2004 FINANCIAL REVIEW
Management's Discussion and Analysis 18
Consolidated Statements of Income 35
Consolidated Balance Sheets 36
Consolidated Statements of Shareholders' Investment 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
Management's Report on Responsibility for Financial Reporting 57
Management's Report on Internal Controls over Financial Reporting 58
Report of Independent Registered Public Accounting Firm on
Financial Statements 59
Report of Independent Registered Public Accounting Firm on Management's
Assessment of Internal Control over Financial Reporting 60
Selected Financial Data 61
Quarterly Financial Data (unaudited) 62
Shareholder Information, Board of Directors and Officers Inside Back Cover
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 United States ("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
workplace 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. When the insurance underwriting market is soft, insurance companies
are generally more aggressive in the risks they underwrite, and insurance
premiums and policy deductibles decline. This usually results in an increase in
industry-wide claim referrals which will increase claim referrals to us provided
we maintain at least our existing share of the overall claim services market.
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 $25,172,000 for 2004 as compared to $7,662,000 in
2003 and $24,512,000 in 2002. Consolidated net income for 2004 included a gain
of $5.2 million, net of related income taxes, on the sale of an undeveloped
parcel of real estate. Consolidated net income for 2003 included 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 included a payment received from a former vendor in full
settlement of a business dispute of $3.8 million, net of related income tax
expense.
Operating earnings is one of the key performance measures our senior management
and chief decision maker use 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.
Crawford & Company ANNUAL REPORT 2004
Following is a reconciliation of consolidated net income on a GAAP (generally
accepted accounting principles) basis to operating earnings for the years ended
December 31, 2004, 2003, 2002, 2001, and 2000:
(In thousands) 2004 2003 2002 2001 2000
- --------------------------------- -------- -------- -------- -------- --------
Net income $ 25,172 $ 7,662 $ 24,512 $ 29,445 $ 25,348
Add/(deduct):
Special (credits) and charges (8,573) 8,000 (6,000) - 16,740
Amortization of goodwill - - - 3,448 3,203
Net corporate interest expense 3,536 5,414 4,706 4,779 4,476
Income tax expense 12,251 8,964 14,029 18,356 15,802
-------- -------- -------- -------- --------
Operating earnings $ 32,386 $ 30,040 $ 37,247 $ 56,028 $ 65,569
======== ======== ======== ======== ========
Consolidated 2000 net income included a charge related to the write down of the
carrying value associated with internal use software formerly under development.
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), eliminated amortization of goodwill after 2001.
The following is a discussion and analysis of the results of operations of our
two reportable segments: U.S. operations and international operations. Our
reportable segments represent components of our business for which separate
financial information is available that is evaluated regularly by our chief
decision maker in deciding how to allocate resources and in assessing
performance. The individual services listed in this annual report do not
represent separate reportable segments. Rather, they describe the various
claims administration services performed within our approximately 700 field
branches around the world. Revenue amounts exclude reimbursements for
out-of-pocket expenses. Expense amounts exclude reimbursed out-of-pocket
expenses, special credits and charges, net corporate interest expense, and
income taxes.
Our discussion and analysis of operating expenses is comprised of two
components. Compensation and Fringe Benefits includes 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, amortization and depreciation.
This discussion should be read in conjunction with our consolidated financial
statements and the accompanying notes.
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
(in thousands) From Prior Year
- -------------- ---------------
Years Ended December 31 2004 2003 2002 2004 2003
- ----------------------- ---- ---- ---- ---- ----
REVENUES:
U.S. $ 478,137 $ 471,847 $ 508,734 1.3% (7.3)%
International 255,430 219,086 190,656 16.6% 14.9%
--------- --------- ---------
Total $ 733,567 $ 690,933 $ 699,390 6.2% (1.2)%
COMPENSATION & FRINGE BENEFITS:
U.S. $ 295,152 $ 292,357 $ 320,475 1.0% (8.8)%
% of Revenues 61.7% 62.0% 62.9%
International 177,159 152,950 130,886 15.8% 16.9%
% of Revenues 69.4% 69.8% 68.6%
--------- --------- ---------
Total $ 472,311 $ 445,307 $ 451,361 6.1% (1.3)%
% of Revenues 64.4% 64.5% 64.5%
EXPENSES OTHER THAN REIMBURSEMENTS,
COMPENSATION & FRINGE BENEFITS:
U.S. $ 162,185 $ 156,201 $ 158,998 3.8% (1.8)%
% of Revenues 33.9% 33.1% 31.3%
International 66,685 59,385 51,784 12.3% 14.7%
% of Revenues 26.1% 27.1% 27.2%
--------- --------- ---------
Total $ 228,870 $ 215,586 $ 210,782 6.2% 2.3%
% of Revenues 31.2% 31.2% 30.2%
OPERATING EARNINGS: (1)
U.S. $ 20,800 $ 23,289 $ 29,261 (10.7)% (20.4)%
% of Revenues 4.4% 4.9% 5.8%
International 11,586 6,751 7,986 71.6% (15.5)%
% of Revenues 4.5% 3.1% 4.2%
--------- --------- ---------
Total $ 32,386 $ 30,040 $ 37,247 7.8% (19.3)%
% of Revenues 4.4% 4.3% 5.3%
(1) Earnings before special credits and charges, net corporate interest expense,
and income taxes.
Crawford & Company ANNUAL REPORT 2004
U.S. OPERATIONS
Years Ended December 31, 2004 and 2003
REVENUES
U.S. revenues before reimbursements, by market type, for 2004 and 2003 were as
follows:
(in thousands) 2004 2003 Variance
- ---------------------- --------- --------- --------
Insurance companies $ 233,531 $ 229,781 1.6 %
Self-insured entities 158,190 167,526 (5.6)%
Class action services 86,416 74,540 15.9 %
--------- ---------
Total U.S. Revenues $ 478,137 $ 471,847 1.3 %
========= =========
Revenues from insurance companies increased 1.6% to $233.5 million in 2004
compared to $229.8 million in 2003, due to an $18.1 million increase in revenues
generated by our catastrophe adjuster unit in response to the hurricanes which
struck the southeastern United States during the 2004 third quarter. This
increase was partially offset by a decline in referrals for high-frequency,
low-severity claims from our insurance company clients during 2004. Revenues
from our catastrophe adjusters totaled $42.5 million in 2004 compared to $24.4
million in 2003. Revenues from self-insured entities decreased 5.6%, to $158.2
million in 2004 from $167.5 million in 2003, due primarily to a reduction in
claim referrals from our existing clients, only partially offset by new business
gains. See the following analysis of U.S. cases received. Class action services
revenues, including administration and inspection services, increased 15.9%,
from $74.5 million in 2003 to $86.4 million in 2004. This increase was due to
work performed on several major projects awarded during 2004. These revenues can
fluctuate significantly depending on the timing and size of project awards.
Excluding the impact of class action services, U.S. unit volume, measured
principally by cases received, decreased 5.5% from 2003 to 2004. This decrease
was partially offset by a 4.3% revenue increase from changes in the mix of
services provided and in the rates charged for those services, resulting in a
net 1.2% decrease in U.S. revenues from 2003 to 2004, excluding revenues from
class action services. Growth in class action services increased U.S. revenues
by 2.5% in 2004.
Excluding the impact of class action services, U.S. unit volume by major service
line, as measured by cases received, for 2004 and 2003 was as follows:
(whole numbers) 2004 2003 Variance
- ------------------------- ------- ------- --------
Casualty 209,110 213,980 (2.3)%
Workers' Compensation 148,902 180,787 (17.6)%
Property 255,030 224,432 13.6 %
Vehicle 144,306 184,266 (21.7)%
Other 20,808 20,107 3.5 %
------- -------
Total U.S. Cases Received 778,156 823,572 (5.5)%
======= =======
The increase in property claims was due to the four hurricanes that struck
Florida and other southeastern states during August and September of 2004. The
decline in vehicle claims was due to a decline in referrals of high-frequency,
low-severity claims from our insurance company clients. Conservative
underwriting by insurance companies, including significant increases in policy
deductibles, contributed to an industry-wide decline in property and casualty
claims frequency, exclusive of recent hurricane-related claims. Our decline in
workers' compensation claims referrals was due to a reduction in claims from our
existing clients, only partially offset by new business gains, and reflected a
continued weakness in U.S. employment levels and associated workplace injury
rates.
COMPENSATION AND FRINGE BENEFITS
Our most significant expense was the compensation of employees, including
related payroll taxes and fringe benefits. U.S. compensation expense as a
percent of revenues decreased to 61.7% in 2004 as compared to 62.0% in 2003,
reflecting a reduction in operating capacity from the catastrophe claims in the
2004 third quarter. In response to the decline in U.S. claims volume, we reduced
our U.S. full-time equivalent employees by 6.3% as compared to 2003. Average
full-time equivalent employees totaled 4,263 in 2004, down from 4,548 in 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S. salaries and wages increased 2.9%, to $244.9 million in 2004 from $237.9
million in 2003. This increase reflected higher compensation expense in our
catastrophe unit due to the hurricanes which struck the southeastern United
States during the 2004 third quarter. Payroll taxes and fringe benefits for U.S.
operations totaled $50.3 million in 2004, decreasing 7.7% from 2003 costs of
$54.5 million. This decrease primarily reflected a reduction in pension expense
of $6.7 million in 2004, net of an increase in self-insured workers'
compensation costs.
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 33.9% in 2004 from
33.1% in 2003. This increase reflected higher outsourced administration fees
associated with growth in class action services revenues during 2004.
REIMBURSEMENTS
Reimbursements in our U.S. operations increased slightly to $49.1 million in
2004 from $49.0 million in 2003.
Years Ended December 31, 2003 and 2002
REVENUES
U.S. revenues before reimbursements, by market type, for 2003 and 2002 were 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 $259.1 million in 2002, due to a continued softening in our U.S.
insurance company referrals for high-frequency, low-severity claims. Lower
medical bill auditing revenues associated with the 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 from $191.3 million in 2002, due primarily to a decline
in workers' compensation claim referrals. See the following analysis of U.S.
cases received. Revenues from class action services, including administration
and inspection services, which can fluctuate significantly based on the timing
and size of project awards, increased 27.7% to $74.5 million in 2003 from $58.4
million in 2002.
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 service
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 was primarily due to
declines in U.S. employment levels and associated workplace injury rates. The
declines in casualty and vehicle claims were 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, contributed to this
decline
Crawford & Company ANNUAL REPORT 2004
in property and casualty claims frequency. The increase in property claims was
largely due to increases in referrals to our Contractor Connection(SM) direct
repair network.
COMPENSATION AND FRINGE BENEFITS
Our most significant expense was 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 was 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 7.0% from 2002 costs of $58.6 million. These
decreases reflected 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, 2002, the
amortization of previously unrecognized losses comprised 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 reflected higher outsourced administration fees
associated with growth in class action services revenues in 2003.
REIMBURSEMENTS
Reimbursements in our U.S. operations increased to $49.0 million in 2003 from
$38.5 million in 2002, reflecting higher reimbursed expenses in our class action
services unit.
INTERNATIONAL OPERATIONS
Years Ended December 31, 2004 and 2003
REVENUES
Substantially all international revenues were derived from the insurance company
market. Revenues before reimbursements from our international operations totaled
$255.4 million in 2004, a 16.6% increase from the $219.1 million reported in
2003. Excluding acquisitions, international unit volume, measured principally by
cases received, increased 1.5% in 2004 compared to 2003. Our third quarter 2004
acquisition of the net assets of Cabinet Mayoussier, Cabinet Tricaud, and TMA in
France increased international revenues by 0.7% in 2004. Revenues increased 4.3%
due to changes in the mix of services provided and in the rates charged for
those services. Revenues reflected a 10.1% increase during 2004 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 2004 cases received, international unit
volume by region for 2004 and 2003 was as follows:
(whole numbers) 2004 2003 Variance
- --------------------- ------- ------- --------
Americas 113,701 117,789 (3.5)%
CEMEA 84,831 86,504 (1.9)%
Asia/Pacific 36,488 39,475 (7.6)%
United Kingdom 110,361 96,429 14.4 %
------- -------
Total International
Cases Received 345,381 340,197 1.5 %
======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The increase in the United Kingdom ("U.K.") was largely due to an increase in
claims received from new contracts entered into in late 2003 and during 2004.
The decrease in the Americas was due to the receipt of approximately 6,000
low-value property claims in Brazil during 2003. There was no such receipt of
claims during 2004. This decline was partially offset by an increase in
weather-related claims in the Caribbean. The decrease in Continental Europe,
Middle East, and Africa ("CEMEA") was due to the loss of a client in South
Africa which referred approximately 3,200 high-frequency, low-value claims to us
during 2003. The decrease in Asia/Pacific was primarily due to a decline in
weather-related claims in Australia during 2004.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, decreased to 69.4% in 2004 from 69.8% in 2003 due primarily
to a reduction of capacity within our U.K. unit as a result of an increase in
claims. Average full-time equivalent employees totaled 3,158 in 2004 (including
approximately 41 full-time equivalent employees added by our acquisition in
France), up from 3,115 in 2003.
Salaries and wages of international personnel increased 15.6% to $150.0 million
in 2004 compared to $129.8 million in 2003, decreasing as a percent of revenues
from 59.2% in 2003 to 58.7% in 2004. Payroll taxes and fringe benefits increased
17.2% to $27.2 million in 2004 compared to $23.2 million in 2003, remaining
constant as a percent of revenues at 10.6% in 2003 and 2004. The increases in
these costs were largely the result of a decline in the value of the U.S. dollar
against other major currencies, primarily the British pound and euro, and
staffing increases in the U.K. to handle claims received from new contracts
entered into in late 2003 and during 2004.
EXPENSES OTHER THAN REIMBURSEMENTS,
COMPENSATION AND FRINGE BENEFITS
Expenses other than reimbursements, compensation and related payroll taxes and
fringe benefits decreased as a percent of revenues from 27.1% in 2003 to 26.1%
in 2004 due primarily to an increase in profit sharing earned from a third-party
Caribbean entity that we provided claims adjusters to on an outsourced basis.
REIMBURSEMENTS
Reimbursements in our international operations increased to $29.0 million in
2004 from $28.1 million in 2003. This increase was due to an increase in the use
of outside experts associated with handling hurricane claims in the Caribbean
during 2004.
Years Ended December 31, 2003 and 2002
REVENUES
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 0.4% 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 decreased 0.4% due to
changes in the mix of services provided and in the rates charged for those
services. Revenues reflected 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 96,429 90,355 6.7 %
------- -------
Total International Cases Received 327,742 329,149 (0.4)%
======= =======
The decrease in the Americas was 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 U.K. was due to claims received from new
contracts, primarily take-over claims associated with a new client agreement
entered into during the third quarter of 2003. The increase in CEMEA was 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 was the result of anticipated increases in claims volume from
new client agreements and was expected to decline as claims under these
agreements were referred to us. There was 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 59.1% 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 reflected the effect of a weak U.S. dollar, primarily as compared to the
British pound and the euro, 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 was 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.
SPECIAL CREDITS AND CHARGES, NET CORPORATE INTEREST EXPENSE, AND INCOME TAXES
During September 2004, we completed the sale of an undeveloped parcel of real
estate. We received net cash of $2.0 million and a $7.6 million first lien
mortgage note receivable, at an effective interest rate of approximately 4% per
annum, due in its entirety in 270 days. A pretax gain of $8.6 million was
recognized on the sale. After reflecting income taxes, this special credit
increased 2004 net income by $5.2 million, or $0.11 per share.
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 2003 net income per share by $0.16.
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 2002 net income per share by $0.08.
During June 2004, we settled a tax credit refund claim with the Internal Revenue
Service and recorded a receivable of $3.5 million comprised of a tax refund of
$1.7 million and associated interest of $1.8 million.
Including interest income of $1.8 million associated with the tax refund claim
discussed above, net corporate interest expense totaled $3.5 million, $5.4
million, and $4.7 million for 2004, 2003, and 2002, respectively.
Our effective tax rate may change periodically due to fluctuations in the mix of
income earned from our various international operations. Excluding the $8.0
million after-tax
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
charge in 2003 disclosed above, our effective tax rate was 36.4% of pretax
income in 2003 and 2002. Our effective tax rate for calendar year 2004 was
37.4%, excluding the tax refund of $1.7 million disclosed above. Taxes on
income, including the expected tax refund for 2004, totaled $12.3 million, $9.0
million, and $14.0 million for 2004, 2003, and 2002, respectively.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At December 31, 2004, current assets exceeded current liabilities by
approximately $130.4 million, an increase of $14.9 million from the working
capital balance at December 31, 2003. Cash and cash equivalents at the end of
2004 totaled $43.6 million, decreasing $2.2 million from $45.8 million at the
end of 2003. Cash was generated primarily from operating activities. The
principal uses of cash were for dividends paid to shareholders, acquisitions of
property and equipment, payments on short-term borrowings, and capitalization of
computer software. Cash dividends to shareholders approximated 58.7% of net
income (before special credits and charges) in 2004, compared to 74.6% in 2003.
The Board of Directors declares cash dividends to shareholders each quarter
based on an assessment of current and projected earnings and cash flows.
During 2004, we did not repurchase any shares of our Class A or Class B Common
Stock. As of December 31, 2004, 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 a $70.0 million committed revolving credit line with a syndication
of banks in order to meet seasonal working capital requirements and other
financing needs that may arise. This committed revolving credit line expires in
October 2006. We expect to renew our revolving credit line on or before October
2006 on terms similar to those under the current commitment. As a component of
this credit line, we maintain a letter of credit facility to satisfy certain
contractual obligations. Including $12.2 million committed under the letter of
credit facility, the balance of our unused line of credit totaled $20.4 million
at December 31, 2004. Short-term borrowings outstanding, including bank
overdraft facilities, as of December 31, 2004 totaled $37.4 million, decreasing
from $43.0 million at the end of 2003. Long-term borrowings outstanding,
excluding current installments, totaled $50.9 million as of December 31, 2004,
compared to $50.7 million at December 31, 2003. We have historically used the
proceeds from our long-term borrowings to finance business acquisitions,
primarily in our international segment. Refer to the Debt Covenants discussion
under the "Factors That May Affect Future Results" section of this report for a
further discussion of our borrowing capabilities. We believe our current
financial resources, together with funds generated from operations and existing
and potential borrowing capabilities, will be sufficient to maintain our current
operations for the next twelve months.
We have not engaged 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 serves to hedge the currency exposure of our
net investment in foreign operations.
During 2004, we recorded an adjustment to Accumulated Other Comprehensive Loss,
a component of Shareholders' Investment, to increase our minimum pension
liability by $2.2 million, net of related tax benefit. During 2003, we recorded
an adjustment to reduce our minimum pension liability by $6.0 million, net of
related tax expense. These non-cash items resulted primarily from fluctuations
in the fair market value of our pension investments as of the plans' respective
measurement dates and a decline in interest rates during 2003 and 2004.
Crawford & Company ANNUAL REPORT 2004
Shareholders' investment at the end of 2004 was $194.8 million, compared with
$172.6 million at the end of 2003. This increase was a result of net income and
a positive translation adjustment, net of dividends paid to shareholders and an
increase in our minimum pension liability.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses our consolidated financial statements, which are 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 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 our 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 change. Although
some variability is inherent in these estimates, the amounts provided for are
based on the best information available to us and we believe these estimates are
reasonable.
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 incurred in administering a claim are passed on to our
clients and included in our 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2004, deferred revenues related to lifetime claim handling
arrangements approximated $15.5 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 $413,000, or
less than $0.01 per share for the year ended December 31, 2004. If our average
claim closing rates for lifetime claims increased by 1%, we would have
recognized additional revenues of approximately $346,000, or less than $0.01 per
share for the year ended December 31, 2004.
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 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, 2004, our allowance for doubtful accounts totaled $23.0
million or approximately 7.6% of gross billed and unbilled receivables. If the
financial condition of our clients deteriorated, resulting in an inability to
make required payments to us, additional allowances may be required. If the
allowance for doubtful accounts changed by 1% of gross billed and unbilled
receivables, reflecting either an increase or decrease in expected future
write-offs, the impact to 2004 pretax income would have been approximately $3.0
million, or $0.04 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, "Goodwill and Other Intangible
Assets" ("SFAS 142"), for goodwill, SFAS 109, "Accounting for Income Taxes"
("SFAS 109"), for deferred income tax assets, and SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), for other long-lived
assets. In the opinion of management, goodwill and other long-lived assets were
appropriately valued and not impaired at December 31, 2004.
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 2004 fourth quarter, we did not
have an impairment
Crawford & Company ANNUAL REPORT 2004
of goodwill in 2004. The estimated market values of our segments are based upon
certain assumptions made by management. If the growth or weighted average cost
of capital assumptions used to calculate the market value of our operating
segments changed, impairment could result. If the growth rate assumption used to
value our operating segments declined to zero from 3.5%, or our weighted average
cost of capital assumption increased by 300 basis points to 13%, 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 exist in our U.S. segment for these
same assumption changes.
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. defied 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.
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 present value of projected benefits
payable under the plans. If our assumption for the expected return on plan
assets of our U.S. and U.K. defined benefit pension plans changed by 0.50%,
representing either an increase or decrease in expected returns, the impact to
2004 pretax income would have been approximately $2.0 million, or $0.03 per
share. If our assumption for the discount rate changed by 0.25%, representing
either an increase or decrease in interest rates, the impact to 2004 pretax
income would have been approximately $1.6 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 37.4% of pretax income for 2004. If our effective tax
rate changed by 1%, we would have recognized an increase or decrease to income
tax expense of approximately $374,000, or $0.01 per share for the year ended
December 31, 2004.
The estimate for income taxes is a critical accounting estimate for 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 medium-quality corporate bond yields of an appropriate duration. 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.
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, 2004, our estimated liability for self-insured risks totaled
$29.9 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 the provision for self-insured losses is adequate to cover
the ultimate net cost of losses incurred; however, this provision is an estimate
and amounts ultimately settled may be significantly greater or less than the
provision established. If the average discount rate we used to determine the
present value of our self-insured liability changed by 1%, reflecting either an
increase or decline in underlying interest rates, our estimated liability for
self-insured risks would have been impacted by approximately $1.9 million,
resulting in an increase or decrease to 2004 net income of approximately $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 did not enter into any transactions using derivative financial instruments or
derivative commodity instruments during the year ended December 31, 2004.
FOREIGN CURRENCY EXCHANGE
Our international operations expose us to foreign currency exchange rate changes
that can 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 34.8%,
31.7%, and 27.3% of total revenues at December 31, 2004, 2003, and 2002,
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, 2004 were used to perform the sensitivity analysis.
Such analysis indicated that a hypothetical 10% change in foreign currency
exchange
Crawford & Company ANNUAL REPORT 2004
rates would have decreased pretax income by approximately $663,000, or $0.01 per
share during 2004, 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, 2004, we had $37.4 million in short-term loans outstanding,
including bank overdraft facilities, with an average variable interest rate of
5.2%. If the average interest rate increased or decreased by 1%, the impact to
2004 pretax income would have been approximately $374,000, or less than $0.01
per share.
Changes in the projected benefit obligations of our defined benefit pension
plans are largely dependent on changes in prevailing interest rates as of the
plans' respective measurement dates that we use to value these obligations under
SFAS 87. If our assumption for the discount rate changed by 0.25%, representing
either an increase or decrease in the rate, the projected benefit obligation of
our U.S. and U.K. defined benefit plans would have changed by approximately
$19.0 million. The impact of this change to 2004 pretax income would have been
approximately $1.6 million, or $0.02 per share.
CREDIT RISK
We process payments for claims settlements, primarily on behalf of our
self-insured clients. The liability for the settlement cost of claims processed,
which is generally prefunded, 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 a subpoena from the State of New York, Office of the Attorney
General, requesting various documents relating to our operations. We are
responding to the subpoena and do not know if the Office of the Attorney General
will request additional documents. We cannot predict when the Attorney General's
investigation will be completed, its ultimate outcome or its effect on our
financial condition, results of operations, or cash flows.
We have received two related federal grand jury subpoenas which we understand
have been issued as part of a possible conflicts of interest investigation
involving a public entity client of one of our New York offices for Risk
Management Services and Healthcare Management. We have completed our responses
to both of these subpoenas. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We have received notice and anticipate that we will be the subject of an audit
under California Labor Code Sections 129 and 129.5 by the Audit Unit, Division
of Workers' Compensation, Department of Industrial Relations, State of
California ("Audit Unit"). The Audit Unit seeks to audit workers' compensation
files which we handled on behalf of our clients in our El Segundo, California
office in 2001 and 2002. This audit relates to a previous audit that we
underwent in El Segundo in 2000 wherein we agreed to the imposition of a civil
penalty pursuant to California Labor Code Section 129.5 and submission to this
current follow-up audit, among other items. With respect to this current audit,
we cannot predict when it will be completed, its ultimate outcome, or its effect
on our financial condition, results of operations, or cash flows.
CONTINGENT PAYMENTS
We normally structure acquisitions to include earnout payments, which are
contingent upon the acquired entity reaching certain revenue and operating
earnings targets. The amount of the contingent payments and length of the
earnout period varies for each acquisition, and the ultimate payments when made
will vary, as they are dependent on future events. Based on 2004 levels of
revenues and operating earnings, additional payments under existing earnout
agreements approximate $4.1 million through 2009, as follows: 2005 - $291,000;
2006 - $88,000; 2007 - $88,000; 2008 - $3.3 million; and 2009 - $298,000.
At December 31, 2004, we have committed $12.2 million under letters of credit to
satisfy certain contractual requirements. As noted in our discussion of Debt
Covenants, these letter of credit commitments were outstanding under our $70.0
million Revolving Credit Agreement.
CONTRACTUAL OBLIGATIONS
The impact that our contractual obligations (excluding payments for interest and
short-term borrowings) as of December 31, 2004 are expected to have on our
liquidity and cash flow in future periods is as follows:
Payments Due by Period
-------------------------------------------------------------------------
More Than
(in thousands) Less Than 1 Year 1-3 Years 3-5 Years 5 Years Total
- -------------- ---------------- --------- --------- ---------- ---------
Long-term debt, including current portion (Note 5) $ 1,390 $ 16,930 $ 22,222 $ 11,111 $ 51,653
Operating lease obligations (Note 4) 29,324 39,915 22,177 19,202 110,618
Capital lease obligations (Note 5) 510 526 77 9 1,122
Outsourced services obligation 11,900 14,875 - - 26,775
---------- -------- --------- --------- --------
Total $ 43,124 $ 72,246 $ 44,476 $ 30,322 $190,168
========== ======== ========= ========= ========
The obligation for outsourced services relates to certain information technology
functions handled by a third-party provider under a contract with an initial
term that will expire during the first quarter of 2007.
PENSION EXPENSE
We use a September 30 measurement date to determine pension expense under SFAS
87 for our U.S. defined benefit pension plan and an October 31 measurement date
for our U.K. defined benefit pension plans. 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. Cash
contributions to the U.S. defined contribution plan of approximately $5.8
million will be made in the 2005 first quarter. Future cash funding of our U.S.
and U.K. defined benefit pension plans will depend largely on future investment
performance and interest rates. For 2005, we expect to make contributions of
approximately $3.3 million to our U.K. defined benefit pension plans. We are not
required to make any contributions to the U.S. defined benefit pension plan in
2005.
Crawford & Company ANNUAL REPORT 2004
DEBT COVENANTS
In October 2003, we entered into a committed $70.0 million revolving credit line
pursuant to a revolving credit agreement (the "Revolving Credit Agreement") and
issued $50.0 million in 6.08% senior notes pursuant to a notes purchase
agreement (the "Notes Purchase Agreement"). As of December 31, 2004, there was
$35.5 million outstanding on the revolving credit line with an average variable
interest rate of 5.2%. In addition, letters of credit of $12.2 million were also
outstanding under this revolving credit line. The $50.0 million senior notes
have scheduled principal repayments of approximately $5.6 million beginning
October 2006 and continuing semi-annually through 2009 with the final payment
due April 2010. The stock of Crawford & Company International, Inc. is pledged
as security under these agreements and our U.S. subsidiaries have guaranteed our
obligations under these agreements.
Both of these agreements contain various provisions which require us to maintain
defined leverage ratios, fixed charge coverage ratios, and minimum net worth
thresholds. We must maintain, on a rolling four quarter basis, a leverage ratio
of consolidated debt to earnings before interest, income taxes, depreciation,
amortization, certain nonrecurring charges, and the capitalization of internally
developed software costs ("EBITDA") of no more than 2.50 times EBITDA. This
ratio is reduced to a maximum allowable of 2.25 times EBITDA at September 30,
2005 and thereafter. We must also maintain a fixed charge coverage ratio of
EBITDA less depreciation and amortization plus lease expense ("EBITR") to total
fixed charges, consisting of interest expense and lease expense, of no less than
1.50 times fixed charges. Additionally, we are required to maintain a minimum
net worth equal to $135,516,350 plus 50% of our cumulative positive consolidated
net income earned after December 31, 2002, plus 100% of the net proceeds from
any equity offering, subject to certain terms and conditions. For purposes of
determining minimum net worth, any noncash adjustments after December 31, 2002
related to our pension fund liabilities, goodwill, or foreign currency
translations are excluded.
We were in compliance with these debt covenants as of December 31, 2004. If we
do not meet the covenant requirements in the future, we would be in default
under these agreements. In such an event, we would need to obtain a waiver of
the default or repay the outstanding indebtedness under the agreements. If we
could not obtain a waiver on satisfactory terms, we could be required to
renegotiate this indebtedness. Any such renegotiations could result in less
favorable terms, including higher interest rates and accelerated payments. Based
upon our business plan for 2005, we expect to remain in compliance with the
financial covenants contained in the Revolving Credit Agreement and the Notes
Purchase Agreement throughout 2005. However, there can be no assurance that our
actual financial results will match our planned results or that we will not
violate the covenants.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision Within the American Jobs Creation Act of 2004."
The FASB issued this Staff Position to provide accounting and disclosure
guidance for the repatriation provision of the American Jobs Creation Act of
2004 ("the Act") which allows a special one-time dividends received deduction on
the repatriation of certain foreign earnings to a U.S. taxpayer. The related
SFAS 109 requires companies to recognize in the period of enactment the effect
of changes in the tax law. However, the FASB believes the Treasury Department
will subsequently provide needed clarification on key elements of the
repatriation provision of the Act. For purposes of applying SFAS 109, FASB Staff
Position 109-2 permits a delayed implementation of the repatriation provision of
the Act beyond the financial reporting period of enactment (2004) so that
companies can properly evaluate the effect of the Act (and any forthcoming
clarifications) on any plan for reinvestment or repatriation of foreign
earnings. Accordingly, we have not recognized any potential impact of the
repatriation provision of the Act in our consolidated financial position at
December 31, 2004, or in our consolidated results of operations or cash flows
for the year ended December 31, 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On December 16, 2004, the FASB issued SFAS 123 (revised 2004), "Share Based
Payments" ("SFAS 123R"), which is a revision of SFAS 123, "Accounting for
Stock-Based Compensation." SFAS 123R supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and amends SFAS 95, "Statement of
Cash Flows." Generally, the approach in SFAS 123R is similar to the approach
described in SFAS 123. However, SFAS 123R requires companies to measure
compensation cost for all share-based payments based on the fair value of the
shares, including employee stock options. Pro forma disclosure will not be
permitted under SFAS 123R. SFAS 123R is effective for public companies for the
first interim or annual periods beginning after June 15, 2005. Early adoption
will be permitted in periods in which financial statements have not yet been
issued. We expect to adopt SFAS 123R at the beginning of our 2005 third quarter.
SFAS 123R permits public companies to adopt its requirements using one of two
methods: 1) a modified prospective method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS 123 for all awards granted to employees prior
to the effective date of SFAS 123R that remain unvested on the effective date,
or 2) a modified retrospective method which includes the requirements of the
modified prospective method described above, but also permits companies to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption. We plan to adopt SFAS 123R using the
modified prospective method. As permitted by SFAS 123, we currently account for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognize no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123R's fair value method will have an impact
on our results of operations, although it will have no impact on our financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS 123R in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described in the disclosure of
pro forma net income and earnings per share in Note 1 to the consolidated
financial statements. Based on employee stock options issued through December
31, 2004, adoption of SFAS 123R in the 2005 third quarter, and use of the
modified prospective method, we expect the adoption of SFAS 123R to reduce net
income by approximately $525,000 in the year of adoption, or $0.01 per share.
SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current generally accepted accounting
principles. Any additional impact on our future net income or cash flows cannot
be predicted at this time because it will depend on levels of share-based
payments granted in the future and on employee exercises of stock options.
On May 19, 2004, the FASB issued Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." This legislation was passed in December 2003,
and provides for a federal subsidy to employers who offer retiree prescription
drug benefits that are at least actuarially equivalent to those offered under
the government sponsored Medicare Part D. We adopted the provisions of Staff
Position 106-2 during the 2004 third quarter, which reduced our accumulated
post-retirement benefit obligation by approximately $2.0 million, resulting in
an unrecognized net gain to the Company's postretirement medical plan. This
unrecognized net gain is being amortized over the remaining life expectancy of
the Plan participants, and through December 31, 2004, such amortization reduced
our post-retirement liability and related expense by $96,000.
Crawford & Company ANNUAL REPORT 2004
Consolidated Statements of Income
(in thousands, except per share data)
For the years ended December 31, 2004 2003 2002
- ------------------------------------- ---- ---- ----
REVENUES:
Revenues before reimbursements $ 733,567 $ 690,933 $ 699,390
Reimbursements 78,095 77,077 58,228
--------- --------- ---------
TOTAL REVENUES 811,662 768,010 757,618
COSTS AND EXPENSES:
Costs of services provided, before reimbursements 565,863 530,362 532,411
Reimbursements 78,095 77,077 58,228
--------- --------- ---------
Costs of services 643,958 607,439 590,639
Selling, general, and administrative expenses 135,318 130,531 129,732
Special (credits) and charges (Note 8) (8,573) 8,000 (6,000)
Corporate interest expense, net of interest income of
$2,363, $444, and $264, respectively 3,536 5,414 4,706
--------- --------- ---------
TOTAL COSTS AND EXPENSES 774,239 751,384 719,077
--------- --------- ---------
INCOME BEFORE INCOME TAXES 37,423 16,626 38,541
PROVISION FOR INCOME TAXES 12,251 8,964 14,029
--------- --------- ---------
NET INCOME $ 25,172 $ 7,662 $ 24,512
========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.52 $ 0.16 $ 0.50
========= ========= =========
Diluted $ 0.51 $ 0.16 $ 0.50
========= ========= =========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,773 48,668 48,580
========= ========= =========
Diluted 48,996 48,776 48,664
========= ========= =========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.24 $ 0.24 $ 0.32
========= ========= =========
Class B Common Stock $ 0.24 $ 0.24 $ 0.32
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Balance Sheets
(in thousands)
As of December 31, 2004 2003
- ------------------ ---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43,571 $ 45,805
Accounts receivable, less allowance for doubtful accounts
of $21,859 in 2004 and $20,832 in 2003 176,187 142,273
Unbilled revenues, at estimated billable amounts 103,586 101,557
Prepaid expenses and other current assets 21,363 13,028
--------- ---------
TOTAL CURRENT ASSETS 344,707 302,663
--------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Land 1,394 2,445
Buildings and improvements 22,832 22,090
Furniture and fixtures 67,835 66,212
Data processing equipment 57,281 59,044
Automobiles 5,580 4,995
--------- ---------
154,922 154,786
Less accumulated depreciation (120,079) (117,618)
--------- ---------
NET PROPERTY AND EQUIPMENT 34,843 37,168
--------- ---------
OTHER ASSETS:
Goodwill arising from acquisitions, net 109,410 104,523
Capitalized software costs, net 32,550 31,540
Deferred income tax assets 32,172 28,505
Other 17,578 12,840
--------- ---------
TOTAL OTHER ASSETS 191,710 177,408
--------- ---------
$ 571,260 $ 517,239
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Crawford & Company ANNUAL REPORT 2004
(in thousands)
As of December 31, 2004 2003
- ------------------ ---- ----
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 37,401 $ 43,007
Accounts payable 41,730 36,152
Accrued compensation and related costs 45,961 37,870
Self-insured risks 18,976 18,040
Accrued income taxes 22,760 7,406
Other accrued liabilities 22,913 22,418
Deferred revenues 22,682 19,172
Current installments of long-term debt 1,900 3,106
--------- ---------
TOTAL CURRENT LIABILITIES 214,323 187,171
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 50,875 50,664
Deferred revenues 10,179 10,559
Self-insured risks 10,958 11,920
Minimum pension liability 73,893 67,846
Postretirement medical benefit obligation 5,544 6,077
Other 10,655 10,408
--------- ---------
TOTAL NONCURRENT LIABILITIES 162,104 157,474
--------- ---------
SHAREHOLDERS' INVESTMENT:
Class A common stock, $1.00 par value, 50,000 shares
authorized; 24,157 and 24,027 shares issued and
outstanding in 2004 and 2003 24,157 24,027
Class B common stock, $1.00 par value, 50,000 shares
authorized; 24,697 shares issued and outstanding
in 2004 and 2003 24,697 24,697
Additional paid-in capital 1,441 840
Retained earnings 201,213 187,747
Accumulated other comprehensive loss (56,675) (64,717)
--------- ---------
TOTAL SHAREHOLDERS' INVESTMENT 194,833 172,594
--------- ---------
$ 571,260 $ 517,239
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Shareholders' Investment
Common Stock
-------------------
Accumulated
Additional Other Total
Class A Class B Paid-in Retained Comprehensive Shareholders'
(in thousands) Non-Voting Voting Capital Earnings Loss Investment
- ---------------------------- ---------- ------- ---------- --------- ------------- ------------
BALANCE AT DECEMBER 31, 2001 $ 23,843 $24,697 $ 27 $186, 683 $ (46,950) $ 183,300
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
employee benefit plans 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
employee benefit plans 102 - 317 - - 419
---------- ------- ---------- --------- ------------- ------------
BALANCE AT DECEMBER 31, 2003 24,027 24,697 840 187,747 (64,717) 172,594
Comprehensive income:
Net income - - - 25,172 - 25,172
Translation adjustment - - - - 10,260 10,260
Minimum pension liability
adjustment (net of $1.3 million
income tax benefit) - - - - (2,218) (2,218)
---------- ------- ---------- --------- ------------- ------------
Total comprehensive income 33,214
Dividends paid - - - (11,706) - (11,706)
Shares issued in connection with
employee benefit plans 130 - 601 - - 731
---------- ------- ---------- --------- ------------- ------------
BALANCE AT DECEMBER 31, 2004 $ 24,157 $24,697 $ 1,441 $ 201,213 $ (56,675) $ 194,833
========== ======= ========== ========= ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
(in thousands)
For the years ended December 31, 2004 2003 2002
- -------------------------------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,172 $ 7,662 $ 24,512
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization 18,177 16,642 17,734
Deferred income taxes 3,758 1,603 3,643
(Gain) loss on sales of land, property and
equipment (7,786) 54 (18)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (30,726) 18 5,473
Unbilled revenues 3,191 1,042 (1,369)
Prepaid or accrued income taxes 11,246 (4,640) (3,193)
Accounts payable and accrued liabilities 9,950 11,980 3,435
Accrued restructuring charges (506) (291) (335)
Deferred revenues 2,947 345 (1,579)
Prepaid and accrued pension costs 1,647 5,600 6,020
Prepaid expenses and other assets (1,319) (2,814) (2,292)
-------- -------- --------
Net cash provided by operating activities 35,751 37,201 52,031
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (10,666) (11,136) (9,189)
Acquisitions of businesses, net of cash acquired (617) (277) (13,569)
Capitalization of software costs (7,574) (12,681) (11,093)
Proceeds from sale of undeveloped land 2,028 - -
Proceeds from sales of property and equipment 250 373 480
-------- -------- --------
Net cash used in investing activities (16,579) (23,721) (33,371)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (11,706) (11,682) (19,428)
Proceeds from exercise of stock options 731 419 578
Increase in short-term borrowings 84 39,790 18,345
Payments on short-term borrowings (10,031) (33,094) (24,657)
Proceeds from long-term debt - 50,272 14,247
Payments on long-term debt (1,347) (50,973) (184)
Capitalized loan costs 31 891 -
-------- -------- --------
Net cash used in financing activities (22,238) (4,377) (11,099)
-------- -------- --------
Effects of exchange rate changes on cash and cash equivalents 832 1,768 972
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,234) 10,871 8,533
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 45,805 34,934 26,401
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 43,571 $ 45,805 $ 34,934
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 63 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 are prepared in accordance
with accounting principles generally accepted in the U.S. and 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 Canada 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.
The Company receives reimbursements from clients for pass-through expenses
related to the cost of media advertising and postage incurred during advertising
and noticing campaigns related to class action settlements administered by the
Company. The Company previously recorded certain of these reimbursements as a
reduction of cost of services rather than reimbursement revenue. Accordingly,
the Company revised the accompanying Consolidated Statements of Income for the
years ended December 31, 2003 and 2002 in order to correctly reflect total
reimbursements. The impact of these revisions increased reimbursement revenues
and expenses by $35,129,000 and $21,311,000 for the years ending December 31,
2003 and 2002, respectively. The following table reconciles the Company's total
revenues as previously reported in each year to total revenues after reflecting
the effects of the revisions:
(in thousands) 2003 2002
---------- ---------
Total revenues, as previously reported $ 732,881 $ 736,307
Effect of revision 35,129 21,311
---------- ---------
Total revenues, revised $ 768,010 $ 757,618
========== =========
The following table reconciles the Company's costs of services as previously
reported in each year to costs of services after reflecting the effects of the
revisions:
(in thousands) 2003 2002
- -------------- --------- ---------
Costs of services,
as previously reported $ 572,310 $ 569,328
Effect of revision 35,129 21,311
--------- ---------
Costs of services, revised $ 607,439 $ 590,639
========= =========
These revisions had no effect on the Company's consolidated revenues before
reimbursements, net income, financial position, or cash flows as previously
reported.
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
Crawford & Company ANNUAL REPORT 2004
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.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company extends credit based on an evaluation of a client's financial
condition and, generally, collateral is not required. Accounts receivable are
typically due within 30 days and are stated at amounts due from clients net of
an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. 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 writes off accounts
receivable when they become uncollectible, and any payments subsequently
received are accounted for as recoveries. The Company's allowances for doubtful
accounts on billed receivables were $21,859,000, $20,832,000, and $19,633,000,
and write-offs, net of recoveries, including revenue adjustments, were
$7,911,000, $9,333,000, and $11,085,000, respectively, for the years ended
December 31, 2004, 2003, and 2002.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of the purchase price over the fair value of the
separately identifiable net assets acquired. 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" ("SFAS 142"), for goodwill, SFAS 109, "Accounting for Income
Taxes" ("SFAS 109"), for deferred income tax assets, and SFAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), 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, including capitalized leases,
was $12,257,000, $11,711,000, and $13,508,000 for 2004, 2003, and 2002,
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 $5,920,000, $4,931,000, and $4,226,000 for 2004, 2003, and 2002,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 medium-quality corporate bond yields of an appropriate duration.
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, 2004 and 2003, accrued self-insured risks totaled
$29,934,000 and $29,960,000, respectively, including current liabilities of
$18,976,000 and $18,040,000, 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. Certain
out-of-pocket costs incurred in administering claims are passed on by the
Company to its clients and included in total revenues as "Reimbursements."
Deferred revenues represent the estimated unearned portion of 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.
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 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
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
Crawford & Company ANNUAL REPORT 2004
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.
Below is the calculation of basic and diluted net income per share:
(in thousands,
except per share data) 2004 2003 2002
- -------------------------------- ---------- --------- ----------
Net income available to
common shareholders $ 25,172 $ 7,662 $ 24,512
========== ========= ==========
Weighted-average common
shares outstanding-basic 48,773 48,668 48,580
Dilutive effect of stock options 223 108 84
---------- --------- ----------
Weighted-average common
shares outstanding
-diluted 48,996 48,776 48,664
========== ========= ==========
Basic net income per share $ 0.52 $ 0.16 $ 0.50
========== ========= ==========
Diluted net income per share $ 0.51 $ 0.16 $ 0.50
========== ========= ==========
Additional options to purchase 4,315,048 shares of Class A Common Stock at $5.74
to $19.50 per share were outstanding at December 31, 2004, but were not included
in the computation of diluted net income per share because the options' exercise
prices were greater than the average market price of the common shares. 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
translation adjustments are included in Comprehensive Income (Loss) in the
Consolidated Statements of Shareholders' Investment, and the accumulated
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. Ending accumulated balances for each item in Accumulated Other
Comprehensive Loss included in the Company's Consolidated Statements of
Shareholders' Investment were as follows:
(in thousands) 2004 2003 2002
- --------------------------- ---------- --------- ---------
Minimum pension liability $ (107,281) $(103,741) $(113,109)
Tax benefit on minimum
pension liability 39,083 37,761 41,171
---------- --------- ---------
Minimum pension liability,
net of tax benefit (68,198) (65,980) (71,938)
Cumulative translation
adjustment 7,358 (2,902) (13,708)
Tax benefit from exercise
of stock options 4,165 4,165 4,165
---------- --------- ---------
Total accumulated other
comprehensive loss $ (56,675) $ (64,717) $ (81,481)
========== ========= =========
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" ("APB 25"), 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company provides the annual disclosures required under SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an Amendment of SFAS
123" ("SFAS 148"). 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) 2004 2003 2002
- ------------------------------------------------------------------ -------- ------- --------
Net income As reported $ 25,172 $ 7,662 $ 24,512
Less: compensation expense using the fair value method, net of tax 946 1,384 1,688
-------- ------- --------
Pro forma $ 24,226 $ 6,278 $ 22,824
======== ======= ========
Net income per share - basic As reported $ 0.52 $ 0.16 $ 0.50
Pro forma $ 0.50 $ 0.13 $ 0.47
Net income per share - diluted As reported $ 0.51 $ 0.16 $ 0.50
Pro forma $ 0.49 $ 0.13 $ 0.47
======== ======= ========
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS 132 (Revised), "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" ("SFAS 132R"). This Statement
amends SFAS 132 to provide additional disclosure requirements about pension
plans and other postretirement benefit plans. The Company 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.
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104"). SAB 104 updates
interpretive guidance in the codification of other related SEC Staff Accounting
Bulletins (mainly SAB 101) to provide consistent accounting guidance on revenue
recognition for SEC registrants. The adoption of SAB 104 did not have a material
impact on the Company's results of operations, financial position, or cash
flows.
On May 19, 2004, the FASB issued Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." The referenced legislation was passed in
December 2003, and provides for a federal subsidy to employers who offer retiree
prescription drug benefits that are at least actuarially equivalent to those
offered under the government sponsored Medicare Part D. The Company adopted the
provisions of FASB Staff Position 106-2 during the third quarter of 2004, which
reduced the accumulated post-retirement benefit obligation by approximately $2.0
million, resulting in an unrecognized net gain to the Company's post-retirement
medical plan ("the Plan"). This unrecognized net gain is being amortized over
the remaining life expectancy of the Plan participants and through December 31,
2004, such amortization reduced the Company's post-retirement liability and
expense by $96,000.
On December 16, 2004, the FASB issued SFAS 123 (revised 2004), "Share Based
Payments"("SFAS 123R"), which is a revision of SFAS 123. SFAS 123R supersedes
APB 25, and amends SFAS 95, "Statement of Cash Flows." Generally, the approach
in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS
123R requires companies to measure compensation cost for all share-based
payments based on the fair value of the shares, including employee stock
options. Pro forma disclosure will not be permitted under SFAS 123R. SFAS 123R
is effective
Crawford & Company ANNUAL REPORT 2004
for public companies for the first interim or annual periods beginning after
June 15, 2005. Early adoption will be permitted in periods in which financial
statements have not yet been issued. The Company expects to adopt SFAS 123R at
the beginning of its 2005 third quarter. SFAS 123R permits public companies to
adopt its requirements using one of two methods: 1) a modified prospective
method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS 123
for all awards granted to employees prior to the effective date of SFAS 123R
that remain unvested on the effective date, or 2) a modified retrospective
method which includes the requirements of the modified prospective method
described above, but also permits companies to restate based on the amounts
previously recognized under SFAS 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year
of adoption. The Company plans to adopt SFAS 123R using the modified prospective
method. As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123R's fair value method will have an impact
on the Company's results of operations, although it will have no impact on the
Company's financial position. The impact of adoption of SFAS 123R cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had the Company adopted SFAS 123R in prior
periods, the impact of that standard would have approximated the impact of SFAS
123 as described in the disclosure of pro forma net income and earnings per
share under "Accounting for Stock-Based Compensation" in Note 1 to the
consolidated financial statements. Based on employee stock options issued
through December 31, 2004, adoption of SFAS 123R in the 2005 third quarter, and
use of the modified prospective method, the Company expects the adoption of SFAS
123R to reduce net income by approximately $525,000 in the year of adoption, or
$0.01 per share. SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current generally
accepted accounting principles. Any additional impact on the Company's future
net income or cash flows cannot be predicted at this time because it will depend
on levels of share-based payments granted in the future and on employee
exercises of stock options.
In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004." The FASB issued this Staff Position to
provide accounting and disclosure guidance for the repatriation provision of the
American Jobs Creation Act of 2004 ("the Act") which allows a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer. The related SFAS 109 requires companies to recognize in the
period of enactment the effect of changes in the tax law. However, the FASB
believes the Treasury Department will subsequently provide needed clarification
on key elements of the repatriation provision of the Act. For purposes of
applying SFAS 109, FASB Staff Position 109-2 permits a delayed implementation of
the repatriation provision of the Act beyond the financial reporting period of
enactment (2004) so that companies can properly evaluate the effect of the Act
(and any forthcoming clarifications) on any plan for reinvestment or
repatriation of foreign earnings. Accordingly, the Company has not recognized
any potential impact of the repatriation provision of the Act in its
consolidated financial position at December 31, 2004 or in its consolidated
results of operations or cash flows for the year ended December 31, 2004. As
disclosed in Note 3 to the consolidated financial statements, "Income Taxes,"
the Company considers undistributed earnings of foreign subsidiaries to be
indefinitely reinvested. Until the necessary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
clarifications are subsequently issued by the Treasury Department, the Company
cannot reasonably determine if it will continue to indefinitely reinvest the
earnings of its foreign subsidiaries. Consequently, the Company cannot currently
estimate a potential range of any related income tax effects.
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 non-contributory defined contribution plan. Employer
contributions under the Company's defined contribution plans are determined
annually based on employee contributions, a percentage of each covered
employee's compensation, and years of service. The cost of these defined
contribution plans totaled $14,153,000, $13,683,000, and $5,879,000 in 2004,
2003, and 2002, 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 $5,544,000 and
$6,077,000 for 2004 and 2003, respectively.
Benefits payable under the Company's U.S. defined benefit pension 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 2005. Cash contributions to the Company's U.K.
defined benefit plans are expected to total approximately $3,275,000 during
2005.
The following schedule reconciles the funded status of the U.S. and U.K. defined
benefit plans with amounts reported in the Company's Consolidated Balance Sheets
at December 31, 2004 and 2003:
(in thousands) 2004 2003
- ------------------------------------- --------- ---------
Change in Benefit Obligation:
Benefit obligation
at beginning of year $ 472,340 $ 466,676
Service cost 1,719 1,983
Interest cost 29,940 29,791
Actuarial loss (gain) 13,002 (16,807)
Benefits paid (22,285) (19,470)
Foreign currency effects 9,457 10,167
--------- ---------
Benefit obligation at end of year 504,173 472,340
--------- ---------
Change in Plan Assets:
Fair value of plan assets
at beginning of year 402,943 354,686
Actual return on plan assets 32,629 45,976
Employer contributions 4,836 12,961
Benefits paid (22,285) (19,470)
Foreign currency effects 8,713 8,790
--------- ---------
Fair value of plan assets at end of year 426,836 402,943
--------- ---------
Funded status of plan (77,337) (69,397)
Unrecognized net loss 108,774 102,750
Unrecognized prior service cost 174 243
--------- ---------
Net amount recognized $ 31,611 $ 33,596
========= =========
Amounts recognized in the Consolidated
Balance Sheets consist of:
Minimum pension liability-
U.S. pension plan $ (62,991) $ (56,332)
Minimum pension liability-
U.K. pension plans (10,902) (11,514)
Pension obligations included
in other accrued liabilities (3,443) (3,112)
Intangible assets included
in other assets 1,666 813
Accumulated other
comprehensive loss 107,281 103,741
--------- ---------
Net amount recognized $ 31,611 $ 33,596
========= =========
Crawford & Company ANNUAL REPORT 2004
Net periodic benefit cost related to the U.S. and U.K. defined benefit pension
plans in 2004, 2003, and 2002 included the following components:
(in thousands) 2004 2003 2002
- -------------- --------- -------- ---------
Service cost $ 1,719 $ 1,983 $ 12,566
Interest cost 29,940 29,791 30,327
Expected return on assets (31,026) (30,579) (27,026)
Net amortization - 1,607 (3,208)
Recognized net
actuarial loss 7,026 10,181 3,557
--------- -------- ---------
Net periodic benefit cost $ 7,659 $ 12,983 $ 16,216
========= ======== =========
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) 2004 2003
- -------------- --------- ----------
Projected benefit obligation $ 504,173 $ 472,340
Accumulated benefit obligation 504,173 472,340
Fair value of plan assets 426,836 402,943
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:
2004 2003
---- ----
Discount rate 6.30% 6.34%
Expected return on plan assets 8.50% 8.50%
The expected long-term rate of return on plan assets was based on 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 plans' asset allocation at the
respective measurement dates, by asset category for the Company's U.S. and U.K.
defined benefit pension plans, was as follows:
2004 2003
---- ----
Equity securities 68.6% 60.4%
Fixed income investments 27.6% 33.3%
Cash 3.8% 6.3%
----- -----
Total asset allocation 100.0% 100.0%
----- -----
The following benefit payments are expected to be paid from the Company's U.S.
and U.K. defined benefit pension plans:
(in thousands) Expected Benefit Payments
- -------------- -------------------------
2005 $ 21,445
2006 22,252
2007 23,228
2008 24,294
2009 25,743
2010-2014 150,543
3. INCOME TAXES
Income before provision for income taxes consisted of the following:
(in thousands) 2004 2003 2002
- ------------------- -------- -------- --------
U.S. $ 27,779 $ 12,153 $ 32,029
Foreign 9,644 4,473 6,512
-------- -------- --------
Income before taxes $ 37,423 $ 16,626 $ 38,541
======== ======== ========
The provision (benefit) for income taxes consisted of the following:
(in thousands) 2004 2003 2002
- ------------------------- -------- ------- -------
Current:
U.S. federal and state $ 5,775 $ 4,545 $ 7,264
Foreign 2,718 2,816 3,122
Deferred:
U.S. federal and state 3,149 2,602 4,564
Foreign 609 (999) (921)
-------- ------- --------
Provision for income taxes $ 12,251 $ 8,964 $ 14,029
======== ======= ========
Cash payments for income taxes were $3,365,000 in 2004, $11,077,000 in 2003, and
$9,518,000 in 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes is reconciled to the federal statutory rate of
35% as follows:
(in thousands) 2004 2003 2002
- ------------------------------ -------- -------- --------
Federal income taxes at
statutory rate $ 13,098 $ 5,819 $ 13,490
State income taxes net
of federal benefit 791 216 501
Effect of nondeductible
government settlement - 2,912 -
Foreign taxes (572) 912 838
Research credit settlement (1,745) - -
Net operating loss utilization - (1,073) (159)
Other 679 178 (641)
-------- -------- --------
Provision for income taxes $ 12,251 $ 8,964 $ 14,029
======== ======== ========
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, 2004, such undistributed earnings
totaled $65,864,000. 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. As disclosed in Note
1 to the consolidated financial statements under "Recent Accounting
Pronouncements," the Company is awaiting needed clarifications from the Treasury
Department concerning the provision in the American Jobs Creation Act of 2004
("the Act") related to a special one-time tax deduction for the repatriation of
certain foreign dividends to a U.S. taxpayer. In accordance with FASB Staff
Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004," the
Company has delayed recognition of any potential impact of the repatriation
provision of the Act beyond the period of enactment (2004), pending
clarifications from the Treasury Department.
Deferred income taxes consisted of the following at December 31, 2004 and 2003:
(in thousands) 2004 2003
- ----------------------------------------- ---------- ---------
Accrued compensation $ 6,003 $ 5,632
Minimum pension liability 39,083 37,761
Self-insured risks 11,296 11,073
Deferred revenues 5,770 9,090
Postretirement benefits 2,074 2,212
Net operating loss carryforwards 9,358 10,551
Other 723 838
---------- ---------
Gross deferred tax assets 74,307 77,157
---------- ---------
Accounts receivable reserve 4,533 2,577
Prepaid pension cost 10,116 14,469
Unbilled revenues 17,277 17,514
Depreciation and amortization 11,064 9,351
Installment sale 2,528 -
Other 513 838
---------- ---------
Gross deferred tax liabilities 46,031 44,749
---------- ---------
Net deferred tax assets before
valuation allowance 28,276 32,408
Less: valuation allowance (8,091) (7,350)
---------- ---------
Net deferred tax asset $ 20,185 $ 25,058
========== =========
Amounts recognized in the Consolidated
Balance Sheets consist of:
Current deferred tax assets included in
accrued income taxes $ 13,048 $ 17,480
Current deferred tax liabilities included
in accrued income taxes (25,035) (20,927)
Long-term deferred tax assets included
in deferred income tax assets 43,235 37,857
Long-term deferred tax liabilities
included in deferred income tax assets (11,063) (9,352)
---------- ---------
Net deferred tax assets $ 20,185 $ 25,058
========== =========
Crawford & Company ANNUAL REPORT 2004
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. The Company
recorded a valuation allowance related to certain net operating loss
carryforwards generated primarily in its international operations. Net operating
loss carryforwards not subject to a valuation allowance are expected to be fully
realized by the Company in 2005.
4. COMMITMENTS UNDER OPERATING LEASES
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 consisted of the following:
(in thousands) 2004 2003 2002
- ---------------------- --------- -------- ---------
Office space $ 30,071 $ 30,483 $ 29,203
Automobiles 7,884 9,040 8,925
Computers & equipment 284 274 209
--------- -------- ---------
Total operating leases $ 38,239 $ 39,797 $ 38,337
========= ======== =========
At December 31, 2004, future minimum payments under non-cancelable operating
leases with terms of more than 12 months are as follows: 2005 - $29,324,000;
2006 - $22,488,000; 2007 - $17,427,000; 2008 - $12,943,000; 2009 - $9,234,000;
and thereafter - $19,202,000.
5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Company maintains a $70.0 million committed revolving credit line with a
syndication of banks in order to meet working capital requirements and other
financing needs that may arise. This committed revolving credit line expires
October 2006. The Company expects to renew the revolving credit line on or
before October 2006 on terms similar to those under the current commitment. As a
component of this credit line, the Company maintains a letter of credit facility
to satisfy certain contractual obligations. Including $12.2 million committed
under the letter of credit facility, the balance of unused lines of credit
totaled $20,400,000 at December 31, 2004. Short-term borrowings, including bank
overdraft facilities, totaled $37,401,000 and $43,007,000 at December 31, 2004
and 2003, respectively. The weighted-average interest rate worldwide on
short-term borrowings was 5.2% during 2004 and 4.8% during 2003.
Long-term debt consisted of the following at December 31, 2004 and 2003:
(in thousands) 2004 2003
- -------------------------------------------------------------------- -------- ---------
Senior debt, semi-annual principal repayments of $5,556 due each April
and October beginning October 2006 through April 2010, and interest
payable semi-annually at 6.08% $ 50,000 $ 50,000
Term loans payable to bank:
Principal and interest at 4.55%, payable monthly through June 2005 1,390 2,089
Principal and interest at 4.75%, payable monthly through March 2006 263 564
Capital lease obligations 1,122 1,117
-------- ---------
Total debt 52,775 53,770
Less: current installments (1,900) (3,106)
-------- ---------
Total long-term debt $ 50,875 $ 50,664
======== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. These provisions also
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. Based on these provisions, approximately $18,100,000 of the
Company's retained earnings at December 31, 2004 is available for the payment of
future cash dividends. The Company was in compliance with its debt covenants as
of December 31, 2004.
Scheduled principal repayments of long-term debt, including capital leases, as
of December 31, 2004 are as follows:
Payments Due by Period
-----------------------------------------------------------
Less than More
(in thousands) 1 Year 1-3 Years 3-5 Years than 5 Years Total
- ----------------------------------------- --------- --------- --------- ------------ ---------
Long-term debt, including current portion $ 1,390 $ 16,930 $ 22,222 $ 11,111 $ 51,653
Capital lease obligations 510 526 77 9 1,122
--------- -------- -------- --------- ---------
Total $ 1,900 $ 17,456 $ 22,299 $ 11,120 $ 52,775
========= ======== ======== ========= =========
Under the Company's long-term debt and short-term borrowing agreements, the
stock of Crawford & Company International, Inc. is pledged as security, and the
Company's U.S. subsidiaries have guaranteed certain borrowings of the Company's
foreign subsidiaries.
Interest expense on the Company's short-term and long-term borrowings was
$5,899,000, $5,858,000, and $4,970,000 for 2004, 2003, and 2002, respectively.
Interest paid on the Company's short-term and long-term borrowings was
$5,892,000, $5,513,000, and $4,225,000 for 2004, 2003, and 2002, respectively.
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 62 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 credits and charges, net corporate interest
expense, and income taxes.
Crawford & Company ANNUAL REPORT 2004
Financial information as of and for the years ended December 31, 2004, 2003, and
2002 covering the Company's reportable segments is presented below:
U.S. International Consolidated
(in thousands) Operations Operations Totals
- -------------- ---------- ------------- ------------
2004
REVENUES BEFORE REIMBURSEMENTS $ 478,137 $ 255,430 $ 733,567
OPERATING EARNINGS 20,800 11,586 32,386
DEPRECIATION AND AMORTIZATION 11,687 6,490 18,177
CAPITAL EXPENDITURES 11,390 6,850 18,240
ASSETS 314,384 256,876 571,260
========= =========== ==========
2003
Revenues before reimbursements $ 471,847 $ 219,086 $ 690,933
Operating earnings 23,289 6,751 30,040
Depreciation and amortization 10,762 5,880 16,642
Capital expenditures 18,265 5,552 23,817
Assets 280,460 236,779 517,239
========= =========== ==========
2002
Revenues before reimbursements $ 508,734 $ 190,656 $ 699,390
Operating earnings 29,261 7,986 37,247
Depreciation and amortization 12,449 5,285 17,734
========= =========== ==========
The Company's most significant international operations are in the U.K. and
Canada, as presented below:
(in thousands) U.K. Canada Other Total
- -------------- ---- ------ ------- ---------
2004
REVENUES BEFORE REIMBURSEMENTS $ 82,392 $ 64,339 $ 108,699 $ 255,430
LONG-LIVED ASSETS 53,477 27,209 23,919 104,605
======== ======== ======== =========
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
======== ======== ======== =========
Revenues before reimbursements by market type for the years ended December 31,
2004, 2003, and 2002 are presented below:
(in thousands) 2004 2003 2002
- -------------- ---- ---- ----
Insurance companies $ 233,531 $ 229,781 $ 259,090
Self-insured entities 158,190 167,526 191,278
Class action services 86,416 74,540 58,366
--------- --------- ---------
Total U.S. revenues 478,137 471,847 508,734
Total international revenues 255,430 219,086 190,656
--------- --------- ---------
Total revenues before reimbursements $ 733,567 $ 690,933 $ 699,390
========= ========= =========
Substantially all international revenues were derived from the insurance company
market.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACQUISITIONS
The Company's 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 2004, the Company acquired the net assets of France-based loss adjusting
firms Cabinet Mayoussier, Cabinet Tricaud, and TMA ("Mayoussier") for an initial
purchase price of $1.4 million, including deferred consideration of $828,000.
This acquisition was made to strengthen the Company's position in the French
loss adjusting market. The market strength of Mayoussier, 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.
Additional contingent payments due under this agreement may be made through
October 2009.
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 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 for 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. In 2004, 2003 and 2002, additional payments of $41,000, $91,000 and
$96,000, respectively, were paid to the former owners of SVS pursuant to the
purchase agreement. There are no additional contingent payments due under the
Resin, SVS, LH&M, or CVLA agreements.
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 $203,000, $296,000, $230,000, $239,000 and $42,000 in 2004, 2003,
2002, 2001, and 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.
Crawford & Company ANNUAL REPORT 2004
The goodwill recognized, fair values of assets acquired, liabilities assumed,
and net cash paid for the acquisitions detailed above were as follows:
(in thousands) 2004 2003 2002
--------------- ------ ------ -------
Goodwill recognized:
U.S. operations $ 492 $ 296 $ 3,102
International operations 1,704 36 7,992
------ ------ -------
Total goodwill recognized 2,196 332 11,094
Fair values of assets acquired 1,164 87 5,155
Other liabilities assumed (2,743) (142) (2,680)
------ ------ -------
Cash paid, net of cash
acquired $ 617 $ 277 $13,569
====== ====== =======
The changes in the carrying amount of goodwill for the years ended December 31,
2003 and 2004 were as follows:
U.S. International
(in thousands) Segment Segment Total
- ----------------- ---------- ------------- ----------
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
ACQUIRED GOODWILL 492 1,704 2,196
FOREIGN CURRENCY EFFECT - 2,691 2,691
---------- ------------- ----------
BALANCE AT
DECEMBER 31, 2004 $ 28,251 $ 81,159 $ 109,410
========== ============= ==========
8. SPECIAL CREDITS AND CHARGES
During September 2004, the Company completed the sale of an undeveloped parcel
of real estate to a limited liability company wholly owned and controlled by a
member of the Company's Board of Directors, for a purchase price of $9.7
million. This purchase price represented a premium over an independent appraised
value of the property. The Company received net cash of $2.0 million and a $7.6
million first lien mortgage note receivable, at an effective interest rate of
approximately 4% per annum, due in its entirety in 270 days. A pretax gain of
$8.6 million was recognized on the sale. This credit, net of related income tax
expense, increased net income per share by $0.11 per share during 2004.
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.
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.
9. 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 $217,910,000 and
$178,158,000 at December 31, 2004 and 2003, 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
2004 levels of revenues and operating earnings, additional payments under
existing earnout agreements approximate $4,065,000 through 2009, as follows:
2005 - $291,000; 2006 - $88,000; 2007 - $88,000; 2008 - $3,300,000; and 2009 -
$298,000.
As part of the $70.0 million Revolving Credit Agreement (disclosed in Note 5 to
the consolidated financial statements), the Company maintains a letter of credit
facility to satisfy certain contractual requirements. At December 31, 2004, the
aggregate amount committed under the facility was $12,200,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 one of the Company's New York
offices for Risk Management Services and Healthcare Management. The Company has
completed its responses to both of these subpoenas. 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.
The Company has received a subpoena from the State of New York, Office of the
Attorney General, requesting various documents relating to its operations. The
Company does not know the full scope or subject matter of the subpoena or any
related investigation and cannot predict when the Attorney General's
investigation will be completed, its ultimate outcome or its effect on the
Company's financial condition, results of operations, or cash flows.
The Company has received notice and anticipates that it will be the subject of
an audit under California Labor Code Sections 129 and 129.5 by the Audit Unit,
Division of Workers' Compensation, Department of Industrial Relations, State of
California ("Audit Unit"). The Audit Unit seeks to audit workers' compensation
files which the Company handled on behalf of clients in its El Segundo,
California office in 2001 and 2002. This audit relates to a previous audit that
the Company underwent in El Segundo in 2000 wherein the Company agreed to the
imposition of a civil penalty pursuant to California Labor Code Section 129.5
and submission to this current follow-up audit, among other items. With respect
to this current audit, the Company cannot predict when it will be completed, its
ultimate outcome, or its effect on the Company's financial condition, results of
operations, or cash flows.
10. 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, 2004, 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 2004 or 2003.
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
2004, 2003, and 2002, the Company issued 94,454, 101,520, and 57,652 shares,
respectively, to employees under this Plan.
Crawford & Company ANNUAL REPORT 2004
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, 2004, there were 944 shares issued under this Scheme.
STOCK OPTION PLANS
The Company has various stock option plans for employees and directors that
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, 2004, there were 1,695,545 shares available for future
option grants under the plans.
The fair value of options, as discussed in Note 1 to the consolidated financial
statements, was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
2004 2003 2002
------- ------- -------
Expected dividend yield 3.4% 3.6% 3.6%
Expected volatility 36% 34% 33%
Risk-free interest rate 3.8% 3.6% 3.7%
Expected life of options 7 years 7 years 7 years
All of the outstanding and exercisable options as of December 31, 2004 were for
Class A Common Stock. A summary of the status of the Company's stock option
plans is as follows:
2004 2003 2002
------------------------- --------------------------- -------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
(shares in thousands) Shares Price Shares Price Shares Price
- ------------------------------ ------ ---------------- -------- ---------------- ------ ----------------
Outstanding, beginning of year 5,320 $ 11 5,495 $ 12 5,282 $ 13
Options granted 1,597 6 456 5 891 9
Options exercised (36) 3 - - (24) 4
Options forfeited and expired (1,658) 11 (631) 12 (654) 12
------ -------- -----
Outstanding, end of year 5,223 10 5,320 11 5,495 12
====== ======== =====
Exercisable, end of year 2,548 12 2,015 12 1,631 12
====== ======== =====
Weighted-average fair value of options
granted during the year:
Incentive stock options $ 1.27 $ 1.27 $ 2.23
Nonqualified stock options 1.48 1.21 2.35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 2004 (shares in thousands):
Options Outstanding Options Exercisable
------------------------------------------ -----------------------------
Weighted- Weighted-
Number Average Average Number Weighted-
Outstanding Remaining Exercise Exercisable Average
Range of Exercise Prices at 12/31/04 Contractual Life Price at 12/31/04 Exercise Price
- ------------------------ ----------- ---------------- --------- ----------- --------------
$ 2.40 to 8.50 1,820 8.8 $ 5.76 183 $ 4.76
8.51 to 12.50 2,025 4.6 10.32 1,187 10.60
12.51 to 17.50 1,244 2.1 13.99 1,044 14.23
17.51 to 19.50 134 3.0 18.93 134 18.93
----------- -----------
2.40 to 19.50 5,223 5.4 9.83 2,548 12.11
=========== ===========
11. SUBSEQUENT EVENTS
On February 1, 2005, the Company's Board of Directors approved, subject to
shareholder approval, the creation of a new "Crawford & Company Executive Stock
Bonus Plan" and authorized the Company to issue up to four million shares of the
Company's Class A Common Stock for this new plan. Compensation expense under the
new plan will be recognized in accordance with SFAS 123R. Under SFAS 123R,
compensation expense is recognized ratably over the service period of the stock
award, based on the grant date value of the stock. The new plan has two separate
components consisting of the Crawford Performance Share Plan and the Crawford
Restricted Stock Plan.
The Crawford Performance Share Plan component is intended to substantially
replace the existing Crawford Stock Option Plan. Stock options outstanding under
the existing Crawford Stock Option Plan will continue to vest in accordance with
the existing provisions. Under the new plan, key employees of the Company will
be eligible to receive shares of the Company's Class A Common Stock upon the
achievement of certain individual and corporate objectives. Shares granted under
this component of the new plan will be determined at the discretion of the
Compensation Committee of the Company's Board of Directors at the beginning of
each year and will vest ratably over five years, subject to the required service
period of each award recipient.
Under the Crawford & Company Restricted Stock Plan component, the Company may
elect to pay up to 25% of certain employee bonus plans in restricted shares of
the Company's Class A Common Stock. Employees receiving shares under this
component of the plan will have restrictions on the ability to sell the shares.
Such restrictions will lapse at the rate of one-half the shares awarded for each
year the employee remains employed by the Company following the incentive plan
year. Shares awarded under this component of the plan will be eligible for
dividends declared on the Company's Class A Common Stock during the vesting
period.
Crawford & Company ANNUAL REPORT 2004
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Crawford & Company is responsible for the integrity and
objectivity of the financial information in this annual report. These
consolidated 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
appointed 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/ THOMAS W. CRAWFORD /s/ JOHN F. GIBLIN /s/ W. BRUCE SWAIN
- --------------------- ------------------- ---------------------
Thomas W. Crawford John F. Giblin W. Bruce Swain
President and Executive Vice President Senior Vice President,
Chief Executive Officer and Chief Financial Officer Controller, and Chief
Accounting Officer
Atlanta, Georgia
March 11, 2005
MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
The management of Crawford & Company is responsible for establishing and
maintaining adequate internal controls over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company's internal controls over financial reporting are a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal controls
over financial reporting include those policies and procedures that:
(i) pertain to maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and disposition of the Company's
assets;
(ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of the
Company's management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Because of their inherent limitations, internal controls over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal controls over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework and the Public Company Accounting Oversight Board ("PCAOB").
Based on this assessment, management determined that the Company maintained
effective internal controls over financial reporting as of December 31, 2004.
Management's assessment of the effectiveness of the Company's internal controls
over financial reporting as of December 31, 2004 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
report dated March 11, 2005, which is included herein.
/s/ THOMAS W. CRAWFORD /s/ JOHN F. GIBLIN /s/ W. BRUCE SWAIN
- ----------------------- ------------------- ---------------------
Thomas W. Crawford John F. Giblin W. Bruce Swain
President and Executive Vice President Senior Vice President,
Chief Executive Officer and Chief Financial Officer Controller, and Chief
Accounting Officer
Atlanta, Georgia
March 11, 2005
Crawford & Company ANNUAL REPORT 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON FINANCIAL STATEMENTS
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, 2004 and 2003, and the related consolidated
statements of income, shareholders' investment, and cash flows for each of the
three years in the period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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
at December 31, 2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Crawford &
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 11, 2005 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 11, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON MANAGEMENT'S
ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of Crawford & Company:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls Over Financial Reporting, that Crawford
& Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Crawford & Company management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Crawford & Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Crawford & Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Crawford & Company as of December 31, 2004 and 2003, and the related
consolidated statements of income, shareholders' investment, and cash flows for
each of the three years in the period ended December 31, 2004, and our report
dated March 11, 2005 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 11, 2005
Crawford & Company ANNUAL REPORT 2004
SELECTED FINANCIAL DATA
For the years ended December 31, 2004 2003 2002 2001 2000
- ----------------------------------------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
Revenues Before Reimbursements $ 733,567 $ 690,933 $ 699,390 $ 725,539 $ 712,174
Operating Earnings (1) 32,386 30,040 37,247 56,028 65,569
Net income 25,172 7,662 24,512 29,445 25,348
Net Income Per Share:
Basic 0.52 0.16 0.50 0.61 0.52
Diluted 0.51 0.16 0.50 0.61 0.52
Operating Margin 4.4% 4.3% 5.3% 7.7% 9.2%
Current Assets 344,707 302,663 272,025 261,284 264,187
Total Assets 571,260 517,239 474,776 431,415 458,351
Current Liabilities 214,323 187,171 148,249 156,307 157,639
Long-Term Debt, Less Current Installments 50,875 50,664 49,976 36,378 36,662
Total Debt 90,176 96,777 81,488 73,144 81,298
Shareholders' Investment 194,833 172,594 159,431 188,300 217,767
Total Capital 285,009 269,371 240,919 261,444 299,065
Current Ratio 1.6:1 1.6:1 1.8:1 1.7:1 1.7:1
Total Debt-to-Total Capital 31.6% 35.9% 33.8% 28.0% 27.2%
Return on Average Shareholders' Investment 13.7% 4.6% 14.1% 14.5% 10.8%
Cash Flows from Operating Activities 35,751 37,201 52,031 63,072 55,094
Cash Flows from Investing Activities (16,579) (23,721) (33,371) (28,275) (28,297)
Cash Flows from Financing Activities (22,238) (4,377) (11,099) (34,126) (21,421)
Shareholders' Equity Per Share 3.99 3.54 3.28 3.88 4.49
Cash Dividends Per Share:
Class A Common Stock 0.24 0.24 0.32 0.56 0.55
Class B Common Stock 0.24 0.24 0.32 0.56 0.55
Weighted-Average Shares Outstanding:
Basic 48,773 48,668 48,580 48,492 48,845
Diluted 48,996 48,776 48,664 48,559 48,933
- ------------------------
(1) Earnings before special credits and charges, amortization of goodwill, net
corporate interest expense, minority interest, and income taxes. For a
reconciliation of operating earnings to net income, see page 19 of this annual
report.
QUARTERLY FINANCIAL DATA (UNAUDITED)
DIVIDEND INFORMATION AND COMMON STOCK QUOTATIONS
FULL
2004 FIRST SECOND THIRD FOURTH YEAR
- --------------------------------------- ----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
REVENUES BEFORE REIMBURSEMENTS $ 169,855 $ 172,016 $ 185,870 $ 205,826 $ 733,567
SPECIAL CREDIT - - 8,573 - 8,573
PRETAX INCOME 3,757 6,265 15,478 11,923 37,423
NET INCOME 2,389 5,540 9,525 7,718 25,172
NET INCOME PER SHARE - BASIC 0.05 0.11 0.20 0.16 0.52
NET INCOME PER SHARE - DILUTED (A) 0.05 0.11 0.20 0.16 0.51
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: (B)
Class A - High 7.07 5.24 6.50 7.68 7.68
Class A - Low 4.73 4.50 4.55 6.26 4.50
Class B - High 7.23 5.56 6.76 8.28 8.28
Class B - Low 4.75 4.60 4.53 6.48 4.53
Full
2003 First Second Third Fourth Year
- --------------------------------------- ----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
Revenues before reimbursements $ 167,258 $ 176,310 $ 172,234 $ 175,131 $ 690,933
Special charge - - - (8,000) (8,000)
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:(B)
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
(A) Due to the method used in calculating per share data as prescribed by SFAS
128, "Earnings Per Share," the quarterly per share data does not total to
the full year per share data.
(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, 2004: Class A - 2,043 and Class B - 714.
Crawford & Company ANNUAL REPORT 2004