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EXHIBIT 13.1
CRAWFORD & COMPANY / ANNUAL REPORT 2003 15
CRAWFORD & COMPANY FINANCIAL REVIEW 2003
Management's Discussion and Analysis 16
Consolidated Statements of Income 31
Consolidated Balance Sheets 32
Consolidated Statements of Shareholders' Investment 34
Consolidated Statements of Cash Flows 35
Notes to Consolidated Financial Statements 36
Report of Management 52
Report of Ernst & Young LLP, Independent Auditors 53
Report of Independent Public Accountants 54
Selected Financial Data 55
Quarterly Financial Data (unaudited) 56
Shareholder Information, Board of Directors and Officers IBC
16 CRAWFORD & COMPANY / ANNUAL REPORT 2003
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've experienced
since the September 11, 2001 terrorist attacks, insurance companies become very
selective in the risks they underwrite, and insurance premiums and policy
deductibles increase, sometimes quite dramatically. This results in a reduction
in industry-wide claims volumes, which reduces claims referrals to us unless we
can offset the decline in claim referrals with growth in our share of the
overall claims services market. Our ability to grow our market share in such a
highly fragmented, competitive market is primarily dependent on the delivery of
superior quality service and effective, properly focused sales efforts.
RESULTS OF OPERATIONS
Consolidated net income was $7,662,000 for 2003 as compared to $24,512,000 in
2002 and $29,445,000 in 2001. Consolidated net income for 2003 includes an
after-tax payment of $8.0 million under an agreement reached with the U.S.
Department of Justice to resolve an investigation into our billing practices.
Consolidated net income for 2002 includes a payment received from a former
vendor in
CRAWFORD & COMPANY / ANNUAL REPORT 2003 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations
full settlement of a business dispute of $3.8 million, net of related income tax
expense. There were no such special charges or credits in 2001. In addition, our
adoption of Statement of Financial Accounting Standards ("SFAS") 142 "Goodwill
and Other Intangible Assets" (SFAS 142) eliminated the requirement to amortize
goodwill which increased our 2002 and 2003 net income by approximately $3.0
million as compared to 2001.
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. Following is a reconciliation of consolidated
net income to operating earnings for the years ended December 31, 2003, 2002,
2001, 2000, and 1999:
(in thousands) 2003 2002 2001 2000 1999
- -------------- -------- -------- -------- -------- --------
Net income $ 7,662 $ 24,512 $ 29,445 $ 25,348 $ 39,264
Add/ (deduct):
Special charges and credits 8,000 (6,000) - 16,740 -
Year 2000 expense - - - - 5,181
Amortization of goodwill - - 3,448 3,203 2,790
Net corporate interest 5,414 4,706 4,779 4,476 2,762
Income taxes 8,964 14,029 18,356 15,802 24,480
-------- -------- -------- -------- --------
Operating earnings $ 30,040 $ 37,247 $ 56,028 $ 65,569 $ 74,477
======== ======== ======== ======== ========
The following is a discussion and analysis of the results of operations
of our two reportable segments: United States ("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. The individual services that are listed in this annual
report do not represent separate reportable segments. Rather, they describe the
various claims administration services that are performed within our
approximately 700 field branches around the world. Revenue amounts exclude
reimbursements for out-of-pocket expenses. Expense amounts exclude special
charges and credits, amortization of goodwill, net corporate interest, and
income taxes.
Our discussion and analysis of operating expenses is comprised of two
components. Compensation and fringe benefits include all compensation, payroll
taxes, and benefits provided to our employees which, as a service company,
represents our most significant and variable expense. Expenses other than
reimbursements, compensation and fringe benefits include office rent and
occupancy costs, other office operating expenses, and depreciation. This
discussion should be read in conjunction with our consolidated financial
statements and the accompanying footnotes.
18 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Operating results for our U.S. and international operations were as
follows:
% Change
From Prior Year
---------------
Years Ended December 31 2003 2002 2001 2003 2002
- ----------------------------------- --------- --------- --------- ------ -------
(in thousands)
Revenues:
U.S. $ 471,847 $ 508,734 $ 534,671 (7.3%) (4.9%)
International 219,086 190,656 190,868 14.9% (0.1%)
--------- --------- ---------
Total $ 690,933 $ 699,390 $ 725,539 (1.2%) (3.6%)
Compensation & Fringe Benefits:
U.S. $ 292,357 $ 320,475 $ 331,116 (8.8%) (3.2%)
% of Revenues 62.0% 62.9% 61.9%
International 152,950 130,886 125,862 16.9% 4.0%
% of Revenues 69.8% 68.6% 65.9%
--------- --------- ---------
Total $ 445,307 $ 451,361 $ 456,978 (1.3%) (1.2%)
% of Revenues 64.5% 64.5% 63.0%
Expenses Other than Reimbursements,
Compensation & Fringe Benefits:
U.S. $ 156,201 $ 158,998 $ 160,300 (1.8%) (0.8%)
% of Revenues 33.1% 31.3% 30.0%
International 59,385 51,784 52,233 14.7% (0.9%)
% of Revenues 27.1% 27.2% 27.4%
--------- --------- ---------
Total $ 215,586 $ 210,782 $ 212,533 2.3% (0.8%)
% of Revenues 31.2% 30.2% 29.3%
Operating Earnings: (1)
U.S. $ 23,289 $ 29,261 $ 43,255 (20.4%) (32.4%)
% of Revenues 4.9% 5.8% 8.1%
International 6,751 7,986 12,773 (15.5%) (37.5%)
% of Revenues 3.1% 4.2% 6.7%
--------- --------- ---------
Total $ 30,040 $ 37,247 $ 56,028 (19.3%) (33.5%)
% of Revenues 4.3% 5.3% 7.7%
(1) Earnings before special charges and credits, amortization of goodwill, net
corporate interest, and income taxes.
U.S. OPERATIONS
Years Ended December 31, 2003 and 2002
REVENUES
U.S. revenues before reimbursements, by market type, for 2003 and 2002 are as
follows:
(in thousands) 2003 2002 Variance
- -------------- --------- --------- --------
Insurance companies $ 229,781 $ 259,090 (11.3%)
Self-insured entities 167,526 191,278 (12.4%)
Class action services 74,540 58,366 27.7%
--------- ---------
Total U.S. Revenues $ 471,847 $ 508,734 (7.3%)
========= =========
Revenues from insurance companies decreased 11.3% to $229.8 million in
2003 compared to 2002, due to a continued softening in our U.S. insurance
company referrals for high-frequency, low-severity
CRAWFORD & COMPANY / ANNUAL REPORT 2003 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations
claims. Lower medical bill auditing revenues associated with the previously
reported non-renewal of a contract with a major domestic insurer contributed
$8.4 million of this decline. In addition, lower revenues from the winding down
of two projects associated with mold-related claims and reopened Northridge
earthquake claims accounted for $7.6 million of the decline. Revenues from
self-insured entities decreased 12.4% to $167.5 million in 2003, due primarily
to a decline in workers' compensation claim referrals. See the following
analysis of U.S. cases received. Revenues from class action services, which can
fluctuate based on the timing of project awards, increased 27.7% to $74.5
million in 2003.
Excluding the impact of class action services, U.S. unit volume,
measured principally by cases received, decreased 14.1% from 2002 to 2003. This
decrease was partially offset by a 3.6% revenue increase from changes in the mix
of services provided and in the rates charged for those services, resulting in a
net 10.5% decrease in U.S. revenues from 2002 to 2003, excluding revenues from
class action services. Growth in class action services increased U.S. revenues
by 3.2% in 2003.
Excluding the impact of class action services, U.S. unit volume by
major product line, as measured by cases received, for 2003 and 2002 was as
follows:
(whole numbers) 2003 2002 Variance
- --------------- ------- ------- --------
Casualty 213,980 225,705 (5.2%)
Workers' Compensation 180,787 229,925 (21.4%)
Property 224,432 219,936 2.0%
Vehicle 184,266 249,019 (26.0%)
Other 20,107 33,696 (40.3%)
------- -------
Total U.S. Cases Received 823,572 958,281 (14.1%)
======= =======
Our decline in workers' compensation claim referrals has been primarily
due to declines in U.S. employment levels and associated injury rates. The
declines in casualty and vehicle claims are largely due to an industry-wide
reduction in referrals from U.S. insurance companies for high-frequency,
low-severity claims. Conservative underwriting by our insurance company clients,
including significant increases in policy deductibles, has contributed to this
decline in property and casualty claims frequency. The increase in property
claims is largely due to increases in referrals to our Contractor Connection(SM)
direct repair network.
COMPENSATION AND FRINGE BENEFITS
Our most significant expense is the compensation of employees, including related
payroll taxes and fringe benefits. In response to the ongoing decline in U.S.
claims volume, we successfully implemented cost-cutting initiatives to reduce
our operating costs by nearly $31 million from 2002 levels. Our level of U.S.
full-time equivalent employees decreased by 13.6% as compared to employment
levels in 2002. There were an average of 4,548 full-time equivalent employees in
2003, compared to an average of 5,266 in 2002. U.S. compensation expense as a
percent of revenues decreased to 62.0% in 2003 as compared to 62.9% in 2002.
U.S. salaries and wages decreased 9.2% to $237.9 million in 2003 from
$261.9 million in 2002. Payroll taxes and fringe benefits for U.S. operations
totaled $54.5 million in 2003, decreasing 6.9% from 2002 costs of $58.6 million.
These decreases reflect the reduction in full-time equivalent employees during
2003, net of an increase in pension expense of $4.9 million in 2003.
Under SFAS 87, "Employers' Accounting for Pensions" (SFAS 87),
unrecognized gains and losses that exceed certain thresholds are included in
pension expense and amortized over the average remaining service life of plan
participants. As our U.S. defined benefit pension plan was frozen at December
31,
20 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Management's Discussion and Analysis of Financial
Condition and Results of Operations
2002, the amortization of previously unrecognized losses comprises substantially
all of our pension expense related to this plan in 2003. The amortization of
unrecognized losses totaled $7.9 million during 2003 compared to $3.6 million
for the 2002 period.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits increased as a percent of revenues to 33.1% in 2003 from
31.3% in 2002. This increase reflects higher processing costs associated with
growth in class action services revenues in 2003.
REIMBURSEMENTS
Reimbursements in our U.S. operations decreased to $13.8 million in 2003 from
$17.2 million in 2002, reflecting the decline in case volume during 2003.
Years Ended December 31, 2002 and 2001
REVENUES
U.S. revenues before reimbursements, by market type, for 2002 and 2001 are as
follows:
(in thousands) 2002 2001 Variance
- -------------- --------- --------- --------
Insurance companies $ 259,090 $ 284,966 (9.1%)
Self-insured entities 191,278 199,049 (3.9%)
Class action services 58,366 50,656 15.2%
--------- ---------
Total U.S. Revenues $ 508,734 $ 534,671 (4.9%)
========= =========
Revenues from insurance companies decreased 9.1% to $259.1 million in
2002 compared to 2001, due to a continued softening in our U.S. insurance
company referrals for high-frequency, low-severity claims and a decrease in
catastrophic claim referrals. Revenues from self-insured entities decreased 3.9%
to $191.3 million in 2002, due to a decline in workers' compensation and
casualty claim referrals. Revenues from class action services, which can
fluctuate based on the timing of project awards, increased 15.2% to $58.4
million in 2002.
Excluding the impact of class action services, U.S. unit volume,
measured principally by cases received, decreased 18.6% from 2001 to 2002. This
decrease was partially offset by a 12.3% revenue increase from changes in the
mix of services provided and in the rates charged for those services, resulting
in a net 6.3% decrease in U.S. revenues from 2001 to 2002, excluding revenues
from class action services. Our U.S. insurance company referrals for
high-frequency, low-severity claims have declined during the year resulting in
an increase in our average revenue per claim. Growth in class action services
increased U.S. revenues by 1.4% in 2002.
Excluding the impact of class action services, U.S. unit volume by
major product line, as measured by cases received, for 2002 and 2001 was as
follows:
(whole numbers) 2002 2001 Variance
- --------------- ------- --------- ---------
Casualty 225,705 241,930 (6.7%)
Workers' Compensation 229,925 264,338 (13.0%)
Property 219,936 286,006 (23.1%)
Vehicle 249,019 322,416 (22.8%)
Other 33,696 61,954 (45.6%)
------- ---------
Total U.S. Cases Received 958,281 1,176,644 (18.6%)
======= =========
CRAWFORD & COMPANY / ANNUAL REPORT 2003 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The decline in property and vehicle claims for the year was largely due
to the decline we are experiencing related to U.S. insurance company referrals
for high-frequency, low-severity claims. Conservative underwriting, increases in
policy deductibles, and mild weather during 2002 contributed to an industry-wide
decline in property and casualty claims frequency. Our decline in workers'
compensation and casualty claim referrals has been primarily due to the loss of
two major accounts due to bankruptcy and declines in U.S. employment levels and
associated injury rates, which have contributed to a reduction in workers'
compensation claims.
COMPENSATION AND FRINGE BENEFITS
In response to the decline in U.S. claims volume, we successfully implemented
cost-cutting initiatives to reduce our operating costs by $1 million per month
from second quarter 2002 levels. There were an average of 5,266 full-time
equivalent employees in 2002, compared to an average of 5,669 in 2001. Despite
this decrease in the number of employees, U.S. compensation expense as a percent
of revenues increased to 62.9% in 2002 compared to 61.9% in 2001 as a result of
the decline in U.S. revenues.
U.S. salaries and wages decreased to $261.9 million in 2002, from
$280.3 million in 2001, reflecting the 7.1% reduction in full-time equivalent
employees in 2002. Payroll taxes and fringe benefits for U.S. operations totaled
$58.6 million in 2002, increasing 15.3% from 2001 costs of $50.8 million. This
increase was primarily due to higher defined benefit pension costs, which
resulted from a decline in the fair market value of our pension investments and
a decrease in interest rates.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits increased as a percent of revenues to 31.3% in 2002 from
30.0% in 2001. This increase was primarily due to higher professional indemnity
self-insurance costs, bad debt expense, and costs related to our ongoing
technology initiatives.
REIMBURSEMENTS
Reimbursements in our U.S. operations decreased to $17.2 million in 2002 from
$22.7 million in 2001, reflecting the decline in case volume during 2002.
INTERNATIONAL OPERATIONS
Years Ended December 31, 2003 and 2002
REVENUES
Substantially all international revenues are derived from the insurance company
market. Revenues before reimbursements from our international operations totaled
$219.1 million in 2003, a 14.9% increase from the $190.7 million reported in
2002. Excluding acquisitions, international unit volume, measured principally by
cases received, decreased 1.4% in 2003 compared to 2002. Our third quarter 2002
acquisition of the loss adjusting business of Robertson & Company in Australia
increased international revenues by 4.1% in 2003. Revenues are net of an 11.6%
increase during 2003 due to the positive effect of a weak U.S. dollar, primarily
as compared to the British pound and the euro.
Excluding the impact of acquisitions on 2003 cases received,
international unit volume by region for 2003 and 2002 was as follows:
(whole numbers) 2003 2002 Variance
- --------------- ------- ------- --------
Americas 117,789 128,164 (8.1%)
CEMEA 86,504 84,087 2.9%
Asia/Pacific 27,020 26,543 1.8%
United Kingdom 93,375 90,355 3.3%
------- -------
Total International Cases Received 324,688 329,149 (1.4%)
======= =======
22 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The decrease in the Americas is due to the receipt of approximately
18,000 product liability claims in Canada during the 2002 second and third
quarters. There was no such large intake of claims in the 2003 period. There was
also an increase in low-value property claims in Brazil of approximately 6,000
cases during 2003. The increase in the United Kingdom ("U.K.") is due to claims
received from new contracts, primarily take-over claims associated with a recent
client agreement entered into during the third and fourth quarters of 2003. The
increase in Continental Europe, Middle East, & Africa ("CEMEA") is largely due
to an increase in small loss claims in South Africa.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, increased to 69.8% in 2003 from 68.6% in 2002, primarily
due to an increase in capacity in our U.K. and Canadian operating units. This
increased capacity is the result of an anticipated increase in claims volumes
from recent client agreements and should decline as claims under these
agreements are referred to us. There were an average of 3,115 full-time
equivalent employees in 2003 (including approximately 110 full-time equivalent
employees added by our acquisition in Australia), compared to an average of
3,003 in 2002.
Salaries and wages of international personnel totaled $129.8 million in
2003 compared to $112.6 million in 2002, increasing slightly as a percent of
revenues, from 59.0% in 2002 to 59.2% in 2003. Payroll taxes and fringe benefits
totaled $23.2 million in 2003 compared to $18.3 million in 2002, increasing as a
percent of revenues from 9.6% in 2002 to 10.6% in 2003. The increases in these
costs reflect the effect of a weak U.S. dollar, and the third quarter 2002
acquisition in Australia.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than reimbursements, compensation and related payroll taxes and
fringe benefits decreased slightly as a percent of revenues from 27.2% in 2002
to 27.1% in 2003.
REIMBURSEMENTS
Reimbursements in our international operations increased to $28.1 million in
2003 from $19.7 million in 2002. This increase is due to the effect of a weak
U.S. dollar, and an increase in the use of outside experts to handle flood
claims in CEMEA, typhoon related claims in Asia, and certain Canadian healthcare
claims.
Years Ended December 31, 2002 and 2001
REVENUES
Substantially all international revenues are derived from the insurance company
market. Revenues before reimbursements from our international operations totaled
$190.7 million in 2002, a 0.1% decrease from the $190.9 million reported in
2001. Excluding acquisitions, international unit volume, measured principally by
cases received, decreased 0.4% in 2002 compared to 2001. Small strategic
acquisitions in Australia and Canada increased revenues by 4.0% in 2002.
Revenues are net of a 0.3% decline during 2002 due to the negative effect of a
strong U.S. dollar.
Excluding the impact of acquisitions on 2002 cases received,
international unit volume by region for 2002 and 2001 was as follows:
(whole numbers) 2002 2001 Variance
- --------------- ------- ------- --------
Americas 122,687 112,346 9.2%
CEMEA 84,087 71,777 17.2%
Asia/Pacific 21,139 21,348 (1.0%)
United Kingdom 90,355 113,951 (20.7%)
------- -------
Total International Cases Received 318,268 319,422 (0.4%)
======= =======
CRAWFORD & COMPANY / ANNUAL REPORT 2003 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The decline in cases received in our U.K. operation is due to reduced
claim referrals from two major accounts and fewer weather-related claims during
2002. Our increase in the Americas is due to the receipt of approximately 18,000
product liability claims in Canada during the second and third quarters of 2002.
In CEMEA, our increase is primarily due to the receipt of approximately 12,600
low-value property claims in Sweden during 2002.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, increased to 68.6% in 2002 from 65.9% in 2001. This
increase is primarily due to an increase in capacity in the U.K. due to the
decline in case volume. There were an average of 3,003 full-time equivalent
employees in 2002 (including approximately 220 full-time equivalent employees
added by our acquisitions in Australia and Canada), compared to an average of
2,900 in 2001.
Salaries and wages of international personnel totaled $112.6 million in
2002 as compared to $109.3 million in 2001, increasing as a percent of revenues,
from 57.2% in 2001 to 59.0% in 2002. Payroll taxes and fringe benefits totaled
$18.3 million in 2002 as compared to $16.6 million in 2001, increasing as a
percent of revenues from 8.7% in 2001 to 9.6% in 2002.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than reimbursements, compensation and related payroll taxes and
fringe benefits decreased slightly as a percent of revenues from 27.4% in 2001
to 27.2% in 2002.
REIMBURSEMENTS
Reimbursements in our international operations increased to $19.7 million in
2002 from $18.0 million in 2001.
SPECIAL CHARGES AND CREDITS, AMORTIZATION OF GOODWILL, NET CORPORATE INTEREST,
AND INCOME TAXES
During November 2003, we made an after-tax payment of $8.0 million in connection
with the settlement of a U.S. Department of Justice investigation. This special
charge reduced net income per share by $0.16 during the 2003 fourth quarter.
During the 2002 first quarter, we received a cash payment of $6.0
million from a former vendor in full settlement of a business dispute. This
special credit, net of related income tax expense, increased net income per
share by $0.08 during the 2002 first quarter.
On January 1, 2002, we adopted SFAS 142. The adoption of this statement
eliminated the requirement to amortize goodwill which increased our 2002 and
2003 net income by approximately $3.0 million, or $0.06 per share.
Net corporate interest totaled $5.4 million, $4.7 million, and $4.8
million for 2003, 2002, and 2001, respectively, reflecting an increase in total
borrowings during 2003.
Our effective tax rate was 36.4% of pretax income for 2003, after
adjustment for the special charge during the year. Taxes on income totaled $9.0
million, $14.0 million, and $18.4 million for 2003, 2002, and 2001,
respectively. In January 2002, the effective tax rate was adjusted from 38.4% to
36.4%. This decline in the effective tax rate was primarily due to the adoption
of SFAS 142 during 2002.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At December 31, 2003, current assets exceeded current liabilities by
approximately $113.7 million, a decrease of $10.1 million from the working
capital balance at December 31, 2002. Cash and cash equivalents at the end of
2003 totaled $41.6 million, increasing $10.5 million from $31.1 million at the
end of 2002. Cash was generated primarily from operating activities and
increases in net short-term borrowings. The principal uses of cash were for
dividends paid to shareholders, pension plan funding,
24 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Management's Discussion and Analysis of Financial
Condition and Results of Operations
investments in computer software, acquisitions of property and equipment, and
payment of the government settlement. Cash dividends to shareholders
approximated 74.6% of net income (before special charges and credits) in 2003,
compared to 93.9% in 2002. The Board of Directors declares cash dividends to
shareholders each quarter based on an assessment of current and projected
earnings and cash flows.
During 2003, we did not repurchase any shares of Class A or Class B
Common Stock. As of December 31, 2003, 705,863 shares remain 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 (see Note 2 of the consolidated financial
statements).
We maintain committed revolving credit lines with banks in order to
meet working capital requirements and other financing needs that may arise. The
balance of unused lines of credit totaled $34.6 million at December 31, 2003.
Short-term borrowings outstanding as of December 31, 2003 totaled $43.0 million,
increasing from $30.0 million at the end of 2002. Long-term borrowings
outstanding, excluding current installments, totaled $50.7 million as of
December 31, 2003, compared to $50.0 million at December 31, 2002. Please refer
to the New Financing discussion under the Factors that May Affect Future Results
section of this report for a further discussion of our borrowing capabilities.
We believe that our current financial resources, together with funds generated
from operations and existing and potential borrowing capabilities, will be
sufficient to maintain our current operations.
We do not engage in any hedging activities to compensate for the effect
of exchange rate fluctuations on the operating results of our foreign
subsidiaries. Foreign currency denominated debt is maintained primarily to hedge
the currency exposure of our net investment in foreign operations.
During 2003, we recorded an adjustment to Accumulated Other
Comprehensive Loss, a component of Shareholders' Investment, to reduce our
minimum pension liability by $6.0 million, net of related tax expense. During
2002, we recorded an adjustment to increase our minimum pension liability by
$43.2 million, net of related tax benefit. These non-cash items resulted
primarily from fluctuations in the fair market value of our pension investments
as of the September 30, 2003 and 2002 measurement dates and a decline in
interest rates during 2002 and 2003.
Shareholders' investment at the end of 2003 was $172.6 million,
compared with $159.4 million at the end of 2002. This increase is a result of
our translation adjustment, net income, and minimum pension liability
adjustment, net of 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.
We believe the following critical accounting policies for revenue
recognition, allowance for doubtful accounts, valuation of goodwill and other
long-lived assets, defined benefit pension plans, determination of effective tax
rate, and self-insured reserves require significant judgments and estimates in
the preparation of the consolidated financial statements. Changes in these
underlying estimates could potentially materially affect consolidated results of
operations, financial position and cash flows in the period of
CRAWFORD & COMPANY / ANNUAL REPORT 2003 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations
change. Although some variability is inherent in these estimates, we believe the
amounts provided for are adequate.
We have discussed the development and selection of the following
critical accounting policies and estimates with the Audit Committee of our Board
of Directors, and the Audit Committee has reviewed our related disclosure in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
REVENUE RECOGNITION
Our revenues are primarily comprised of claims processing or program
administration fees. Fees for professional services are recognized in unbilled
revenues at the time such services are rendered at estimated collectible
amounts. Substantially all unbilled revenues are billed within one year.
Out-of-pocket costs that are incurred in administering a claim are passed on to
our clients and are included in revenues. Deferred revenues represent the
estimated unearned portion of fees related to future services under certain
fixed-fee service arrangements. Deferred revenues are recognized based on the
estimated rate at which the services are provided. These rates are primarily
based on an historical evaluation of actual claim closing rates by major lines
of coverage. Additionally, recent claim closing rates are evaluated to ensure
that current claim closing history does not indicate a significant deterioration
or improvement in the longer-term historical closing rates used.
Our fixed-fee service arrangements typically call for us to handle
claims on either a one- or two-year basis, or for the lifetime of the claim. In
cases where we handle a claim on a non-lifetime basis, we typically receive an
additional fee on each anniversary date that the claim remains open. For service
arrangements where we provide services for the life of the claim, we are only
paid one fee for the life of the claim, regardless of the ultimate duration of
the claim. As a result, our deferred revenues for claims handled for one or two
years are not as sensitive to changes in claim closing rates since the revenues
are ultimately recognized in the near future and additional fees are generated
for handling long-lived claims. Deferred revenues for lifetime claim handling
are considered more sensitive to changes in claim closing rates since we are
obligated to handle these claims to their ultimate conclusion with no additional
fees for long-lived claims.
Based upon our historical averages, we close approximately 99% of all
cases referred under lifetime claim service arrangements within the first five
years from the date of referral. Also, within that five-year period, the
percentage of claims remaining open in any one particular year has remained
relatively consistent from period to period. Each quarter we evaluate our
historical claim closing rates by major line of insurance coverage and make
adjustments as necessary. Any changes in estimates are recognized in the period
in which they are determined.
As of December 31, 2003, deferred revenues related to lifetime claim
handling arrangements approximated $15.8 million. If the rate at which we close
cases changes, the amount of revenues recognized within a period could be
affected. In addition, given the competitive environment in which we operate, we
may be unable to raise our prices to offset the additional expense associated
with handling longer-lived claims. Absent an increase in per claim fees from our
clients, a 1% decrease in claim closing rates for lifetime claims would have
resulted in the deferral of additional revenues of approximately $437,000, or
$0.01 per share for the year ended December 31, 2003. If our average claim
closing rates for lifetime claims were to increase by 1%, we would have
recognized additional revenues of approximately $367,000, or $0.01 per share for
the year ended December 31, 2003.
The estimate for deferred revenues is a critical accounting estimate
for our U.S. segment.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts, relating to our billed and
unbilled receivables, for estimated losses resulting primarily from adjustments
clients may make to invoiced amounts and the inability of
26 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Management's Discussion and Analysis of Financial
Condition and Results of Operations
our clients to make required payments. These allowances are established by using
historical write-off information to project future experience and by considering
the current credit worthiness of our clients, any known specific collection
problems, and our assessment of current property and casualty insurance industry
conditions. Each quarter we evaluate the adequacy of the assumptions used in
determining these allowances and make adjustments as necessary. Changes in
estimates are recognized in the period in which they are determined.
As of December 31, 2003, our allowance for doubtful accounts totaled
$22.1 million or approximately 8.4% of gross billed and unbilled receivables. If
the financial condition of our clients were to deteriorate, resulting in an
inability to make required payments to us, additional allowances may be
required. If the allowance for doubtful accounts were to change by 1% of gross
billed and unbilled receivables, reflecting either an increase or decrease in
expected future write-offs, the impact to 2003 pretax income would have been
approximately $2.6 million, or $0.03 per share.
The estimate for the allowance for doubtful accounts is a critical
accounting estimate for both our U.S. and international segments.
VALUATION OF GOODWILL AND OTHER LONG-LIVED ASSETS
We regularly evaluate whether events and circumstances have occurred which
indicate that the carrying amounts of goodwill and other long-lived assets
(primarily property and equipment, deferred income tax assets, and capitalized
software) may warrant revision or may not be recoverable. When factors indicate
that such assets should be evaluated for possible impairment, we perform an
impairment test in accordance with SFAS 142 for goodwill, SFAS 109 "Accounting
for Income Taxes" for deferred income tax assets, and SFAS 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" for other long-lived assets. In
the opinion of management, goodwill and other long-lived assets are
appropriately valued and not impaired at December 31, 2003 and 2002.
We perform an annual impairment analysis of goodwill in accordance with
SFAS 142 where we compare the book value of our operating segments to the
estimated market value of those units as determined by discounting future
projected cash flows. Based upon our analysis completed in the 2003 fourth
quarter, we do not have an impairment of goodwill in 2003. The estimated market
values of our segments are based upon certain assumptions made by management. If
the growth or discount rate assumptions used to calculate the market value of
our operating segments were to change, impairment could result. If the growth or
discount rate assumptions used to value our operating segments were to change by
1%, representing a 25% decline in the projected rate of growth or a 9% increase
in the discount rate, we would have a potential impairment in our international
operating segment. We would then be required to perform a detailed analysis to
measure the amount of impairment loss, if any. No potential impairment would be
recognized in our U.S. segment.
The valuation of goodwill and other long-lived assets is a critical
accounting estimate for both our U.S. and international segments.
DEFINED BENEFIT PENSION PLANS
We sponsor various defined benefit pension plans in the U.S. and U.K. which
cover a substantial number of employees in each location. Our U.S. defined
benefit retirement plan was frozen on December 31, 2002. Benefits payable under
our U.S. defined benefit retirement plan are generally based on career
compensation, while the U.K. plans are generally based on an employee's final
salary. Our funding policy is to make cash contributions in amounts sufficient
to maintain the plans on an actuarially sound basis, but not in excess of
deductible amounts permitted under applicable income tax regulations. Plan
assets are invested in equity and fixed income securities, with a target
allocation of approximately 60 percent to equity securities and 40 percent to
fixed income investments.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The estimated liability for our defined benefit pension plans is
sensitive to changes in the underlying assumptions for the expected return on
plan assets and the discount rate used to determine the projected benefits
payable under the plans. If our assumption for the expected return on plan
assets were to change by 0.50%, representing either an increase or decrease in
expected returns, the impact to 2003 pretax income would have been approximately
$1.3 million, or $0.02 per share. If our assumption for the discount rate were
to change by 0.25%, representing either an increase or decrease to interest
rates, the impact to 2003 pretax income would have been approximately $1.1
million, or $0.02 per share.
The estimates for our defined benefit pension plans are critical
accounting estimates for both our U.S. and international segments.
DETERMINATION OF EFFECTIVE TAX RATE
We account for certain income and expense items differently for financial
reporting and income tax purposes. Provisions for deferred taxes are made in
recognition of these temporary differences. The most significant differences
relate to minimum pension liability, unbilled and deferred revenues,
self-insurance, and depreciation and amortization.
For financial reporting purposes, in accordance with the liability
method of accounting for income taxes as specified in SFAS 109, the provision
for income taxes is the sum of income taxes both currently payable and deferred.
Currently payable income taxes represent the liability related to our income tax
returns for the current year, while the net deferred tax expense or benefit
represents the change in the balance of deferred tax assets or liabilities as
reported on the Consolidated Balance Sheets. The changes in deferred tax assets
and liabilities are determined based upon changes between the basis of assets
and liabilities for financial reporting purposes and the basis of assets and
liabilities for income tax purposes, measured by the statutory tax rates that
management estimates will be in effect when these differences reverse.
In addition to estimating the future tax rates applicable to the
reversal of tax differences, management must also make certain assumptions
regarding whether tax differences are permanent or temporary. If the differences
are temporary, management must estimate the timing of their reversal, and
whether taxable income in future periods will be sufficient to fully recognize
any gross deferred tax assets. Other factors which influence the effective tax
rate include changes in the composition of taxable income from the countries in
which we operate and our ability to recover prior net operating losses in
certain of our international subsidiaries.
Our effective tax rate was 36.4% of pretax income for 2003, after
adjustment for the special charge during the year. If our effective tax rate
were to increase by 1%, we would have recognized additional income tax expense
of approximately $246,000, or $0.01 per share for the year ended December 31,
2003.
The estimate for income taxes is a critical accounting estimate for our
both our U.S. and international segments.
SELF-INSURANCE RESERVES
We self-insure certain insurable risks consisting primarily of professional
liability, employee medical and disability, workers' compensation, and auto
liability. Insurance coverage is obtained for catastrophic property and casualty
exposures, including professional liability on a claims made basis, as well as
those risks required to be insured by law or contract. We record a liability for
claims incurred under these self-insured programs based on our estimate of the
ultimate aggregate exposure and discount that liability using an average of
published short- and long-term medium quality corporate bond yields. The
estimated liability is calculated based on historical claim payment experience,
the expected life of the claims, and the reserves established on the claims. In
addition, reserves are established for losses
28 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Management's Discussion and Analysis of Financial
Condition and Results of Operations
that have occurred but have not been reported and for the adverse development of
reserves on reported losses. Each quarter we evaluate the adequacy of the
assumptions used in developing these reserves and make adjustments as necessary.
Changes in estimates are recognized in the period in which they are determined.
As of December 31, 2003, our estimated liability for self-insured risks
totaled $30.0 million. The estimated liability is most sensitive to changes in
the ultimate reserve for a claim and the interest rate used to discount the
liability. We believe that the provision for self-insured losses is adequate to
cover the ultimate net cost of losses incurred; however, this provision is an
estimate and may be significantly greater or less than the provision
established. If the average discount rate we use to determine the present value
of our self-insured liability were to change by 1%, reflecting either an
increase or decline in underlying interest rates, our estimated liability for
self-insured risks would be impacted by approximately $1.9 million, resulting in
an increase or decrease to 2003 net income of $1.2 million, or $0.02 per share.
The estimate for self-insured reserves is a critical accounting
estimate for our U.S. segment.
MARKET RISK
DERIVATIVES
We have not entered into any transactions using derivative financial instruments
or derivative commodity instruments.
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. Our revenues from international operations
were 31.7%, 27.3%, and 26.3% of total revenues at December 31, 2003, 2002, and
2001, respectively. Except for borrowings 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 December 31, 2003 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
$412,000, or $0.01 per share, during 2003, had the U.S. dollar exchange rate
increased relative to the currencies to which we had exposure.
INTEREST RATES
We are exposed to interest rate fluctuations on certain of our 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
December 31, 2003, we had $43.0 million in short-term loans outstanding with an
average variable interest rate of 4.8%. If the average interest rate were to
change by 1%, the impact to 2003 pretax income would have been approximately
$430,000, or $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 2003 pretax income would have been approximately $1.1
million, or $0.02 per share.
CREDIT RISK
We process payments for claims settlements, primarily on behalf of
our self-insured clients. The liability
CRAWFORD & COMPANY / ANNUAL REPORT 2003 29
Management's Discussion and Analysis of Financial
Condition and Results of Operations
for the settlement cost of claims processed, which is generally pre-funded,
remains with the client. Accordingly, we do not incur significant credit risk in
the performance of these services.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain of the statements contained in this and other sections of this Annual
Report are forward-looking. While management believes that these statements are
accurate, our business is dependent upon general economic conditions and various
conditions specific to our industry. Future trends and these factors could cause
actual results to differ materially from the forward-looking statements that
have been made. In particular, the following issues and uncertainties should be
considered in evaluating our prospects:
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 we
maintain; however, we are self-insured for the deductibles under various
insurance coverages. In our opinion, adequate reserves have been provided for
such self-insured risks.
We have received two related federal grand jury subpoenas which we
understand have been issued as part of a possible conflicts of interest
investigation involving a public entity client of our Melville, New York office
for Risk Management Services and Healthcare Management. We have responded to one
of these subpoenas and are currently responding to the other. These subpoenas do
not relate to our billing practices. We cannot predict when the government's
investigation will be completed, its ultimate outcome or its effect on our
financial condition, results of operations, or cash flows, including the effect,
if any, on our contract with the client. Although the loss of revenues from this
client would not be material to our financial condition, results of operations,
and cash flows, the investigation could result in the imposition of civil,
administrative or criminal fines or sanctions.
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 2003 levels of
revenues and operating earnings, additional payments under existing earnout
agreements would approximate $2,838,000 through 2008, as follows: 2004 -
$323,000; 2005 - $284,000; and 2008 - $2,231,000.
We maintain an uncollateralized letter of credit facility to satisfy
certain contractual requirements. At December 31, 2003, the aggregate amount
available under the facility was $15,000,000, of which $10,884,000 is committed.
CONTRACTUAL OBLIGATIONS
The impact that our contractual obligations as of December 31, 2003 are expected
to have on our liquidity and cash flow in future periods is as follows:
Payments Due by Period
Less than More than
(in thousands) 1 Year 1-3 Years 3-5 Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------
Long-term debt, including current
portion (Note 5) $ 2,653 $ - $ - $ 50,000 $ 52,653
Operating lease obligations (Note 4) 30,937 40,186 22,428 22,177 115,728
Capital lease obligations (Note 5) 442 566 106 3 1,117
Outsourced services obligation 11,900 26,775 - - 38,675
- --------------------------------------------------------------------------------------------------------------------
Total $ 45,932 $ 67,527 $ 22,534 $ 72,180 $208,173
====================================================================================================================
The obligation for outsourced services relates to certain information
technology functions handled by a third-party provider under a contract with an
initial term which will expire during the first quarter of 2007.
30 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Management's Discussion and Analysis of Financial
and Results of Operations
POSTRETIREMENT MEDICAL BENEFITS
In December 2003, a law was passed which expands Medicare, primarily by adding a
prescription drug benefit for Medicare-eligible retirees starting in 2006. We
anticipate that the benefits we pay after 2006 will be lower as a result of the
new Medicare provision; however, the retiree medical obligations and costs
reported do not reflect the impact of this legislation. Deferring the
recognition of the new Medicare provisions' impact is permitted by Financial
Accounting Standards Board Staff Position 106-1 due to open questions about some
of the new Medicare provisions and a lack of authoritative guidance about
certain matters. The final accounting guidance could require changes to
previously reported information.
PENSION EXPENSE
We use a September 30 measurement date to determine U.S. pension expense under
SFAS 87. As a result of significant declines in the fair market value of our
pension plan investments, as well as declines in interest rates, effective
December 31, 2002, we froze our U.S. defined benefit pension plan and replaced
it with a defined contribution retirement plan. As a result of the freeze, we
have reviewed the actuarial assumptions used in valuing the U.S. plan. Based on
a review performed by our actuaries, we have reduced the employee turnover and
retirement assumptions to better reflect expected future employee turnover and
retirement rates associated with our U.S. plan. U.S. pension expense in 2004,
including both the defined benefit and defined contribution plans, is expected
to decrease $6.3 million to approximately $9.3 million. Future cash funding of
our U.S. defined benefit pension plan will depend largely on future investment
performance and interest rates; however, we are not required to make any
contributions to the plan in 2004. Cash contributions to the U.S. defined
contribution plan of approximately $6.2 million will be made in the 2004 first
quarter.
NEW FINANCING
In October 2003, we entered into a committed $70.0 million revolving credit line
and issued $50.0 million in 6.08% senior notes due October 2010. The revolving
credit line was used to refinance $14 million in long-term debt associated with
the acquisition of the Australian operations of the Robertson & Company Group
and other outstanding short-term debt which carried higher interest rates. As of
December 31, 2003, there was $40.9 million outstanding on the revolving credit
line with an average variable interest rate of 5.0%. The proceeds from the
senior note were used to refinance $36.0 million on existing long-term debt and
pay approximately $2.2 million in U.S. dollar denominated debt owed by various
international subsidiaries. The balance of $11 million was invested in
short-term bonds.
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 were in compliance with the debt covenants as of December
31, 2003. Based upon our business plan for 2004, we expect to remain in
compliance during 2004. If we were not to meet the covenant requirements, both
agreements are subject to being called or renegotiated. Any such renegotiations
could result in less favorable terms, including higher interest rates and
accelerated payments.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 31
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------
(in thousands, except per share data)
REVENUES:
Revenues before reimbursements $ 690,933 $ 699,390 $ 725,539
Reimbursements 41,948 36,917 40,732
- ---------------------------------------------------------------------------------------------
TOTAL REVENUES 732,881 736,307 766,271
- ---------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Costs of services provided,
before reimbursements 530,362 532,411 546,361
Reimbursements 41,948 36,917 40,732
- ---------------------------------------------------------------------------------------------
Cost of services 572,310 569,328 587,093
Selling, general, and administrative 130,531 129,732 123,150
expenses
Special charges and (credits) (Note 9) 8,000 (6,000) -
Corporate interest, net 5,414 4,706 4,779
Amortization of goodwill - - 3,448
- ---------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 716,255 697,766 718,470
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 16,626 38,541 47,801
PROVISION FOR INCOME TAXES 8,964 14,029 18,356
- ---------------------------------------------------------------------------------------------
NET INCOME $ 7,662 $ 24,512 $ 29,445
=============================================================================================
NET INCOME PER SHARE:
Basic $ 0.16 $ 0.50 $ 0.61
=============================================================================================
Diluted $ 0.16 $ 0.50 $ 0.61
=============================================================================================
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,668 48,580 48,492
=============================================================================================
Diluted 48,776 48,664 48,559
=============================================================================================
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.24 $ 0.32 $ 0.56
=============================================================================================
Class B Common Stock $ 0.24 $ 0.32 $ 0.56
=============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
32 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Consolidated Balance Sheets
As of December 31, 2003 2002
- ---------------------------------------------------------------------------------------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,564 $ 31,091
Accounts receivable, less allowance for doubtful
accounts of $20,832 in 2003 and $19,633 in 2002 142,273 135,174
Unbilled revenues, at estimated billable amounts 100,253 93,792
Prepaid expenses and other current assets 13,028 11,968
- ---------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 297,118 272,025
- ---------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Land 2,445 2,401
Buildings and improvements 22,090 21,069
Furniture and fixtures 66,212 62,273
Data processing equipment 59,044 54,590
Automobiles 4,995 4,373
- ---------------------------------------------------------------------------------------
154,786 144,706
Less accumulated depreciation (117,618) (108,607)
- ---------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 37,168 36,099
- ---------------------------------------------------------------------------------------
OTHER ASSETS:
- ---------------------------------------------------------------------------------------
Goodwill arising from acquisitions, net 104,523 97,798
Capitalized software costs, net 31,540 23,977
Deferred income tax assets 28,505 31,899
Other 14,144 12,978
- ---------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 178,712 166,652
- ---------------------------------------------------------------------------------------
$ 512,998 $ 474,776
=======================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 33
Consolidated Balance Sheets
As of December 31, 2003 2002
- -------------------------------------------------------------------------------------------------
(in thousands)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 43,007 $ 30,019
Accounts payable 41,451 31,956
Accrued compensation and related costs 33,104 26,454
Self-insured risks 18,040 15,833
Accrued income taxes 7,406 9,594
Other accrued liabilities 18,177 14,384
Deferred revenues 19,172 18,516
Current installments of long-term debt 3,106 1,493
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 183,463 148,249
- -------------------------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 50,664 49,976
Deferred revenues 10,559 12,127
Self-insured risks 11,920 11,819
Minimum pension liability 67,846 76,747
Postretirement medical benefit obligation 6,077 6,289
Other 9,875 10,138
- -------------------------------------------------------------------------------------------------
TOTAL NONCURRENT LIABILITIES 156,941 167,096
- -------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $1.00 par value, 50,000 shares
authorized; 24,027 and 23,925 shares issued and
outstanding in 2003 and 2002, respectively 24,027 23,925
Class B Common Stock, $1.00 par value, 50,000 shares
authorized; 24,697 shares issued and outstanding in
2003 and 2002 24,697 24,697
Additional paid-in capital 840 523
Retained earnings 187,747 191,767
Accumulated other comprehensive loss (64,717) (81,481)
- -------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 172,594 159,431
- -------------------------------------------------------------------------------------------------
$ 512,998 $ 474,776
=================================================================================================
34 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Consolidated Statements of Shareholders' Investment
Accumulated
Common Stock Additional Other Total
Class A Class B Paid-In Retained Comprehensive Shareholders'
Non-Voting Voting Capital Earnings Loss Investment
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
BALANCE AT DECEMBER 31, 2000 $ 23,754 $ 24,697 $ - $ 183,664 $ (14,348) $ 217,767
Comprehensive loss:
Net income - - - 29,445 - 29,445
Translation adjustment - - - - (3,825) (3,825)
Minimum pension liability
adjustment
(net of $17.9 million income
tax benefit) - - - - (28,777) (28,777)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (3,157)
Dividends paid - - - (27,146) - (27,146)
Shares issued in connection
with options and benefits 89 - 27 720 - 836
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 23,843 24,697 27 186,683 (46,950) 188,300
Comprehensive loss:
Net income - - - 24,512 - 24,512
Translation adjustment - - - - 4,465 4,465
Tax benefit from exercise of
stock options - - - - 4,165 4,165
Minimum pension liability
adjustment
(net of $23.2 million income
tax benefit) - - - - (43,161) (43,161)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (10,019)
Dividends paid - - - (19,428) - (19,428)
Shares issued in connection
with options and benefits 82 - 496 - - 578
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 23,925 24,697 523 191,767 (81,481) 159,431
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - 7,662 - 7,662
Translation adjustment - - - - 10,806 10,806
Minimum pension liability
adjustment
(net of $3.4 million income tax
expense) - - - - 5,958 5,958
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 24,426
Dividends paid - - - (11,682) - (11,682)
Shares issued in connection
with options and benefits 102 - 317 - - 419
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 $ 24,027 $ 24,697 $ 840 $ 187,747 $ (64,717) $ 172,594
=================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 35
Consolidated Statements of Cash Flows
For The Years Ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,662 $ 24,512 $ 29,445
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 16,381 17,414 20,626
Deferred income taxes 129 3,975 (287)
(Gain) loss on sales of property
and equipment 54 (18) 125
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net 18 5,473 (309)
Unbilled revenues (1,374) (1,369) 2,852
Prepaid or accrued income taxes (3,166) (3,525) 6,198
Accounts payable and accrued liabilities 1,375 4,027 4,035
Accrued restructuring charges (391) (335) (859)
Deferred revenues 345 (1,579) (2,741)
Prepaid and accrued pension costs 5,600 6,020 4,022
Prepaid expenses and other assets 10,225 (1,972) (35)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 36,858 52,623 63,072
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (11,136) (9,189) (11,990)
Acquisitions of businesses, net of cash acquired (332) (13,569) (9,207)
Capitalization of software costs (12,681) (11,093) (7,332)
Proceeds from sales of property and equipment 373 480 254
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,776) (33,371) (28,275)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (11,682) (19,428) (27,146)
Proceeds from exercise of stock options 419 578 836
Increase in short-term borrowings 39,790 18,345 13,578
Payments on short-term borrowings (33,094) (24,657) (21,275)
Proceeds from long-term debt 50,272 14,247 143
Payments on long-term debt (50,973) (184) (262)
Capitalized loan costs 891 - -
- -----------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,377) (11,099) (34,126)
- -----------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash
and cash equivalents 1,768 972 (841)
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 10,473 9,125 (170)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 31,091 21,966 22,136
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 41,564 $ 31,091 $ 21,966
=====================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
36 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
NOTE 1. MAJOR ACCOUNTING AND REPORTING POLICIES
NATURE OF OPERATIONS AND INDUSTRY CONCENTRATION
The Company is the world's largest independent provider of claims management
solutions to insurance companies and self-insured entities, with a global
network of more than 700 offices in 67 countries. 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. Substantial portions of the Company's revenues
and accounts receivable are derived from United States ("U.S.") claims services
provided to the property and casualty insurance industry.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany
transactions. The financial statements of the Company's international
subsidiaries outside North America and the Caribbean are included in the
Company's consolidated financial statements on a two-month delayed basis in
order to provide sufficient time for accumulation of their results.
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation. In addition, costs associated with the Company's claims management
systems totaling $3,018,000, $3,263,000, and $28,000 in 2003, 2002, and 2001,
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.
Net income was not affected by these reclassifications.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, receivables, accounts payable,
and short-term borrowings approximates carrying value due to the short-term
maturity of the instruments. The fair value of long-term debt approximates
carrying value based on the effective interest rates compared to current market
rates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and marketable securities with
original maturities of three months or less.
GOODWILL AND OTHER LONG-LIVED ASSETS
The Company performs a goodwill impairment test as of October 1 each year and
regularly evaluates whether events and circumstances have occurred which
indicate that the carrying amounts of goodwill and other long-lived assets
(primarily property and equipment, deferred income tax assets, and capitalized
software) may warrant revision or may not be recoverable. When factors indicate
that such assets should be evaluated for possible impairment, the Company
performs an impairment test in accordance with Statement of Financial Accounting
Standards ("SFAS") 142 "Goodwill and Other Intangible Assets"
CRAWFORD & COMPANY / ANNUAL REPORT 2003 37
Notes to Consolidated Financial Statements
(SFAS 142) for goodwill, SFAS 109 "Accounting for Income Taxes" for deferred
income tax assets, and SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" for other long-lived assets.
PROPERTY AND EQUIPMENT
The Company depreciates the cost of property and equipment over the estimated
useful lives of the related assets, primarily using the straight-line method.
The estimated useful lives for the principal property and equipment
classifications are as follows:
Classification Estimated Useful Lives
- -------------- ----------------------
Furniture and fixtures 3-10 years
Data processing equipment 3-5 years
Automobiles 3-4 years
Buildings and improvements 7-40 years
Depreciation expense on property and equipment was $11,710,000, $13,508,000,
and $15,106,000 for 2003, 2002, and 2001, respectively.
CAPITALIZED SOFTWARE
Capitalized software reflects costs related to internally developed or purchased
software that are capitalized and amortized on a straight-line basis over
periods ranging from three to ten years. Amortization expense for capitalized
software was $4,671,000, $4,230,000, and $2,072,000 for 2003, 2002, and 2001,
respectively.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the
separately identifiable net assets acquired. Goodwill acquired prior to June 30,
2001 was amortized over 15 to 40 years using the straight-line method. Goodwill
acquired after June 30, 2001 was not amortized in accordance with SFAS 142. See
New Accounting Pronouncements for further discussion.
SELF-INSURED RISKS
The Company self-insures certain insurable risks consisting primarily of
professional liability, employee medical and disability, workers' compensation,
and auto liability. Insurance coverage is obtained for catastrophic property and
casualty exposures (including professional liability on a claims-made basis), as
well as those risks required to be insured by law or contract. Provision for
claims under the self-insured program is made based on the Company's estimate of
the aggregate liability for claims incurred and is discounted using an average
of published short- and long-term medium quality corporate bond yields. The
estimated liability is calculated based on historical claim payment experience,
the expected life of the claims, and the reserves established on the claims. In
addition, reserves are established for losses that have occurred but have not
been reported and for the adverse development of reserves on reported losses. At
December 31, 2003 and 2002, accrued self-insured risks totaled $29,960,000 and
$27,652,000, respectively, including current liabilities of $18,040,000 and
$15,833,000, respectively.
REVENUE RECOGNITION
The Company's revenues are primarily comprised of claims processing or program
administration fees. Fees for professional services are recognized in unbilled
revenues at the time such services are rendered at estimated collectible
amounts. Substantially all unbilled revenues are billed within one year.
Out-of-pocket costs that are incurred in administering a claim are passed on by
the Company to its clients and are included in revenues. Deferred revenues
represent the estimated unearned portion of
38 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
fees derived from certain fixed-rate claim service agreements. The Company's
fixed-fee service arrangements typically call for the Company to handle claims
on either a one- or two-year basis, or for the lifetime of the claim. In cases
where the claim is handled on a non-lifetime basis, an additional fee is
typically received on each anniversary date that the claim remains open. For
service arrangements where services are provided for the life of the claim, the
Company only receives one fee for the life of the claim, regardless of the
ultimate duration of the claim. Deferred revenues are recognized based on the
estimated rate at which the services are provided. These rates are primarily
based on an historical evaluation of actual claim closing rates by major line of
coverage.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts, relating to billed and
unbilled receivables, for estimated losses resulting primarily from adjustments
clients may make to invoiced amounts, and the inability of clients to make
required payments. These allowances are established using historical write-off
information to project future experience and by considering the current credit
worthiness of clients, any known specific collection problems, and an assessment
of current property and casualty insurance industry conditions.
The Company's allowances for doubtful accounts on billed receivables, were
$20,832,000, $19,633,000, and $16,755,000, and write-offs, net of recoveries,
including revenue adjustments were $9,333,000, $11,085,000, and $12,254,000,
respectively, for the years ended December 31, 2003, 2002, and 2001.
INCOME TAXES
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. Provisions for deferred taxes are
made in recognition of these temporary differences. The most significant
differences relate to minimum pension liability, unbilled and deferred revenues,
self-insurance, and depreciation and amortization.
For financial reporting purposes, in accordance with the liability method of
accounting for income taxes as specified in SFAS 109, the provision for income
taxes is the sum of income taxes both currently payable and deferred. Currently
payable income taxes represent the liability related to the income tax returns
for the current year, while the net deferred tax expense or benefit represents
the change in the balance of deferred tax assets or liabilities as reported on
the Consolidated Balance Sheets. The change in deferred tax assets and
liabilities are determined based upon changes between the basis of assets and
liabilities for financial reporting purposes and the basis of assets and
liabilities for income tax purposes, measured by the statutory tax rates that
management estimates will be in effect when these differences reverse.
In addition to estimating the future tax rates applicable to the reversal of
tax differences, management must also make certain assumptions regarding whether
tax differences are permanent or temporary. If the differences are temporary,
management must estimate the timing of their reversal, and whether taxable
operating income in future periods will be sufficient to fully recognize any
gross deferred tax assets. Others factors which influence the effective tax rate
include changes in the composition of taxable income from the countries in which
the Company operates and the ability of the Company to recover prior net
operating losses in certain of its international subsidiaries.
NET INCOME PER SHARE
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.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 39
Notes to Consolidated Financial Statements
Below is the calculation of basic and diluted net income per share:
(in thousands, except per share data) 2003 2002 2001
- ----------------------------------------------------------------------------------
Net income available to common shareholders $ 7,662 $24,512 $29,445
==================================================================================
Weighted-average common shares outstanding - basic 48,668 48,580 48,492
Dilutive effect of stock options 108 84 67
- ----------------------------------------------------------------------------------
Weighted-average common shares outstanding - diluted 48,776 48,664 48,559
==================================================================================
Basic net income per share $ 0.16 $ 0.50 $ 0.61
==================================================================================
Diluted net income per share $ 0.16 $ 0.50 $ 0.61
==================================================================================
Additional options to purchase 4,790,313 shares of Class A Common Stock
at $5.50 to $19.50 per share were outstanding at December 31, 2003, 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 these shares would have been antidilutive.
FOREIGN CURRENCY TRANSLATION
For operations outside the U.S. that prepare financial statements in currencies
other than the U.S. dollar, results from operations and cash flows are
translated at average exchange rates during the period, and assets and
liabilities are translated at end-of-period exchange rates. The resulting
cumulative translation adjustment is reported as a component of Accumulated
Other Comprehensive Loss in the Consolidated Balance Sheets.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the Company consists of the total of net income,
foreign currency translation adjustments, tax benefit from the exercise of stock
options, and minimum pension liability adjustments. The Company reports
comprehensive income (loss) in the Consolidated Statements of Shareholders'
Investment.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation utilizing the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
("APB") 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no compensation expense has been recognized for
the 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 SFAS 123, "Accounting for
Stock-Based Compensation," (SFAS 123) the Company's net income and net income
per share would have been reduced to the pro forma amounts indicated below:
(in thousands, except per share data) 2003 2002 2001
- ---------------------------------------------------------------------------------------------
Net income As reported $ 7,662 $ 24,512 $ 29,445
Less: compensation expense using the fair
value method, net of tax 1,384 1,688 2,495
- ---------------------------------------------------------------------------------------------
Pro forma $ 6,278 $ 22,824 $ 26,950
=============================================================================================
Net income per share - basic As reported $ 0.16 $ 0.50 $ 0.61
=============================================================================================
Pro forma $ 0.13 $ 0.47 $ 0.56
=============================================================================================
Net income per share - diluted As reported $ 0.16 $ 0.50 $ 0.61
=============================================================================================
Pro forma $ 0.13 $ 0.47 $ 0.56
=============================================================================================
40 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
NEW ACCOUNTING PRONOUNCEMENTS
In November 2001, the Emerging Issues Task Force released Issue 01-14 "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred." The issue requires that reimbursed out-of-pocket expenses be
characterized as revenues in the income statement. This issue was effective for
the Company on January 1, 2002. In order to comply with the issue, reimbursed
expenses have been reclassified on the income statement for 2001. Reimbursed
expenses totaled $41,948,000, $36,917,000, and $40,732,000 in 2003, 2002, and
2001, respectively.
The Company adopted SFAS 142, effective January 1, 2002. SFAS 142
changes the accounting for goodwill and certain 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 Company
evaluates goodwill, at least annually, in accordance with SFAS 142.
The following table presents the effect of adopting SFAS 142 on net income
and basic and diluted net income per share:
(in thousands, except per share data) 2003 2002 2001
- ----------------------------------------------------------------------------
Reported net income $ 7,662 $ 24,512 $ 29,445
Add: goodwill amortization -- -- 3,037
- ----------------------------------------------------------------------------
Adjusted net income $ 7,662 $ 24,512 $ 32,482
============================================================================
Basic net income per share:
Reported net income per share $ 0.16 $ 0.50 $ 0.61
Goodwill amortization per share -- -- 0.06
- ----------------------------------------------------------------------------
Adjusted basic net income per share $ 0.16 $ 0.50 $ 0.67
============================================================================
Diluted net income per share:
Reported net income per share $ 0.16 $ 0.50 $ 0.61
Goodwill amortization per share -- -- 0.06
- ----------------------------------------------------------------------------
Adjusted diluted net income per share $ 0.16 $ 0.50 $ 0.67
============================================================================
In June 2002, the Financial Accounting Standards Board ("FASB")
approved SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). The statement addresses accounting for costs to
terminate contracts that are not capital leases, costs to consolidate facilities
or relocate employees, and termination benefits. The statement requires that the
fair value of a liability for penalties for early contract termination be
recognized when the entity effectively terminates the contract. The fair value
of a liability for other contract termination costs should be recognized when an
entity ceases using the rights conveyed by the contract. The liability for
one-time termination benefits should be accrued ratably over the future service
period based on when the employees are entitled to receive the benefits and a
minimum retention period. SFAS 146 is effective for disposal activities
initiated after December 31, 2002. The adoption of this statement did not have a
material impact on the Company's consolidated results of operations, financial
position, or cash flows.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -Transition and Disclosure - an amendment of SFAS 123." This
statement amends SFAS 123, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of
CRAWFORD & COMPANY / ANNUAL REPORT 2003 41
Notes to Consolidated Financial Statements
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion 25 and related interpretations. Accordingly,
compensation expense for stock options is measured as the excess, if any, of the
market value of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The Company has adopted the annual
disclosure provisions of SFAS 148 for the year ended December 31, 2002. The
adoption of SFAS 148 did not have a material impact on the Company's
consolidated results of operations, financial position, or cash flows.
FASB Interpretation 46, "Consolidation of Variable Interest Entities"
(Interpretation 46), requires the primary beneficiary of a variable interest
entity (VIE) to include the assets, liabilities, and results of the activities
of the VIE in its consolidated financial statements, as well as disclosure of
information about the assets and liabilities, and the nature, purpose and
activities of consolidated VIEs. In addition, Interpretation 46 requires
disclosure of information about the nature, purpose and activities of
unconsolidated VIEs in which the Company holds a significant variable interest.
The provisions of Interpretation 46 were effective immediately for any interests
in VIEs acquired after January 31, 2003. In October 2003, the FASB deferred the
effective date of Interpretation 46 to the fourth quarter of 2003 for variable
interests acquired before February 1, 2003. The adoption of this Interpretation
did not have a material impact on the Company's consolidated results of
operations, financial position, or cash flows.
In December 2003, the FASB issued SFAS 132 (Revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132R). This
statement amends SFAS 132, to provide additional disclosure requirements about
pension plans and other postretirement benefit plans. The Company has adopted
the annual disclosure provisions of SFAS 132R for the year ended December 31,
2003. The adoption of SFAS 132R did not have a material impact on the Company's
consolidated results of operations, financial position, or cash flows.
NOTE 2. RETIREMENT PLANS
The Company and its subsidiaries sponsor various defined contribution and
defined benefit 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.
Discretionary employer contributions under the Company's non-contributory
defined contribution plans are determined annually based on a percentage of each
covered employee's compensation and an employee's years of service. Employer
contributions under the Company's other defined contribution plans are
determined annually based on employee contributions, a percentage of each
covered employee's compensation, and the profitability of the Company. The cost
of these plans totaled $13,683,000, $5,879,000, and $5,171,000 in 2003, 2002,
and 2001, respectively.
Certain retirees and a fixed number of long-term employees are entitled
to receive postretirement medical benefits under the Company's various medical
benefit plans. The postretirement medical benefit obligation was $6,077,000 and
$6,289,000 for 2003 and 2002, respectively.
Benefits payable under the Company's U.S. defined benefit retirement
plan are generally based on career compensation, while its United Kingdom (U.K.)
plans are based on an employee's final salary. The U.S. plan has a September 30
measurement date and the U.K. plans have October 31 measurement dates. The
Company's funding policy is to make cash contributions in amounts sufficient to
maintain the plans on an actuarially sound basis, but not in excess of
deductible amounts permitted under applicable income tax regulations. The
Company is not required to make any contributions to its frozen U.S. defined
benefit pension plan during 2004.
42 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
The following schedule reconciles the funded status of the defined
benefit plans with amounts reported in the Company's Consolidated Balance Sheets
at December 31, 2003 and 2002:
(in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 466,281 $ 416,839
Service cost 1,983 12,548
Interest cost 29,768 30,296
Actuarial (gain) loss (16,749) 17,039
Benefits paid (19,461) (17,348)
Foreign currency effects 10,167 6,907
- -------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 471,989 466,281
- -------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year 354,686 393,770
Actual return on plan assets 45,976 (38,788)
Employer contributions 12,950 9,169
Benefits paid (19,459) (17,348)
Foreign currency effects 8,790 7,883
- -------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 402,943 354,686
- -------------------------------------------------------------------------------------------------------------------------------
Funded status of plan (69,046) (111,595)
Unrecognized net loss 96,939 137,436
Unrecognized prior service cost 243 1,864
- -------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 28,136 $ 27,705
===============================================================================================================================
Amounts recognized in the Consolidated Balance Sheets consist of:
Minimum pension liability $ (67,846) $ (76,747)
Pension obligation included in other accrued liabilities (2,869) (2,663)
Intangible assets included in other assets 813 1,752
Accumulated other comprehensive loss 98,038 105,363
- -------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 28,136 $ 27,705
===============================================================================================================================
Net periodic benefit cost related to the defined benefit pension plans
in 2003, 2002, and 2001 included the following components:
(in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Service cost $ 1,983 $ 12,548 $12,101
Interest cost 29,768 30,296 28,775
Expected return on assets (30,579) (27,026) (33,016)
Net amortization 1,593 (3,208) (401)
Recognized net actuarial loss (gain) 10,318 3,557 (1,085)
- -------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 13,083 $ 16,167 $ 6,374
===============================================================================================================================
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the retirement plans with accumulated benefit
obligations in excess of plan assets were as follows:
(in thousands) 2003 2002
- -------------------------------------------------------------------
Projected benefit obligation $ 471,989 $ 466,281
Accumulated benefit obligation 470,789 431,433
Fair value of plan assets 402,943 354,686
===================================================================
CRAWFORD & COMPANY / ANNUAL REPORT 2003 43
Notes to Consolidated Financial Statements
The Company reviews the actuarial assumptions of its defined benefit
pension plans on an annual basis as of each plan's respective measurement date.
Major assumptions used in accounting for the plans were:
2003 2002
- ------------------------------------------------------------
Discount rate 6.34% 6.75%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 0.00% 3.50%
============================================================
The expected long-term rate of return on plan assets was based upon the
plans' asset mix and historical returns on equity securities and fixed income
investments. Plan assets are invested in equity and fixed income securities,
with a target allocation of approximately 60 percent to equity securities and 40
percent to fixed income investments. The plan's asset allocation at September
30, 2003 and 2002, by asset category for the frozen U.S. defined benefit pension
plan was as follows:
2003 2002
- ------------------------------------------------------
Equity securities 54.1% 52.4%
Fixed income investments 37.9% 45.5%
Cash 8.0% 2.1%
- ------------------------------------------------------
Total asset allocation 100.0% 100.0%
======================================================
The following benefit payments are expected to be paid from the frozen
U.S. defined benefit pension plan:
Expected Benefit
(in thousands) Payments
- -------------------------------------------------------------------
2004 $ 16,719
2005 17,451
2006 18,207
2007 18,975
2008 19,853
2009 - 2013 112,448
NOTE 3. INCOME TAXES
Income before provisions for income taxes consists of the following:
(in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------
U.S. $12,153 $32,029 $38,622
Foreign 4,473 6,512 9,179
- -------------------------------------------------------------------------------------------
Income before taxes $16,626 $38,541 $47,801
===========================================================================================
The provisions (credits) for income taxes consist of the following:
(in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Current:
U.S. federal and state $4,545 $ 7,264 $15,308
Foreign 2,816 3,122 3,335
Deferred 1,603 3,643 (287)
- -------------------------------------------------------------------------------------------------------
Provision for income taxes $8,964 $14,029 $18,356
=======================================================================================================
Cash payments for income taxes were $11,077,000 in 2003, $9,518,000 in 2002, and
$12,153,000 in 2001.
44 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
The provisions for income taxes are reconciled to the federal statutory rate of
35% as follows:
- --------------------------------------------------------------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------
Federal income taxes at statutory rate $ 5,819 $ 13,490 $ 16,730
State income taxes net of federal benefit 216 501 1,709
Effect of nondeductible government settlement 2,912 - -
Foreign taxes 912 - -
Net operating loss utilization (1,073) - -
Other 178 38 (83)
- --------------------------------------------------------------------------------------------
Provision for income taxes $ 8,964 $ 14,029 $ 18,356
============================================================================================
The Company does not provide for additional U.S. and foreign income taxes on
undistributed earnings of foreign subsidiaries because they are considered to be
indefinitely reinvested. At December 31, 2003, such undistributed earnings
totaled $60,338,000. Determination of the deferred income tax liability on these
unremitted earnings is not practicable, since such liability, if any, is
dependent on circumstances existing when remittance occurs.
Deferred income taxes consist of the following at December 31, 2003 and 2002:
- -------------------------------------------------------------------------------------------------------------
(in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------
Accrued compensation $ 5,632 $ 5,081
Minimum pension liability 23,292 25,222
Self-insured risks 11,073 10,294
Deferred revenues 9,090 9,495
Postretirement benefits 2,212 2,289
Other 4,039 3,812
- -------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 55,338 56,193
- -------------------------------------------------------------------------------------------------------------
Accounts receivable reserve 2,577 1,323
Unbilled revenues 17,514 16,338
Depreciation and amortization 9,351 7,426
Other 838 428
- -------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 30,280 25,515
- -------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 25,058 $ 30,678
=============================================================================================================
Amounts recognized in the Consolidated Balance Sheets consist of:
Current deferred tax assets included in accrued income taxes $ 17,480 $ 16,869
Current deferred tax liabilities included in accrued income taxes (20,927) (18,090)
Long-term deferred tax assets included in deferred income tax assets 37,857 52,217
Long-term deferred tax liabilities included in deferred income tax assets (9,352) (20,318)
- -------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 25,058 $ 30,678
=============================================================================================================
A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. No such valuation
allowance was required in 2003 or 2002. The Company records deferred tax assets
at net realizable value.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 45
Notes to Consolidated Financial Statements
NOTE 4. LEASE COMMITMENTS
The Company and its subsidiaries lease office space, certain computer equipment,
and its automobile fleet under operating leases. License and maintenance costs
related to the leased vehicles are paid by the Company. Rental expense for all
operating leases consists of the following:
- --------------------------------------------------------------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------
Office space $ 30,483 $ 29,203 $ 28,938
Automobiles 9,040 8,925 9,962
- --------------------------------------------------------------------------------------------
Total operating leases $ 39,523 $ 38,128 $ 38,900
============================================================================================
At December 31, 2003, future minimum payments under non-cancelable operating
leases with terms of more than 12 months were as follows: 2004 - $30,937,000;
2005 - $22,261,000; 2006 - $17,925,000; 2007 - $12,926,000; 2008 - $9,502,000;
and thereafter - $22,177,000.
NOTE 5. LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consists of the following at December 31, 2003 and 2002:
(in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------
Senior debt due October 2010, interest payable semi-annually at 6.08% $ 50,000 $ -
Term loans payable to bank due:
September 2004, interest payable quarterly at 6.8% - 15,000
September 2004, interest payable quarterly at 7.7% - 21,000
June 2005, interest payable semi-annually at 6.0% - 11,087
October 2004, interest payable quarterly at 4.9% 2,089 2,430
December 2004, interest payable quarterly at 4.9% 564 636
Mortgage payable, secured by building, due August 2003, interest rate of 7.3% - 435
Capital lease obligations 1,117 881
- -------------------------------------------------------------------------------------------------------------
Total debt 53,770 51,469
Less: current installments (3,106) (1,493)
- -------------------------------------------------------------------------------------------------------------
Total long-term debt $ 50,664 $ 49,976
=============================================================================================================
The Company leases certain computer and office equipment under capital leases
with terms ranging from 24 to 60 months and depreciates these assets over the
expected useful life.
The senior debt and term loans payable contain various provisions that, among
other things, require the Company to maintain defined leverage ratios, fixed
charge coverage ratios, and minimum net worth thresholds; and limit the
incurrence of certain liens, encumbrances, and disposition of assets in excess
of defined amounts, none of which are expected to restrict future operations.
The Company was in compliance with its debt covenants as of December 31, 2003.
The Company maintains a $70.0 million committed revolving credit line with
banks in order to meet working capital requirements and other financing needs
that may arise. The balance of unused lines of credit totaled $34,573,000 at
December 31, 2003. Short-term borrowings totaled $43,007,000 and $30,019,000 at
December 31, 2003 and 2002, respectively. The weighted-average interest rate on
short-term borrowings was 4.8% during 2003 and 4.4% during 2002. Cash paid for
interest was $5,513,000, $4,225,000, and $6,080,000 for 2003, 2002, and 2001,
respectively.
46 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
NOTE 6. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: one which provides various claims
administration services through branch offices located in the United States
("U.S. Operations") and the other which provides similar services through branch
or representative offices located in 66 other countries ("International
Operations"). The Company's reportable segments represent components of the
business for which separate financial information is available that is evaluated
regularly by the chief decision maker in deciding how to allocate resources and
in assessing performance. Intersegment sales are recorded at cost and are not
material. The Company measures segment profit based on operating earnings,
defined as earnings before special charges and credits, amortization of
goodwill, net corporate interest, and income taxes.
Financial information as of and for the years ended December 31, 2003, 2002,
and 2001 covering the Company's reportable segments is presented below:
U.S. International Consolidated
(in thousands) Operations Operations Totals
- ---------------------------------------------------------------------------------------------
2003
- ---------------------------------------------------------------------------------------------
REVENUES BEFORE REIMBURSEMENTS $ 471,847 $ 219,086 $ 690,933
OPERATING EARNINGS 23,289 6,751 30,040
DEPRECIATION AND AMORTIZATION 10,501 5,880 16,381
CAPITAL EXPENDITURES 18,265 5,552 23,817
ASSETS 276,219 236,779 512,998
=============================================================================================
2002
- ---------------------------------------------------------------------------------------------
Revenues before reimbursements $ 508,734 $ 190,656 $ 699,390
Operating earnings 29,261 7,986 37,247
Depreciation and amortization 12,130 5,284 17,414
Capital expenditures 15,630 4,652 20,282
Assets 259,567 215,209 474,776
=============================================================================================
2001
- ---------------------------------------------------------------------------------------------
Revenues before reimbursements $ 534,671 $ 190,868 $ 725,539
Operating earnings 43,255 12,773 56,028
Depreciation and amortization 13,833 6,793 20,626
=============================================================================================
The Company's most significant international operations are in the U.K. and
Canada.
- ------------------------------------------------------------------------------------------
(in thousands) U.K. Canada Other Total
- ------------------------------------------------------------------------------------------
2003
- ------------------------------------------------------------------------------------------
REVENUES BEFORE REIMBURSEMENTS $ 65,412 $ 60,143 $ 93,531 $ 219,086
LONG-LIVED ASSETS 57,797 25,743 15,460 99,000
==========================================================================================
2002
- ------------------------------------------------------------------------------------------
Revenues before reimbursements $ 56,736 $ 55,870 $ 78,050 $ 190,656
Long-lived assets 57,329 21,724 11,786 90,839
==========================================================================================
2001
- ------------------------------------------------------------------------------------------
Revenues before reimbursements $65,388 $52,546 $72,934 $190,868
CRAWFORD & COMPANY / ANNUAL REPORT 2003 47
Notes to Consolidated Financial Statements
Revenues before reimbursements by market type as of December 31, 2003, 2002,
and 2001 are presented below:
- --------------------------------------------------------------------------------------------
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------
Insurance companies $ 229,781 $ 259,090 $ 284,966
Self-insured entities 167,526 191,278 199,049
Class action services 74,540 58,366 50,656
- --------------------------------------------------------------------------------------------
Total U.S. revenues 471,847 508,734 534,671
Total international revenues 219,086 190,656 190,868
- --------------------------------------------------------------------------------------------
Total revenues before reimbursements $ 690,933 $ 699,390 $ 725,539
============================================================================================
Substantially all international revenues are derived from the insurance
company market.
NOTE 7. ACQUISITIONS
The Company's annual acquisitions for the years presented were not material
individually, or in the aggregate, to the Company's consolidated financial
statements. Accordingly, pro forma results of operations are not presented. The
Company uses the purchase method of accounting for all acquisitions. The Company
considers the purchase price allocations of all acquisitions to be preliminary
for the 12 months following the acquisition date and are subject to change
during that period. Results of operations of acquired companies are included in
the Company's consolidated results as of the acquisition date.
During 2003, the Company recorded the acquisition of Robco Claims Management
PTY LTD, a Papau New Guinea claims adjusting company, for a purchase price of
$116,000 in cash, excluding cash acquired. The Company also recorded additional
payments of $316,000 to the former owners of Certiser, SA, under the terms of a
purchase agreement which was originally executed in 1999.
During 2002, the Company recorded the acquisition of the operations of
Robertson & Company Group ("Robertson") in Australia, a claims adjusting
company, for an aggregate initial purchase price of $10,194,000 in cash,
excluding cash acquired. This acquisition was made in order to expand the
Company's presence in the Australian market. The market strength of Robertson,
the established locations, and the assembled workforce supported a premium above
the fair value of separately identifiable net assets. This premium was recorded
as goodwill. The purchase price of Robertson was reduced by $542,000 in 2003 due
to a refund received from the Australian government of Goods & Services Taxes
associated with the acquisition. The purchase price of Robertson may be further
increased based on future earnings through October 31, 2008.
During 2001, the Company recorded the following acquisitions: Leonard, Hirst
& Miller Adjusters (1997), Ltd. ("LH&M"), a Canadian multi-line adjusting firm;
Central Victorian Loss Adjusters ("CVLA"), an Australian claims administrator;
SVS Experts B.V. ("SVS"), a Dutch independent adjuster; and Resin, an
independent adjuster in Brazil, for an aggregate initial purchase price of
$6,433,000 in cash, excluding cash acquired. In 2002, an additional payment of
$138,000 was paid to the former owners of Resin pursuant to the purchase
agreement. There are no additional contingent payments due under this agreement.
In 2003 and 2002, additional payments of $91,000 and $96,000, respectively, were
paid to the former owners of SVS pursuant to the purchase agreement. The
purchase price of SVS may be further increased based on future earnings through
May 31, 2004. The purchase price of LH&M may be further increased based on
future earnings through April 30, 2004. The purchase price of CVLA may be
further increased based on future earnings through June 30, 2004.
During 2000, the Company recorded the acquisition of Greentree
Investigations, Inc. ("Greentree"), a provider of surveillance services for an
aggregate initial purchase price of $900,000 in cash, excluding cash acquired.
Additional payments of $296,000, $230,000, $239,000 and $42,000 in 2003, 2002,
2001, and
48 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
2000, respectively, were paid to the former owner of Greentree, pursuant to the
purchase agreement. The purchase price of Greentree may be further increased
based on future earnings through April 3, 2005.
During 1999, the Company acquired the Garden City Group ("GCG"), a legal
administration services provider, for an initial purchase price of $6,812,000,
excluding cash acquired. Additional payments of $2,873,000, $2,535,000,
$2,607,000, and $3,235,000 in 2002, 2001, 2000, and 1999, respectively, were
paid to the former owners of GCG pursuant to the purchase agreement. There are
no additional contingent payments due under this agreement.
The goodwill recognized, fair values of assets acquired, liabilities assumed,
and net cash paid for the acquisitions detailed above were as follows:
(in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------
Goodwill recognized:
U.S. operations $ 296 $ 3,102 $ 2,773
International operations 36 7,992 5,322
- --------------------------------------------------------------------------------------------
Total goodwill recognized 332 11,094 8,095
Fair values of assets acquired 87 5,155 3,261
Other liabilities assumed (142) (2,680) (2,149)
- --------------------------------------------------------------------------------------------
Cash paid, net of cash acquired $ 277 $ 13,569 $ 9,207
============================================================================================
The changes in the carrying amount of goodwill for the years ended December
31, 2002 and 2003 are as follows:
- --------------------------------------------------------------------------------------------
Domestic International
(in thousands) Segment Segment Total
- --------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 24,361 $ 61,878 $ 86,239
Acquired goodwill 3,102 7,992 11,094
Foreign currency effect - 465 465
- --------------------------------------------------------------------------------------------
Balance at December 31, 2002 27,463 70,335 97,798
ACQUIRED GOODWILL 296 36 332
FOREIGN CURRENCY EFFECT - 6,393 6,393
- --------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 $27,759 $76,764 $104,523
============================================================================================
NOTE 8. RESTRUCTURING CHARGES
During the third quarter of 1998, the Company restructured its U.K. and Canadian
operations and realigned senior management following the resignation of its
former chairman and chief executive officer. These restructuring programs
resulted in the elimination of approximately 350 staff positions and the closing
of 67 offices. After reflecting income tax benefits, the restructuring charge
totaled $9,692,000.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 49
Notes to Consolidated Financial Statements
The following is a rollforward of the Company's accrued restructuring costs:
- --------------------------------------------------------------------------------------------
Employee
(in thousands) Leases Separations Total
- --------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ 2,442 $ 316 $ 2,758
Utilized (624) (235) (859)
- --------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,818 81 1,899
Utilized (254) (81) (335)
- --------------------------------------------------------------------------------------------
Balance at December 31, 2002 1,564 - 1,564
UTILIZED (391) - (391)
- --------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 1,173 - 1,173
LESS NONCURRENT PORTION (945) - (945)
- --------------------------------------------------------------------------------------------
CURRENT PORTION OF ACCRUED RESTRUCTURING COSTS $ 228 $ - $ 228
============================================================================================
The noncurrent portion of accrued restructuring costs consists of long-term
lease obligations related to various U.K. offices which the Company has vacated
and is currently attempting to sublease. Management believes the remaining
reserves are adequate to complete its plan.
NOTE 9. SPECIAL CHARGES AND CREDITS
During November 2003, the Company made an after-tax payment of $8,000,000, or
$0.16 per share, under an agreement reached with the U.S. Department of Justice
to resolve an investigation of the Company's billing practices.
In December 2000, the Company announced the termination of its contract with
a software development company. In connection with the cancellation of the
contract, the Company wrote down the carrying value of costs related to internal
use software formerly under development. The non-cash charge totaled $10,312,000
after tax, or $0.21 per share for the year ended December 31, 2000. During 2002,
the Company received a cash payment of $6,000,000 from a former vendor in full
settlement of a business dispute. This credit, net of related income tax
expense, increased net income per share by $0.08 during 2002.
NOTE 10. CONTINGENCIES
The Company maintains funds in trust to administer claims for certain clients.
These funds are not available for the Company's general operating activities
and, as such, have not been recorded in the accompanying consolidated balance
sheets. The amount of these funds totaled approximately $134,258,000 and
$141,611,000 at December 31, 2003 and 2002, respectively.
The Company normally structures its acquisitions to include earnout payments
which are contingent upon the acquired entity reaching certain targets for
revenues and operating earnings. 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
2003 levels of revenues and operating earnings, additional payments under
existing earnout agreements would approximate $2,838,000 through 2008, as
follows: 2004 - $323,000; 2005 - $284,000; and 2008 - $2,231,000.
50 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Notes to Consolidated Financial Statements
The Company maintains an uncollateralized letter of credit facility to
satisfy certain contractual requirements. At December 31, 2003, the aggregate
amount available under the facility was $15,000,000, of which $10,884,000 is
committed.
The Company has received two related federal grand jury subpoenas which the
Company understands have been issued as part of a possible conflicts of interest
investigation involving a public entity client of its Melville, New York office
for Risk Management Services and Healthcare Management. The Company has
responded to one of these subpoenas and is currently responding to the other.
These subpoenas do not relate to the billing practices of the Company. The
Company cannot predict when the government's investigation will be completed,
its ultimate outcome or its effect on the Company's financial condition, results
of operations, or cash flows, including the effect, if any, on the contract with
the client. Although the loss of revenues from this client would not be material
to the Company's financial condition, results of operations, and cash flows, the
investigation could result in the imposition of civil, administrative or
criminal fines or sanctions.
NOTE 11. COMMON STOCK
The Company has two classes of Common Stock outstanding, Class A Common Stock
and Class B Common Stock. These two classes of stock have essentially identical
rights, except that shares of Class A Common Stock generally do not have any
voting rights. Under the Company's Articles of Incorporation, the Board of
Directors may pay higher (but not lower) cash dividends on the non-voting Class
A Common Stock than on the voting Class B Common Stock.
SHARE REPURCHASES
In April 1999, the Company's Board of Directors authorized a discretionary share
repurchase program of an aggregate of 3,000,000 shares of Class A and Class B
Common Stock through open market purchases. Through December 31, 2003, the
Company has reacquired 2,150,876 shares of its Class A Common Stock and 143,261
shares of its Class B Common Stock at an average cost of $10.99 and $12.21 per
share, respectively. No shares were repurchased in 2003 or 2002.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan, the Company is authorized to issue
up to 1,500,000 shares of Class A Common Stock to U.S. and Canadian employees,
nearly all of whom are eligible to participate. Under the terms of the Plan,
employees can choose each year to have up to $21,000 of their annual earnings
withheld to purchase the Company's Class A Common Stock. The purchase price of
the stock is 85% of the lesser of the closing price for a share of stock on the
first day of the purchase period or the last day of the purchase period. During
2003, 2002, and 2001, the Company issued 101,520, 57,652, and 80,984 shares,
respectively, to employees under this Plan.
Under the 1999 U.K. Sharesave Scheme, the Company is authorized to issue up
to 500,000 shares of Class A Common Stock to eligible employees in the U.K. The
Scheme has terms comparable to the 1996 Employee Stock Purchase Plan. As of
December 31, 2003, no shares have been issued under this Scheme.
STOCK OPTION PLANS
The Company has various stock option plans for employees and directors which
provide for nonqualified and incentive stock option grants. The option exercise
price cannot be less than the fair market value of the Company's stock at the
date of grant, and an option's maximum term is 10 years. Options generally
vest ratably over five years or, with respect to certain nonqualified options
granted to key executives, upon the attainment of specified prices of the
Company's stock. At December 31, 2003, there were 1,744,745 shares available for
future option grants under the plans.
CRAWFORD & COMPANY / ANNUAL REPORT 2003 51
The fair value of options, as discussed in Note 1, is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
- --------------------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------
Expected dividend yield 3.6% 3.6% 3.4%
Expected volatility 34% 33% 20%
Risk-free interest rate 3.6% 3.7% 4.6%
Expected life of options 7 YEARS 7 years 7 years
- ------------------------------------------------------------------------------------------
All of the outstanding and exercisable options as of December 31, 2003 are
for Class A Common Stock. A summary of the status of the Company's stock option
plans is as follows:
- -------------------------------------------------------------------------------------------------------------------------
(shares in thousands) 2003 2002 2001
Weighted-Average Weighted-Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 5,495 $ 12 5,282 $ 13 4,445 $ 13
Options granted 456 5 891 9 1,116 10
Options exercised - - (24) 4 (8) 3
Options forfeited and expired (631) 12 (654) 12 (271) 12
-----------------------------------------------------------
OUTSTANDING, END OF YEAR 5,320 11 5,495 12 5,282 13
-----------------------------------------------------------
Exercisable, end of year 2,015 12 1,631 12 1,390 12
-----------------------------------------------------------
Weighted-average fair value
of options granted during the year:
Incentive stock options $ 1.27 $ 2.23 $ 1.90
Nonqualified stock options 1.21 2.35 1.90
=========================================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 2003 (shares in thousands):
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Exercise Price
- -------------------------------------------------------------------------------------------------------
$ 2 to 8 569 8.4 $ 5 92 $ 3
9 to 12 2,751 5.7 10 1,173 11
13 to 17 1,719 3.0 14 469 14
18 to 20 281 2.6 19 281 19
-------------------------------------------------------------
$ 2 to 20 5,320 4.9 11 2,015 12
=======================================================================================================
52 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Report of Management
The management of Crawford & Company is responsible for the integrity and
objectivity of the financial information in this annual report. These financial
statements are prepared in conformity with accounting principles generally
accepted in the United States, using informed judgements and estimates where
appropriate.
The Company maintains a system of internal accounting policies, procedures,
and controls designed to provide reasonable assurance that assets are
safeguarded and transactions are executed and recorded in accordance with
management's authorization. The internal accounting control system is augmented
by a program of internal audits and reviews by management, written policies and
guidelines, and the careful selection and training of qualified personnel.
Management believes it maintains an effective system of internal accounting
controls.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, is responsible for monitoring the Company's accounting and reporting
practices. The Audit Committee meets regularly with management, the internal
auditors, and the independent auditors to review the work of each and to assure
that each performs its responsibilities. The independent auditors, Ernst & Young
LLP, are recommended by the Audit Committee of the Board of Directors, and
selected by the Board of Directors. Both the internal auditors and Ernst & Young
LLP have unrestricted access to the Audit Committee allowing open discussion,
without management present, on the quality of financial reporting and the
adequacy of internal accounting controls.
/s/ Grover L. Davis /s/ John F. Giblin /s/ W. Bruce Swain
Grover L. Davis John F. Giblin W. Bruce Swain
Chairman and Executive Vice President Senior Vice President,
Chief Executive Officer and Chief Financial Officer Controller, and Chief
Accounting Officer
Atlanta, Georgia
February 2, 2004
CRAWFORD & COMPANY / ANNUAL REPORT 2003 53
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors of Crawford & Company:
We have audited the accompanying consolidated balance sheets of Crawford &
Company as of December 31, 2003 and 2002, and the related consolidated
statements of income, shareholders' investment, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of Crawford & Company
for the year ended December 31, 2001 were audited by other auditors who have
ceased operations and whose report dated January 25, 2002 expressed an
unqualified opinion on those statements before the reclassification adjustments
described in Note 1 and the transitional disclosures required by Statement of
Financial Accounting Standards 142, "Goodwill and Other Intangible Assets,"
described in Note 1.
As discussed above, the financial statements of Crawford & Company for the
year ended December 31, 2001 were audited by other auditors who have ceased
operations. As described in Note 1, the Company reclassified reimbursements
received for out-of-pocket expenses from operating expenses to revenues as
required by Emerging Issues Task Force Issue 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred." We audited the adjustment that was applied to reclassify the balances
reflected in the 2001 financial statements. Our procedures included (a) agreeing
the reclassification amounts to the Company's underlying accounting records, and
(b) testing the mathematical accuracy of the reclassification adjustment. In our
opinion, such adjustment is appropriate and has been properly applied. As
described in Note 1, these financial statements have been revised to include the
transitional disclosures required by Statement 142, "Goodwill and Other
Intangible Assets," which was adopted by the Company as of January 1, 2002. Our
audit procedures with respect to the disclosures in Note 1 included (a) agreeing
the previously reported net income to the previously issued financial statements
and the adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill that is no longer being amortized to the Company's underlying records
obtained from management, and (b) testing the mathematical accuracy of the
reconciliation of adjusted net income to reported net income, and the related
net income per share amounts. In our opinion, the disclosures for 2001 in Note 1
are appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 financial statements of the company other than with
respect to such adjustment and disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 financial statements as a
whole.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Crawford & Company
as of December 31, 2003 and 2002, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2002 the
Company ceased amortization of goodwill in accordance with Statement of
Financial Accounting Standards 142, "Goodwill and Other Intangible Assets."
/s/ Ernst & Young LLP
Atlanta, Georgia
February 2, 2004
54 CRAWFORD & COMPANY / ANNUAL REPORT 2003
The following is a copy of a previously issued Report of Independent Public
Accountants. This report relates to prior years financial statements. This
report has not been reissued by Arthur Andersen LLP.
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Crawford & Company:
We have audited the accompanying consolidated balance sheets of CRAWFORD &
COMPANY (a Georgia corporation) AND SUBSIDIARIES as of December 31, 2001 and
2000, and the related consolidated statements of income, shareholders'
investment, and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crawford & Company and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
January 25, 2002
CRAWFORD & COMPANY / ANNUAL REPORT 2003 55
SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------
For The Years Ended December 31, 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
REVENUES BEFORE REIMBURSEMENTS $ 690,933 $ 699,390 $ 725,539 $ 712,174 $ 701,926
OPERATING EARNINGS(1) 30,040 37,247 56,028 65,569 74,477
NET INCOME 7,662 24,512 29,445 25,348 39,264
NET INCOME PER SHARE:
Basic 0.16 0.50 0.61 0.52 0.78
Diluted 0.16 0.50 0.61 0.52 0.78
OPERATING MARGIN 4.3% 5.3% 7.7% 9.2% 10.6%
CURRENT ASSETS 297,118 272,025 261,284 264,187 267,836
TOTAL ASSETS 512,998 474,776 431,415 458,351 474,028
CURRENT LIABILITIES 183,463 148,249 156,307 157,639 157,990
LONG-TERM DEBT,
LESS CURRENT INSTALLMENTS 50,664 49,976 36,378 36,662 16,053
TOTAL DEBT 96,777 81,488 73,144 81,298 55,430
SHAREHOLDERS' INVESTMENT 172,594 159,431 188,300 217,767 250,279
TOTAL CAPITAL 269,371 240,919 261,444 299,065 305,709
CURRENT RATIO 1.6:1 1.8:1 1.7:1 1.7:1 1.7:1
TOTAL DEBT-TO-TOTAL CAPITAL 35.9% 33.8% 28.0% 27.2% 18.1%
RETURN ON AVERAGE
SHAREHOLDERS' INVESTMENT 4.6% 14.1% 14.5% 10.8% 16.0%
CASH FLOWS FROM OPERATING ACTIVITIES 36,858 52,623 63,072 55,094 68,648
CASH FLOWS FROM INVESTING ACTIVITIES (23,776) (33,371) (28,275) (28,297) (36,778)
CASH FLOWS FROM FINANCING ACTIVITIES (4,377) (11,099) (34,126) (21,421) (21,790)
SHAREHOLDERS' EQUITY PER SHARE 3.54 3.28 3.88 4.49 4.93
CASH DIVIDENDS PER SHARE:
Class A Common Stock 0.24 0.32 0.56 0.55 0.52
Class B Common Stock 0.24 0.32 0.56 0.55 0.52
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,668 48,580 48,492 48,845 50,380
Diluted 48,776 48,664 48,559 48,933 50,498
- ---------------------------------------------------------------------------------------------------------------------
(1) Earnings before special charges and credits, year 2000 expense,
amortization of goodwill, net corporate interest, minority interest,
and income taxes. For a reconciliation of operating earnings to net
income, see page 17 of this annual report.
56 CRAWFORD & COMPANY / ANNUAL REPORT 2003
Quarterly Financial Data (unaudited)
Dividend Information and Common Stock Quotations
- -----------------------------------------------------------------------------------------------------------------------------
2003 First Second Third Fourth Fiscal Year
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
REVENUES BEFORE REIMBURSEMENTS $ 167,258 $ 176,310 $ 172,234 $175,131 $ 690,933
PRETAX INCOME (LOSS) 5,108 9,514 (1,279) 3,283 16,626
NET INCOME (LOSS) 3,249 6,051 (3,726) 2,088 7,662
NET INCOME (LOSS) PER SHARE - BASIC(A) 0.07 0.12 (0.08) 0.04 0.16
NET INCOME (LOSS) PER SHARE - DILUTED(A) 0.07 0.12 (0.08) 0.04 0.16
CASH DIVIDENDS PER SHARE:
Class A Common Stock 0.06 0.06 0.06 0.06 0.24
Class B Common Stock 0.06 0.06 0.06 0.06 0.24
COMMON STOCK QUOTATIONS:(A)
Class A - High 4.90 5.55 7.02 7.39 7.39
Class A - Low 3.41 3.87 4.90 6.92 3.41
Class B - High 5.91 6.49 7.10 7.36 7.36
Class B - Low 3.90 4.16 4.95 6.92 3.90
- -----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
2002 First Second Third Fourth Fiscal Year
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues before reimbursements $ 171,767 $ 177,989 $ 175,912 $ 173,722 $ 699,390
Pretax income 12,841 7,653 8,863 9,184 38,541
Net income 8,167 4,867 5,637 5,841 24,512
Net income per share - basic 0.17 0.10 0.11 0.12 0.50
Net income per share - diluted 0.17 0.10 0.11 0.12 0.50
Cash dividends per share:
Class A Common Stock 0.14 0.06 0.06 0.06 0.32
Class B Common Stock 0.14 0.06 0.06 0.06 0.32
Common stock quotations:(B)
Class A - High 12.00 11.55 7.79 5.50 12.00
Class A - Low 8.40 6.15 4.97 4.06 4.06
Class B - High 14.85 14.97 10.50 7.30 14.97
Class B - Low 11.00 7.60 5.86 5.00 5.00
- -------------------------------------------------------------------------------------------------------------------------
(A) Due to the method used in calculating per share data as prescribed by SFAS
128, the quarterly per share data does not total to the full year per share
data in 2003.
(B) The quotations listed in this table set forth the high and low closing
prices per share of Crawford & Company Class A Common Stock and Class B
Common Stock, respectively, as reported on the NYSE Composite Tape.
The approximate number of record holders of the Company's stock as of
December 31, 2003: Class A - 2,023 and Class B - 751.