued hardening of the U.S.
insurance market. Class action revenues, which can fluctuate based on the timing
of project awards, decreased 6.3% to $11.5 million in the quarter.
Case Volume Analysis
Excluding the impact of class action services, U.S. unit volume, measured
principally by cases received, decreased 16.4% in the first quarter of 2002
compared to the same period in 2001. This decrease was partially offset by a
13.3% revenue increase from changes in the mix of services provided and in the
rates charged for those services, resulting in a net 3.1% decrease in U.S.
revenues in the first quarter of 2002, excluding revenues from class action
services. The decline in the Company's U.S. insurance company referrals for high
frequency, low severity claims has resulted in an increase in the Company's
average revenue per claim. The decline in class action services decreased U.S.
revenues by 0.6% in the first quarter of 2002.
COMPENSATION AND FRINGE BENEFITS
The Company's most significant expense is the compensation of its employees,
including related payroll taxes and fringe benefits. U.S. compensation expense
as a percent of revenues increased to 64.5% in the first quarter of 2002 as
compared to 62.1% in 2001. This increase primarily resulted from an increase in
capacity in the Company's U.S. operating units due to the decline in case
volume. There were an average of 5,451 full-time equivalent employees in the
2002 first quarter, compared to an average of 5,641 in the 2001 period.
U.S. salaries and wages decreased to $65.8 million for the quarter ended March
31, 2002, from $68.1 million in the comparable 2001 period, reflecting the
reduction in full-time equivalent employees during the current quarter. Payroll
taxes and fringe benefits for U.S. operations totaled $16.0 million in the first
quarter of 2002, increasing 18.7% from 2001 costs of $13.5
11
million for the comparable period. This increase is primarily due to higher
defined benefit pension costs which resulted from a decline in the fair market
value of the Company's pension investments and a decrease in interest rates
during 2001.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits were 30.5% of revenues for the quarter ended March 31, 2002,
up from 29.5% for the same period in 2001. This increase is due primarily to
higher legal fees and professional indemnity costs.
REIMBURSEMENTS
Reimbursements in the Company's U.S. operations decreased to $4.5 million for
the quarter ended March 31, 2002, from $5.1 million in the comparable 2001
period, reflecting the decline in case volume.
INTERNATIONAL OPERATIONS
REVENUES
Revenues before reimbursements from the Company's international operations
decreased 5.9%, from $48.0 million in the first quarter of 2001 to $45.2 million
in the first quarter of 2002. Excluding acquisitions, international unit volume,
measured principally by cases received, decreased 16.3% in the first quarter of
2002 compared to the same period in 2001. Small strategic acquisitions in
Australia and Canada increased international revenues by 3.5% for the quarter
ended March 31, 2002. Revenues are net of a 3.7% decline during the quarter
ended March 31, 2002, due to the negative effect of a strong U.S. dollar.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, increased to 69.5% for the quarter ended March 31, 2002
from 64.9% for the same period in 2001, primarily due to an increase in capacity
in the Company's United Kingdom and Canada operating units due to the decline in
case volume. There were an average of 2,941 full-time equivalent employees in
the 2002 first quarter, compared to an average of 2,802 in the 2001 period.
Salaries and wages of international personnel increased slightly to $26.8
million for the quarter ended March 31, 2002, from $26.7 million in the
comparable 2001 period. Payroll taxes and fringe benefits for international
operations totaled $4.6 million in the first quarter of 2002, increasing from
2001 costs of $4.4 million for the comparable period.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than compensation and related payroll taxes and fringe benefits
were 26.6% of international revenues for the quarter ended March 31, 2002, up
from 26.3% for the same period in 2001.
12
REIMBURSEMENTS
Reimbursements in the Company's international operations decreased to $2.2
million for the quarter ended March 31, 2002, from $3.2 million in the
comparable 2001 period. This decline is due to a decline in case volume and the
completion of a large project in 2001 that required the extensive use of outside
experts.
NONRECURRING CREDIT, AMORTIZATION OF GOODWILL, NET CORPORATE INTEREST, AND
INCOME TAXES
During the 2002 first quarter, the Company received a one-time cash payment of
$6.0 million from a former vendor in full settlement of a business dispute. This
nonrecurring credit, net of related income tax expense, increased net income per
share by $0.08 during the 2002 first quarter.
On January 1, 2002 the Company adopted SFAS 142 "Goodwill and Other Intangible
Assets". The adoption of this statement increased the Company's first quarter
2002 net income by approximately $738,000 or $0.01 per share.
Net corporate interest totaled $1.2 million for the quarter ended March 31,
2002, substantially unchanged from the comparable 2001 period.
Taxes on income totaled $4.7 million, or 36.4% of pretax income, for the quarter
ended March 31, 2002, as compared to $5.1 million, or 38.4% of pretax income,
for the comparable 2001 period. This decline in the Company's effective tax rate
is primarily due to the adoption of SFAS 142 during 2002.
FINANCIAL CONDITION
At March 31, 2002 current assets exceeded current liabilities by approximately
$108.2 million, an increase of $3.2 million from the working capital balance at
December 31, 2001. Cash and cash equivalents at March 31, 2002 totaled $16.1
million, a decrease of $5.9 million from the balance at the end of 2001. Cash
was generated primarily from operating activities and short-term borrowings,
while the principal uses of cash were for payments on short-term borrowings,
dividends paid to shareholders, acquisitions of property and equipment, and
investments in computer software. Cash dividends to shareholders approximated
82% of net income in both the 2002 and 2001 first quarters. The Company's Board
of Directors declares cash dividends to shareholders each quarter based on an
assessment of the Company's current and projected earnings and cash flows. If
the Company's earnings and cash flows do not improve in future quarters, the
Board may reconsider the Company's dividend payout ratio.
During the first quarter of 2002, the Company did not repurchase any of its
Class A or Class B Common Stock. As of March 31, 2002, 705,863 shares remain to
be repurchased under the share repurchase program authorized by the Company's
Board of Directors.
The Company maintains credit lines with banks in order to meet seasonal working
capital requirements and other financing needs that may arise. Short-term
borrowings outstanding as of March 31, 2002 totaled $39.0 million, increasing
from $36.4 million at the end of 2001. Long-term borrowings outstanding,
excluding current installments, as of March 31, 2002 remained
13
constant at $36.4 million, as compared to the end of 2001. The Company believes
that its current financial resources, together with funds generated from
operations and existing and potential 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.
Shareholders' investment at March 31, 2002 was $188.4 million, compared with
$188.3 million at December 31, 2001.
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 and
assumptions. The Company's Form 10-K for the year ended December 31, 2001,
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.
LEGAL PROCEEDINGS
In the normal course of the claims administration services business, the Company
is named as a defendant in suits by insureds or claimants contesting decisions
by the Company or its clients with respect to the settlement of claims.
Additionally, clients of the Company have brought actions for indemnification on
the basis of alleged negligence on the part of the Company, its agents, or
employees in rendering service to clients. The majority of these claims are of
the type covered by insurance maintained by the Company; however, the Company is
self-insured for the deductibles under its various insurance coverages. In the
opinion of the Company's management, adequate reserves have been provided for
such self-insured risks.
In 2000, the Company received federal grand jury subpoenas requesting certain
business and financial records of the Company dating back to 1992. Additional
document requests and grand jury subpoenas were received in 2001 and 2002. The
Company has been advised by the U.S. Department of Justice Fraud Section that
the subpoenas were issued in connection with a nationwide investigation into the
Company's billings for services in its U.S. Claims Management and Healthcare
Management Services branch offices. One of the subpoenas relates to a matter
that is also the subject of a billing dispute, currently being negotiated,
between the Company and a client. The Company is cooperating fully with the
government's inquiry and has retained outside counsel to conduct an internal
investigation into its billing practices under the direction of the Company's
Board of Director's. In addition, the Company has issued written corporate
billing policies in order to clarify its billing practices and eliminate
inconsistencies in their application, and is continuing to strengthen its
internal audit and branch inspection procedures.
The Company cannot predict when the government's investigation will be
completed, its ultimate outcome or its effect on the Company's financial
condition or results of operations. However, the investigation could cause
disruption in the delivery of the Company's services, and ultimately result in
the imposition of civil, administrative or criminal fines or sanctions, as well
14
as potential reimbursements to clients and loss of existing or prospective
clients or business opportunities. Any such result could have a material adverse
effect on the Company's financial condition and results of operations. Legal
fees associated with the investigation were $747,000 for the first quarter of
2002, net of related tax benefits, or $0.02 per share.
INSURANCE RENEWAL
The Company is currently negotiating the renewal of its various insurance
coverages effective June 2002. The Company will likely incur increased premiums
and higher self-insured retentions upon renewal. It is not possible at this time
to determine the impact this will have on the Company's consolidated results of
operations, financial position, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
DERIVATIVES
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments.
FOREIGN CURRENCY EXCHANGE
The Company's international operations expose the Company 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. The Company's revenues from
its international operations were 26.3% and 26.7% of total revenues at March 31,
2002 and 2001, respectively. Except for borrowing in foreign currencies, the
Company does not presently engage in any hedging activities to compensate for
the effect of exchange rate fluctuations on the net assets or operating results
of its foreign subsidiaries.
The Company measures currency earnings risk related to its 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 March 31, 2002 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
$188,000 during the first three months of 2002, had the U.S. dollar exchange
rate increased relative to the currencies with which the Company had exposure.
INTEREST RATES
The Company is exposed to interest rate fluctuations on certain of its variable
rate borrowings. Depending on general economic conditions, the Company uses
variable rate debt for short-term borrowings and fixed rate debt for long-term
borrowings. At March 31, 2002, the Company had $39.0 million in short-term loans
outstanding with an average variable interest rate of 4.4%.
CREDIT RISK
The Company processes payments for claims settlements, primarily on behalf of
its self-insured clients. The liability for the settlement cost of claims
processed by the Company, which is generally pre-funded, remains with the
client. Accordingly, the Company does not incur significant credit risk in the
performance of these services.
15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Crawford & Company:
We have reviewed the accompanying condensed consolidated balance sheet of
CRAWFORD & COMPANY (a Georgia corporation) AND SUBSIDIARIES as of March 31,
2002, and the related condensed consolidated statements of income and cash flows
for the quarter ended March 31, 2002. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
May 13, 2002
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
15.1 Letter from Ernst & Young LLP
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the period
covered by this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAWFORD & COMPANY
(Registrant)
Date: May 13, 2002 /s/ Grover L. Davis
----------------------------------------
Grover L. Davis
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2002 /s/ John F. Giblin
----------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: May 13, 2002 /s/ W. Bruce Swain
----------------------------------------
W. Bruce Swain
Senior Vice President and Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
15.1 Letter from Ernst & Young LLP 20
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