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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____ to ____
COMMISSION FILE NUMBER 1-10356
CRAWFORD & COMPANY
(Exact name of Registrant as specified in its charter)
GEORGIA 58-0506554
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5620 GLENRIDGE DRIVE, N.E.
ATLANTA, GEORGIA 30342
(Address of principal executive offices) (Zip Code)
(404) 256-0830
(Registrant's telephone number, including area code)
-------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 1, 2005 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 24,279,884
CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,697,172
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CRAWFORD & COMPANY
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2005
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Income (unaudited)
Six Months ended June 30, 2005 and 2004..................... 3
Condensed Consolidated Statements of Income (unaudited)
Quarters ended June 30, 2005 and 2004....................... 4
Condensed Consolidated Balance Sheets
June 30, 2005 (unaudited) and December 31, 2004............. 5
Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months ended June 30, 2005 and 2004..................... 7
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 8
Report of Independent Registered Public Accounting Firm........ 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 29
Item 4. Controls and Procedures........................................ 30
Part II. Other Information:
Item 1. Legal Proceedings.............................................. 31
Item 4. Submission of Matters to a Vote of Security Holders............ 31
Item 6. Exhibits....................................................... 31
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
------------------
JUNE 30, JUNE 30,
2005 2004
-------- --------
REVENUES:
Revenues before reimbursements $370,336 $341,871
Reimbursements 36,088 29,398
-------- --------
TOTAL REVENUES 406,424 371,269
-------- --------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 292,254 263,260
Reimbursements 36,088 29,398
-------- --------
Cost of Services 328,342 292,658
Selling, general, and administrative expenses 67,395 67,786
Corporate interest expense, net of interest income of
$331 and $2,064, respectively 2,882 803
-------- --------
TOTAL COSTS AND EXPENSES 398,619 361,247
-------- --------
INCOME BEFORE INCOME TAXES 7,805 10,022
PROVISION FOR INCOME TAXES 2,763 2,093
-------- --------
NET INCOME $ 5,042 $ 7,929
======== ========
NET INCOME PER SHARE:
Basic $ 0.10 $ 0.16
Diluted $ 0.10 $ 0.16
======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,878 48,724
Diluted 49,388 48,836
======== ========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.12 $ 0.12
Class B Common Stock $ 0.12 $ 0.12
======== ========
(See accompanying notes to condensed consolidated financial statements)
3
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
------------------
JUNE 30, JUNE 30,
2005 2004
-------- --------
REVENUES:
Revenues before reimbursements $186,002 $172,016
Reimbursements 20,779 14,517
-------- --------
TOTAL REVENUES 206,781 186,533
-------- --------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 147,335 132,135
Reimbursements 20,779 14,517
-------- --------
Cost of Services 168,114 146,652
Selling, general, and administrative expenses 33,161 34,150
Corporate interest expense, net of interest income of
$149 and $1,929, respectively 1,355 (534)
-------- --------
TOTAL COSTS AND EXPENSES 202,630 180,268
-------- --------
INCOME BEFORE INCOME TAXES 4,151 6,265
PROVISION FOR INCOME TAXES 1,470 725
-------- --------
NET INCOME $ 2,681 $ 5,540
======== ========
NET INCOME PER SHARE:
Basic $ 0.05 $ 0.11
Diluted $ 0.05 $ 0.11
======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,884 48,724
Diluted 49,391 48,796
======== ========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.06 $ 0.06
Class B Common Stock $ 0.06 $ 0.06
======== ========
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED) *
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43,555 $ 43,571
Accounts receivable, less allowance for doubtful
accounts of $21,179 in 2005 and $21,859 in 2004 175,207 176,187
Unbilled revenues, at estimated billable amounts 102,785 103,586
Prepaid expenses and other current assets 14,754 21,363
----------- ------------
TOTAL CURRENT ASSETS 336,301 344,707
----------- ------------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 152,272 154,922
Less accumulated depreciation (116,176) (120,079)
----------- ------------
NET PROPERTY AND EQUIPMENT 36,096 34,843
----------- ------------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 110,240 109,410
Capitalized software costs, net 31,982 32,550
Deferred income tax asset 32,157 32,172
Other 18,427 17,578
----------- ------------
TOTAL OTHER ASSETS 192,806 191,710
----------- ------------
TOTAL ASSETS $ 565,203 $ 571,260
=========== ============
* derived from the audited Consolidated Balance Sheet
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(IN THOUSANDS)
(UNAUDITED) *
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 38,912 $ 37,401
Accounts payable 43,216 41,730
Accrued compensation and related costs 44,791 45,961
Deferred revenues 20,402 22,682
Self-insured risks 19,955 18,976
Accrued income taxes 17,388 22,760
Other accrued liabilities 20,488 22,913
Current installments of long-term debt 1,543 1,900
----------- ------------
TOTAL CURRENT LIABILITIES 206,695 214,323
----------- ------------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 50,950 50,875
Deferred revenues 10,073 10,179
Self-insured risks 8,625 10,958
Minimum pension liabilities 76,161 73,893
Postretirement medical benefit obligation 5,544 5,544
Other 10,379 10,655
----------- ------------
TOTAL NONCURRENT LIABILITIES 161,732 162,104
----------- ------------
SHAREHOLDERS' INVESTMENT:
Class A common stock, $1.00 par value; 50,000 shares
authorized; 24,189 and 24,157 shares issued and
outstanding in 2005 and 2004, respectively 24,189 24,157
Class B common stock, $1.00 par value; 50,000 shares
authorized; 24,697 shares issued and outstanding
in 2005 and 2004 24,697 24,697
Additional paid-in capital 1,719 1,441
Retained earnings 200,389 201,213
Accumulated other comprehensive loss (54,218) (56,675)
----------- ------------
TOTAL SHAREHOLDERS' INVESTMENT 196,776 194,833
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 565,203 $ 571,260
=========== ============
* derived from the audited Consolidated Balance Sheet
(See accompanying notes to condensed consolidated financial statements)
6
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
2005 2004
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,042 $ 7,929
Reconciliation of net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 9,631 9,044
Deferred income taxes 13 (90)
Stock-based compensation 99 -
Loss on sales of property and equipment, net 15 103
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable, net 2,891 (11,716)
Unbilled revenues 2,664 (3,680)
Accrued or prepaid income taxes (5,373) (86)
Accounts payable and accrued liabilities (1,328) (9,063)
Deferred revenues (2,596) 2,626
Accrued pension costs (1,745) (1,664)
Prepaid expenses and other assets (1,416) 1,134
-------- ---------
Net cash provided by (used in) operating activities 7,897 (5,463)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (7,308) (4,685)
Capitalization of computer software costs (2,626) (3,120)
Proceeds from 2004 sale of undeveloped land 7,562 -
Payment for prior acquisitions (90) (479)
Proceeds from sales of property and equipment 208 85
-------- ---------
Net cash used in investing activities (2,254) (8,199)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (5,866) (5,847)
Proceeds from exercises of stock options 310 -
Increase in short-term borrowings 2,325 4,642
Payments on short-term borrowings (1,933) (8,045)
Payments on long-term debt and capital leases (975) (300)
Capitalized loan costs - 61
-------- ---------
Net cash used in financing activities (6,139) (9,489)
-------- ---------
Effect of exchange rate changes on cash and cash equivalents 480 436
-------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (16) (22,715)
Cash and cash equivalents at beginning of period 43,571 45,805
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,555 $ 23,090
======== =========
(See accompanying notes to condensed consolidated financial statements)
7
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Crawford & Company
(the "Company") included herein have been prepared pursuant to the rules and
regulations of the United States ("U.S.") Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The condensed consolidated balance sheet as of December
31, 2004 presented herein was derived from the audited consolidated balance
sheet included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain previously reported amounts have been reclassified to conform to the
current presentation.
The results of operations for the six months ended June 30, 2005 are not
necessarily indicative of the results to be expected during the balance of the
year ending December 31, 2005. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and related notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
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. There have
been no material changes to the Company's critical accounting policies and
estimates as disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 123 (revised 2004), "Share
Based Payments" ("SFAS 123R"), which is a revision of SFAS 123, "Accounting for
Stock Compensation." SFAS 123R supersedes SFAS 123 and Accounting Principles
Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25")
and amends SFAS 95, "Statement of Cash Flows."
8
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. When originally issued, SFAS 123R was to be effective for public companies
for the first interim or annual period beginning after June 15, 2005. However,
in April 2005 the SEC amended Regulation S-X to allow public companies that had
not yet adopted SFAS 123R to delay adoption of the Standard until the beginning
of the first annual period beginning after June 15, 2005. Accordingly, the
Company expects to adopt SFAS 123R at the beginning of 2006.
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. Under APB 25, the
Company recognizes compensation cost for stock grants, but generally recognizes
no compensation cost for its employee stock option and employee stock purchase
plans due to the terms of those plans. 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 future
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 5 to these condensed consolidated financial statements.
Based on employee stock options issued through June 30, 2005, adoption of SFAS
123R at the beginning of 2006, and use of the "modified prospective" method, the
Company expects the adoption of SFAS 123R to reduce net income by approximately
$909,000 in the year of adoption, or $0.02 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.
9
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The American Jobs Creation Act of 2004 ("the Act") allows a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. tax payer. This deduction is elective by the tax payer. Recently, the
Treasury Department provided needed clarification on key elements of the
repatriation provision of the Act. Generally, it is the Company's policy to
consider undistributed earnings of its foreign subsidiaries to be indefinitely
reinvested. The Company is currently evaluating the elective dividend
repatriation provision of the Act and the recent guidance issued by the Treasury
Department. Accordingly, the Company has not yet estimated a potential range of
any related income tax effects or impact on its financial position, results of
operations, or cash flows.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and errors corrections. SFAS 154 requires
retrospective application for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. SFAS 154 also states that a correction of an error in
previously issued financial statements is not an accounting change. However, the
reporting of an error correction under SFAS 154 will involve adjustments to
previously issued financial statements similar to those generally applicable to
reporting an accounting change retrospectively. SFAS 154 is effective for
accounting changes and corrections of error made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption of SFAS 154 to have
a material impact on its consolidated financial statements. SFAS 123R, which the
Company plans to adopt at the beginning of 2006, contains explicit transitional
guidance. Accordingly, the transition requirements of SFAS 154 will not apply to
the Company's pending adoption of SFAS 123R.
3. 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,
shares issuable under employee stock purchase plans, and contingently issuable
shares under the stock bonus program, if any, using the "treasury stock" method.
10
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Below is the calculation of basic and diluted net income per share for the
quarters and six months ended June 30, 2005 and 2004:
Quarter ended Six months ended
------------------ ------------------
June 30, June 30, June 30, June 30,
(in thousands, except per share data) 2005 2004 2005 2004
- ------------------------------------- -------- -------- -------- --------
Net income available to common
shareholders $ 2,681 $ 5,540 $ 5,042 $ 7,929
======== ======== ======== ========
Weighted-average common shares
outstanding - Basic 48,884 48,724 48,878 48,724
Dilutive effect of stock-based
compensation 507 72 510 112
-------- -------- -------- --------
Weighted-average common shares
outstanding - Diluted 49,391 48,796 49,388 48,836
======== ======== ======== ========
Basic net income per share $ 0.05 $ 0.11 $ 0.10 $ 0.16
======== ======== ======== ========
Diluted net income per share $ 0.05 $ 0.11 $ 0.10 $ 0.16
======== ======== ======== ========
Additional options to purchase 3,261,260 shares of the Company's Class A common
stock at exercise prices ranging from $7.05 to $19.50 per share were outstanding
at June 30, 2005, but were not included in the computation of diluted net income
per share because the options' exercise prices were greater than the average
market price of the common shares. To include them would have been antidilutive.
4. COMPREHENSIVE INCOME
For the quarters and six months ended June 30, 2005 and 2004, comprehensive
income for the Company consisted of the total of net income and foreign currency
translation adjustments. Below is the calculation of comprehensive income for
the quarters and six months ended June 30, 2005 and 2004:
Quarter ended Six months ended
------------------- ------------------
June 30, June 30, June 30, June 30,
(in thousands) 2005 2004 2005 2004
- ---------------------------- -------- --------- -------- --------
Net income $ 2,681 $ 5,540 $ 5,042 $ 7,929
Foreign currency translation
adjustment 473 (3,442) 2,457 (386)
-------- --------- -------- --------
Comprehensive income $ 3,154 $ 2,098 $ 7,499 $ 7,543
======== ========= ======== ========
11
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by SFAS 123, the Company accounts for stock-based compensation
utilizing the intrinsic value method in accordance with the provisions of APB 25
and related interpretations. Accordingly, no compensation cost has been
recognized for the Company's stock option plans because the exercise prices of
the stock options equal the market prices of the underlying stock on the dates
of grant. The Company's employee stock purchase plans are also considered
noncompensatory under APB 25.
The Company's executive stock bonus plan ("the Plan") is considered compensatory
under APB 25. From the Plan's 2005 inception through June 30, 2005, the Company
recognized pretax compensation cost of approximately $99,000 for the Plan.
Compensation cost for the remainder of 2005 is estimated to approximate the
amount recognized during the first six months of 2005, but could vary based on
potential changes in the quoted price of the Company's Class A common stock,
achievement rates for the corporate and participant goals contained in the Plan,
and participant attrition rates.
Had compensation cost for all of the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with SFAS 123, the Company's net income and net income
per share would have been reduced to the pro forma amounts indicated below:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands, except per share data) 2005 2004 2005 2004
- ------------------------------------- -------- -------- -------- --------
Net income as reported $ 2,681 $ 5,540 $ 5,042 $ 7,929
Add: Stock-based employee
compensation expense included
in reported net income, net
of tax 23 - 64 -
Less: Stock-based compensation
expense using the fair value
method, net of tax (391) (155) (737) (345)
-------- -------- -------- --------
Pro forma net income $ 2,313 $ 5,385 $ 4,369 $ 7,584
======== ======== ======== ========
Net income per share - basic:
As reported $ 0.05 $ 0.11 $ 0.10 $ 0.16
======== ======== ======== ========
Pro forma $ 0.05 $ 0.11 $ 0.09 $ 0.16
======== ======== ======== ========
Net income per share - diluted:
As reported $ 0.05 $ 0.11 $ 0.10 $ 0.16
======== ======== ======== ========
Pro forma $ 0.05 $ 0.11 $ 0.09 $ 0.16
======== ======== ======== ========
12
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair value of options is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------- -------- -------- --------
Expected dividend yield 3.3% 3.4% 3.3% 3.4%
Expected volatility 34% 35% 34% 34%
Risk-free interest rate 4.1% 3.8% 4.1% 3.8%
Expected life of options 7 years 7 years 7 years 7 years
6. RETIREMENT PLANS
The Company and its subsidiaries sponsor various defined benefit and defined
contribution retirement plans covering substantially all employees. Effective
December 31, 2002, the Company elected to freeze its U.S. defined benefit
pension plan and replace it with a discretionary, non-contributory defined
contribution plan. Net periodic benefit cost related to the U.S. and United
Kingdom ("U.K.") defined benefit pension plans for the quarters and six months
ended June 30, 2005 and 2004 included the following components:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands) 2005 2004 2005 2004
- ----------------------------- -------- -------- -------- --------
Service cost $ 515 $ 430 $ 1,029 $ 860
Interest cost 7,842 7,485 15,685 14,970
Expected return on assets (8,128) (7,756) (16,246) (15,513)
Recognized net actuarial loss 1,876 1,756 3,751 3,513
-------- -------- -------- --------
Net periodic benefit cost $ 2,105 $ 1,915 $ 4,219 $ 3,830
======== ======== ======== ========
The Company is not required to make any contributions to its frozen U.S. defined
benefit pension plan during 2005. During the quarter and six months ended June
30, 2005, cash contributions of approximately $995,000 and $2,010,000,
respectively, were made to the Company's U.K. defined benefit pension plans.
7. SEGMENT INFORMATION
The Company has two reportable segments, one which provides claims services
through branch offices located in the United States ("U.S. Operations") and the
other which provides similar
13
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
net corporate interest expense and income taxes. Financial information for the
quarters and six months ended June 30, 2005 and 2004 covering the Company's
reportable segments is presented below:
Quarter ended Six months ended
------------------- ------------------
June 30, June 30, June 30, June 30,
(in thousands) 2005 2004 2005 2004
- ----------------------------------------- --------- -------- -------- --------
REVENUES:
U.S. $ 114,354 $109,593 $226,861 $218,906
International 71,648 62,423 143,475 122,965
--------- -------- -------- --------
TOTAL REVENUES BEFORE REIMBURSEMENTS $ 186,002 $172,016 $370,336 $341,871
========= ======== ======== ========
OPERATING EARNINGS:
U.S. $ 1,810 $ 3,826 $ 3,646 $ 6,718
International 3,696 1,905 7,041 4,107
--------- -------- -------- --------
TOTAL OPERATING EARNINGS $ 5,506 $ 5,731 $ 10,687 $ 10,825
========= ======== ======== ========
8. COMMITMENTS AND CONTINGENCIES
The Company normally structures its 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 projected
levels of revenues and operating earnings, additional payments under existing
earnout agreements would approximate $4.0 million through 2009, as follows:
2005 2006 2007 2008 2009
- -------- ------- ------- ---------- --------
$234,000 $79,000 $79,000 $3,292,000 $266,000
14
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the normal course of the claims administration services business, the Company
is named as a defendant in suits by insureds or claimants contesting decisions
made by the Company or its clients with respect to the settlement of claims.
Additionally, clients of the Company have brought actions for indemnification on
the basis of alleged negligence by the Company, its agents, or its employees in
rendering service to clients. The majority of these claims are of the type
covered by insurance maintained by the Company. However, the Company is
self-insured for the deductibles under various insurance coverages. In the
opinion of Company management, adequate reserves have been provided for such
self-insured risks.
The Company has received a subpoena from the State of New York, Office of the
Attorney General, requesting various documents relating to the Company's
operations. The subpoena does not apply to the operations of the Company's
international segment or the GCG class action administration unit. The Company
has responded to the subpoena. The Company 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 is currently 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 is auditing 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.
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Crawford & Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Crawford & Company as of June 30, 2005, and the related condensed consolidated
statements of income for the three-month and six-month periods ended June 30,
2005 and 2004, and the condensed consolidated statements of cash flows for the
six-month periods ended June 30, 2005 and 2004. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Crawford & Company as of December 31, 2004, and the related
consolidated statements of income and cash flows for the year then ended (not
presented herein) and in our report dated March 11, 2005, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2004, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Atlanta, Georgia
August 3, 2005
16
ITEM 2. 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 have 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 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 approximately $2.7 million and $5.5 million for the
quarters ended June 30, 2005 and 2004, respectively, and approximately $5.0
million and $7.9 million for the six months ended June 30, 2005 and 2004,
respectively. During the 2004 second quarter, we settled a tax credit refund
claim, including interest, with the Internal Revenue Service which increased net
income $2.8 million by reducing federal income tax expense by $1.7 million and
17
decreasing pretax net corporate interest expense by $1.8 million. There was no
such tax refund settlement in 2005.
Operating earnings is one of the key performance measures used by our senior
management and chief decision maker to evaluate the performance of our business
and make resource allocation decisions. We believe this measure is useful to
investors in that it allows them to evaluate our performance using the same
criteria our management uses. Operating earnings (earnings before net corporate
interest expense and income taxes) during the quarter and six months ended June
30, 2005, totaled approximately $5.5 million and $10.7 million, respectively,
compared with approximately $5.7 million and $10.8 million, respectively, in the
comparable 2004 periods. Following is a reconciliation of consolidated net
income on a generally accepted accounting principles (GAAP) basis to operating
earnings for the quarters and six months ended June 30, 2005 and 2004 and the
related margins as a percentage of revenues before reimbursements:
Quarter ended Six months ended
--------------------------------- ----------------------------------
June 30, % June 30, % June 30, % June 30, %
(in thousands) 2005 Margin 2004 Margin 2005 Margin 2004 Margin
- --------------- -------- ------ -------- ------ -------- ------ -------- --------
Net income $ 2,681 1.5% $ 5,540 3.2% $ 5,042 1.4% $ 7,929 2.3%
Add/(deduct):
Net
corporate
interest 1,355 0.7 (534) (0.3) 2,882 0.8 803 0.3
Income
taxes 1,470 0.8 725 0.4 2,763 0.7 2,093 0.6
-------- ------ -------- ------ -------- ------ -------- --------
Operating
earnings $ 5,506 3.0% $ 5,731 3.3% $ 10,687 2.9% $ 10,825 3.2%
======== ====== ======== ====== ======== ====== ======== ========
The following is a discussion and analysis of the results of operations of our
two reportable segments, U.S. operations and international operations, and our
consolidated financial condition. 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. Revenue amounts discussed exclude
reimbursements for out-of-pocket expenses. Expense amounts discussed exclude
reimbursed out-of-pocket expenses, 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 outsourced services,
office rent and occupancy costs, other office operating expenses, amortization
and depreciation, and cost of risk. This discussion should be read in
conjunction with our unaudited condensed consolidated financial statements and
the accompanying notes.
18
Operating results for our U.S. and international operations for the quarters and
six months ended June 30, 2005 and 2004 were as follows:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands) 2005 2004 2005 2004
- ----------------------------------- -------- -------- -------- --------
REVENUES BEFORE REIMBURSEMENTS:
U.S. $114,354 $109,593 $226,861 $218,906
International 71,648 62,423 143,475 122,965
-------- -------- -------- --------
TOTAL $186,002 $172,016 $370,336 $341,871
COMPENSATION & FRINGE BENEFITS:
U.S. $ 74,200 $ 67,606 $146,316 $136,474
% of Revenues 64.9% 61.7% 64.5% 62.3%
International 49,922 42,832 100,467 85,237
% of Revenues 69.6% 68.6% 70.0% 69.4%
-------- -------- -------- --------
TOTAL $124,122 $110,438 $246,783 $221,711
% of Revenues 66.7% 64.2% 66.6% 64.8%
EXPENSES OTHER THAN REIMBURSEMENTS,
COMPENSATION & FRINGE BENEFITS:
U.S. $ 38,344 $ 38,161 $ 76,899 $ 75,714
% of Revenues 33.5% 34.8% 33.9% 34.6%
International 18,030 17,686 35,967 33,621
% of Revenues 25.2% 28.3% 25.1% 27.3%
-------- -------- -------- --------
TOTAL $ 56,374 $ 55,847 $112,866 $109,335
% of Revenues 30.3% 32.5% 30.5% 32.0%
OPERATING EARNINGS (1):
U.S. $ 1,810 $ 3,826 $ 3,646 $ 6,718
% of Revenues 1.6% 3.5% 1.6% 3.1%
International 3,696 1,905 7,041 4,107
% of Revenues 5.2% 3.1% 4.9% 3.3%
-------- -------- -------- --------
TOTAL $ 5,506 $ 5,731 $ 10,687 $ 10,825
% of Revenues 3.0% 3.3% 2.9% 3.2%
(1) Earnings before net corporate interest expense and income taxes.
19
U.S. OPERATIONS
REVENUES
U.S. revenues before reimbursements, by market type, for the quarters and six
months ended June 30, 2005 and 2004 were as follows:
Quarter ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
(in thousands) 2005 2004 Variance 2005 2004 Variance
- -------------------------- -------- -------- -------- -------- -------- --------
Insurance companies $ 48,215 $ 48,369 (0.3%) $102,194 $ 98,822 3.4%
Self-insured entities 38,594 40,353 (4.4%) 77,934 80,762 (3.5%)
Class action services 27,545 20,871 32.0% 46,733 39,322 18.5%
-------- -------- -------- --------
TOTAL U.S. REVENUES
BEFORE REIMBURSEMENTS $114,354 $109,593 4.3% $226,861 $218,906 3.6%
======== ======== ======== ========
Revenues from insurance companies decreased 0.3% from the 2004 second quarter to
$48.2 million in the 2005 second quarter, reflecting a continued softening in
our U.S. insurance company referrals for high-frequency, low-severity claims.
These revenues increased 3.4% to $102.2 million for the six months ended June
30, 2005, compared to $98.8 million for the 2004 period, due to a $4.0 million
increase in revenues generated by our catastrophe adjusters involved in
finalizing claims resulting from the hurricanes which struck the U.S. during
2004. Revenues from self-insured clients decreased 4.4% and 3.5% from the second
quarter and six months ended June 30, 2004, respectively, to $38.6 million and
$77.9 million in the comparable 2005 periods, due primarily to a reduction in
claim referrals from our existing clients, only partially offset by net new
business gains. See the following analysis of U.S. cases received. Class action
services revenues, including administration and inspection services, increased
32.0% and 18.5% from the 2004 second quarter and six-month periods,
respectively, to $27.5 million and $46.7 million in the 2005 second quarter and
year-to-date periods. Class action services revenues can fluctuate significantly
depending on the timing and size of project awards.
Case Volume Analysis
Excluding the impact of class action services, which has project-based revenues
that are not denominated by individual cases, U.S. unit volume, measured
principally by cases received, decreased 7.3% in the second quarter of 2005
compared to the same 2004 quarter. This decrease was partially offset by a 5.5%
revenue increase from changes in the mix of services provided and in the rates
charged for those services, resulting in a net 1.8% decrease in U.S. revenues
for the second quarter of 2005, excluding revenues from class action services.
The decrease in referrals of high-frequency, low-severity claims has increased
our average revenue per claim in the 2005 second quarter. Growth in class action
services increased U.S. revenues by 6.1% in the quarter ended June 30, 2005,
compared to the same quarter in 2004.
For the six month period ended June 30, 2005, U.S. unit volume decreased 3.8%,
compared to the same 2004 period. This decrease was partially offset by a 4.0%
revenue increase from changes in the mix of services provided and in the rates
charged for those services, resulting in a net 0.2% increase in U.S. revenues
for the first six months of 2005, excluding revenues from class action services.
Growth in class action services increased U.S. revenues by 3.4% in the 2005
six-month period, compared to the same period in 2004.
20
Excluding the impact of class action services, U.S. unit volume by major service
line, as measured by cases received, for the quarters and six months ended June
30, 2005 and 2004 was as follows:
Quarter ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
(whole numbers) 2005 2004 Variance 2005 2004 Variance
- --------------------------- -------- -------- -------- -------- -------- --------
Casualty 46,207 49,653 (6.9%) 93,788 101,679 (7.8%)
Property 43,495 49,085 (11.4%) 92,052 90,058 2.2%
Vehicle 30,875 34,109 (9.5%) 63,804 68,049 (6.2%)
Workers' Compensation 36,984 38,230 (3.3%) 73,000 77,820 (6.2%)
Other 5,498 4,886 12.5% 11,387 9,574 18.9%
------- ------- ------- -------
TOTAL U.S. CASES RECEIVED 163,059 175,963 (7.3%) 334,031 347,180 (3.8%)
======= ======= ======= =======
Conservative underwriting by insurance companies, including significant
increases in policy deductibles, contributed to an industry-wide decline in
property and casualty claims frequency during the 2005 second quarter. For the
2005 year-to-date period, property claims increased due to the residual impact
from the four hurricanes that struck Florida and other southeastern states
during August and September of 2004. The decline in vehicle claims during the
quarter and six months ended June 30, 2005 was due to a decline in referrals of
high-frequency, low-severity claims from our insurance company clients. The
decline in worker's compensation claims during the quarter and six months ended
June 30, 2005 was due to a reduction in claims from our existing clients and
reflected continued weakness in the growth of U.S. employment levels and
associated workplace injuries.
COMPENSATION AND FRINGE BENEFITS
Our most significant expense is the compensation of employees, including related
payroll taxes and fringe benefits. U.S. compensation expense as a percent of
revenues increased to 64.9% in the second quarter of 2005 as compared to 61.7%
in the same 2004 quarter. For the six month period ended June 30, 2005, U.S.
compensation expense as a percent of revenues increased to 64.5% compared to
62.3% in the 2004 period. These increases primarily reflect an increase in
capacity in our U.S. field operations. There was an average of 4,234 full-time
equivalent employees in the first six months of 2005, compared to an average of
4,188 in the same 2004 period. There was an average of 76 more catastrophe
adjusters employed in the first six months of 2005 compared to the same period
in 2004.
U.S. salaries and wages totaled $59.1 million and $117.1 million for the quarter
and six months ended June 30, 2005, respectively, increasing 5.2% and 5.7%, from
$56.2 million and $110.8 million in the comparable 2004 periods as a result of
the higher compensation expense associated with our catastrophe adjusters and
merit salary increases granted during the period. Payroll taxes and fringe
benefits for U.S. operations totaled $15.1 million and $29.2 million in the
second quarter and first six months of 2005, respectively, increasing 32.5% and
13.6% from 2004 costs of $11.4 million and $25.7 million for the comparable
periods. These increases are primarily due to higher costs in our self-insured
workers compensation and self-insured medical benefits programs.
21
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits were 33.5% of revenues for the quarter ended June 30, 2005,
down from 34.8% for the same quarter in 2004. U.S. expenses other than
reimbursements, compensation and related payroll taxes and fringe benefits were
33.9% of revenues for the six-month period ended June 30, 2005, down from 34.6%
for the same period in 2004. These decreases are primarily due to lower
self-insured professional indemnity costs.
REIMBURSEMENTS
Reimbursements in our U.S. operations increased to $13.5 million and $22.2
million for the quarter and six months ended June 30, 2005, respectively, from
$8.1 million and $17.0 million in the comparable 2004 periods, reflecting an
increase in revenues from our class action services unit.
INTERNATIONAL OPERATIONS
REVENUES
Substantially all international revenues were derived from the insurance company
market. Revenues before reimbursements from our international operations
increased 14.8%, from $62.4 million in the second quarter of 2004 to $71.6
million in the 2005 second quarter. Revenues before reimbursements for the first
six months of 2005 totaled $143.5 million, a 16.7% increase from $123.0 million
reported in the first six months of 2004. International unit volume, measured
principally by cases received, increased 11.3% and 19.4% in the current quarter
and six months ended June 30, 2005, respectively, compared to the same periods
in 2004. Our third quarter 2004 acquisition of the net assets of Cabinet
Mayousseir, Cabinet Tricaud, and TMA in France increased international revenues
by 1.6% in the second quarter and six months ended June 30, 2005. Revenues per
claim decreased 3.9% and 10.8% during the quarter and six months ended June 30,
2005, respectively, due to changes in the mix of services provided and in the
rates charged for those services. Growth in high-frequency, low-severity claim
referrals in the United Kingdom ("U.K.") and Continental Europe, Middle East and
Africa ("CEMEA") from new contracts entered into during 2004 and 2005 reduced
the average revenue per claim in the first half of 2005. Revenues reflect a 5.8%
and 6.5% increase during the quarter and six months ended June 30, 2005,
respectively, due to the positive effect of a weak U.S. dollar, primarily as
compared to the British pound and the euro.
International unit volume by region for the quarters and six months ended June
30, 2005 and 2004 was as follows:
Quarter ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
(whole numbers) 2005 2004 Variance 2005 2004 Variance
- -------------------- -------- -------- -------- -------- -------- --------
United Kingdom 31,829 26,937 18.2% 73,184 51,309 42.6%
Americas 27,557 24,532 12.3% 56,938 52,667 8.1%
CEMEA 21,633 21,269 1.7% 47,255 42,311 11.7%
Asia/Pacific 10,216 9,205 11.0% 20,083 19,043 5.5%
------ ------ ------- -------
TOTAL INTERNATIONAL
CASES RECEIVED 91,235 81,943 11.3% 197,460 165,330 19.4%
====== ====== ======= =======
22
The increases in the U.K. and CEMEA for the quarter and six months ended June
30, 2005 were largely due to an increase in claims received from new contracts
entered into during 2004 and 2005. The increases in the Americas were primarily
due to an increase in auto appraisal claims in Canada. The increases in
Asia/Pacific were primarily due to an increase in weather-related claims in
2005.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, increased to 69.6% for the quarter ended June 30, 2005 from
68.6% for the same quarter in 2004. For the six-month period ended June 30,
2005, compensation, payroll taxes and fringe benefits increased slightly as a
percentage of revenues to 70.0% from 69.4% in 2004. These increases are
primarily due to staff increases in the U.K. and CEMEA to handle claims referred
under new contracts entered into during 2004 and 2005. There was an average of
3,227 full-time equivalent employees in the first six months of 2005 compared to
an average of 3,116 in the same 2004 period.
Salaries and wages of international personnel increased to $42.1 million for the
quarter ended June 30, 2005, from $36.0 million in the same 2004 quarter. For
the six-month periods, salaries and wages increased to $84.3 million in 2005
from $71.5 million in 2004. Payroll taxes and fringe benefits for international
operations totaled $7.8 million and $16.2 million for the quarter and six months
ended June 30, 2005, respectively, compared to $6.8 million and $13.8 million
for the same periods in 2004. The increases in these costs were largely the
result of staffing increases in the U.K. and CEMEA and a decline in the value of
the U.S. dollar against other major currencies, primarily the British pound and
the euro.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than compensation and related payroll taxes and fringe benefits
were 25.2% and 25.1% of international revenues for the quarter and six months
ended June 30, 2005, respectively, down from 28.3% and 27.3% for the same
periods in 2004, primarily due to a reduction of operating capacity within our
U.K. unit.
REIMBURSEMENTS
Reimbursements in our international operations increased to $7.3 million and
$13.9 million for the quarter and six months ended June 30, 2005, respectively,
from $6.4 million and $12.4 million in the same 2004 periods. These increases
were primarily due to a decline in the value of the U.S. dollar against other
major currencies, primarily the British pound and the euro, and an increase in
the use of outside experts to handle certain claims.
NET CORPORATE INTEREST EXPENSE AND INCOME TAXES
During June 2004, we settled a tax credit refund claim with the Internal Revenue
Service and recorded a receivable of $3.5 million, which is comprised of a tax
refund of $1.7 million and associated interest of $1.8 million.
Net corporate interest expense increased to $1.4 million and $2.9 million for
the quarter and six months ended June 30, 2005, respectively, from interest
income of $534,000 and interest expense of $803,000 in the comparable 2004
periods. Net corporate interest (income) expense
23
for the 2004 periods included interest income of $1.8 million associated with
the tax credit refund claim.
Our effective tax rate was 35.4% of pretax income for the quarter and six months
ended June 30, 2005, compared to 39.4% and 38.4% of pretax income for the
quarter and six months ended June 30, 2004, respectively. Our effective tax
rates for the 2004 periods exclude the $1.7 million related to the tax credit
refund claim settled in June 2004. Taxes on income totaled $1.5 million and $2.8
million for the quarter and six months ended June 30, 2005, respectively, as
compared to $725,000 and $2.1 million, including the expected tax refund, for
the comparable 2004 periods. We perform a quarterly evaluation of our effective
tax rate expected for the year. Based on operating results through the first six
months of 2005 and a projection of operating results for the remainder of the
year, we estimate that our effective tax rate will be 35.4% for the calendar
year 2005. The change in our estimated effective tax rate for 2005 was primarily
due to a change in the mix of income expected from our various international
operations.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At June 30, 2005, our working capital balance (current assets less current
liabilities) was $129.6 million, a slight decrease from the December 31, 2004
balance of $130.4 million. Cash and Cash Equivalents totaled $43.6 million at
both June 30, 2005 and December 31, 2004. Cash was generated primarily from
operating activities. Cash provided by operations during the six months ended
June 30, 2005 totaled $7.9 million and reflected collections of accounts
receivable generated from the hurricane-related claims administered in late 2004
and early 2005 and improved collections in our class action services unit. The
principal uses of cash were for acquisitions of property and equipment,
dividends paid to shareholders, and investments in computer software.
Cash dividends paid to shareholders were 116.3% of net income in the first six
months of 2005, compared to 73.7% for the same period in 2004. Our Board of
Directors declares cash dividends to shareholders each quarter based on an
assessment of current and projected earnings and cash flows.
During the first six months of 2005, we did not repurchase any of the Company's
Class A or Class B common stock. As of June 30, 2005, 705,863 shares are
eligible to be repurchased under the discretionary 1999 share repurchase program
authorized by our 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.
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 of
our own contractual obligations. Including $13.7 million committed under the
letter of credit facility, the balance of our unused line of credit totaled
$20.2 million at June 30, 2005. Our short-term debt obligations typically peak
during the first quarter and generally decline during the balance of the year.
Short-term borrowings outstanding, including bank overdraft facilities, as of
June 30, 2005 totaled $38.9 million, increasing from $37.4 million at December
31, 2004. Long-term borrowings outstanding, excluding current installments, as
of June 30, 2005 totaled $51.0 million
24
compared to $50.9 million at December 31, 2004. 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 that our current
financial resources, together with funds generated from operations and existing
and potential borrowing capabilities, will be sufficient to maintain our current
operations 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.
Shareholders' investment at June 30, 2005 was $196.8 million, compared with
$194.8 million at December 31, 2004. This increase was a result of net income
and a positive foreign currency translation adjustment, net of dividends paid to
shareholders during the first six months of 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses our condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates these
estimates and judgments based upon historical experience and on various other
factors that are believed to be reasonable under the circumstances. The results
of these evaluations form the basis for making judgments 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. There have been no material changes to our critical
policies and estimates since December 31, 2004.
For a complete discussion regarding the application of our critical accounting
policies, see our Annual Report on Form 10-K for the year ended December 31,
2004 filed with the Securities and Exchange Commission, under the heading
"Critical Accounting Policies and Estimates" in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section.
FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS
Certain information presented in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" may include forward-looking
statements, the accuracy of which is subject to a number of risks, uncertainties
and assumptions. Our Annual Report on Form 10-K for the year ended December 31,
2004 discusses such risks, uncertainties and assumptions and other key factors
that could cause actual results to differ materially from those expressed in
such forward-looking statements.
25
LEGAL PROCEEDINGS
As disclosed in Note 8, "Commitments and Contingencies," to the condensed
consolidated financial statements, we have potential exposure to certain legal
and regulatory matters.
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 projected levels of
revenues and operating earnings, additional payments under existing earnout
agreements would approximate $4.0 million through 2009, as follows: 2005 -
$234,000; 2006 - $79,000; 2007 - $79,000; 2008 - $3,292,000; and 2009 -
$266,000.
At June 30, 2005, we have committed $13.7 million under letters of credit to
satisfy certain of our own contractual requirements. As noted in our discussion
of Debt Covenants, these letters of credit commitments are a component of our
$70.0 million Revolving Credit Agreement.
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 June 30, 2005, there was $36.1
million outstanding on the revolving credit line with an average variable
interest rate of 5.32%. In addition, letters of credit of $13.7 million were
also committed 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 October 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 non-recurring 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 non-cash 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 June 30, 2005. However,
based upon our annualized operating results for the first six months of 2005, we
may not be in compliance with certain financial covenants contained in the
Revolving Credit Agreement and the Notes Purchase Agreement as of the end of the
fourth quarter of 2005. If we do not meet the covenant requirements in the
future, we would be in default under these agreements. In such an
26
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 123 (revised 2004), "Share
Based Payments" ("SFAS 123R"), which is a revision of SFAS 123, "Accounting for
Stock Compensation." SFAS 123R supersedes SFAS 123 and Accounting Principles
Board ("APB") Opinion 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. When originally issued, SFAS 123R was to be effective for public companies
for the first interim or annual period beginning after June 15, 2005. However,
in April 2005 the SEC amended Regulation S-X to allow public companies that had
not yet adopted SFAS 123R to delay adoption of the Statement until the beginning
of the first annual period beginning after June 15, 2005. Accordingly, we expect
to adopt SFAS 123R at the beginning of 2006.
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 our
employees using APB 25's intrinsic value method. Under APB 25, we recognize
compensation cost for stock grants, but we generally recognize no compensation
cost for our employee stock option and employee stock purchase plans due to the
terms of those plans. 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 future 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 under "Accounting for Stock-Based Compensation" in Note 5 to the condensed
consolidated financial statements. Based on employee stock options issued
through June 30, 2005, adoption of SFAS 123R at the beginning of 2006, and use
of the "modified prospective" method, we expect the adoption of SFAS 123R to
reduce net income by approximately $909,000 in the year of adoption, or $0.02
per share.
27
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.
The American Jobs Creation Act of 2004 ("the Act") allows a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. tax payer. This deduction is elective by the tax payer. Recently, the
Treasury Department provided needed clarification on key elements of the
repatriation provision of the Act. Generally, it is our policy to consider
undistributed earnings of our foreign subsidiaries to be indefinitely
reinvested. We are currently evaluating the elective dividend repatriation
provision of the Act and the recent guidance issued by the Treasury Department.
Accordingly, we have not yet estimated a potential range of any related income
tax effects or impact on its financial position, results of operations, or cash
flows.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and errors corrections. SFAS 154 requires
retrospective application for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. SFAS 154 also states that a correction of an error in
previously issued financial statements is not an accounting change. However, the
reporting of an error correction under SFAS 154 will involve adjustments to
previously issued financial statements similar to those generally applicable to
reporting an accounting change retrospectively. SFAS 154 is effective for
accounting changes and corrections of error made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of SFAS 154 to have a material
impact on our consolidated financial statements. SFAS 123R, which we plan to
adopt at the beginning of 2006, contains explicit transitional guidance.
Accordingly, the requirements of SFAS 154 will not apply to our pending adoption
of SFAS 123R.
PENDING LEGISLATION
We are aware of possible future Congressional legislation that may impact the
Pension Benefit Guaranty Corporation ("PBGC") and the Employee Retirement Income
Security Act of 1974 ("ERISA") as they relate to defined benefit pension plans
in the U.S. Our frozen U.S. defined benefit pension plan is regulated by both
the PBGC and ERISA. We understand that this pending legislation, if enacted,
could significantly alter future pension funding requirements and actuarial
formulas used by sponsors of defined benefit pension plans that are regulated by
the PBGC and ERISA. Our plan, including the related critical accounting policies
and estimates, could be impacted by any such future legislation. This pending
legislation, called the National Employee Savings and Trust Equity Guarantee Act
and the Pension Protection Act, have not been finalized or enacted into law.
Accordingly, we cannot yet estimate the potential impact, if any, this possible
legislation may have on our financial position, results of operations, or cash
flows.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVES
We have not entered into any transactions using derivative financial instruments
or derivative commodity instruments as of June 30, 2005.
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. Revenues from our international operations were 38.7% and
36.0% of total consolidated revenues for the six months ending June 30, 2005 and
2004, respectively. Except for borrowing in foreign currencies, we have not
engaged 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 June 30, 2005 were used to perform the sensitivity analysis.
Such analysis indicates that a hypothetical 10% change in foreign currency
exchange rates would have increased or decreased pretax income by approximately
$451,000, or less than $0.01 per share, during the first six months of 2005, had
the U.S. dollar exchange rate increased or decreased relative to the currencies
with 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 June
30, 2005, we had $38.9 million in short-term borrowings outstanding, including
bank overdraft facilities, with an average variable interest rate of 5.3%. If
the average interest rate increased or decreased by 1%, the impact to pretax
income for the six months ended June 30, 2005 would have been approximately
$192,000, 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
measurement dates 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 pretax income for the six months ended
June 30, 2005 would have been approximately $904,000, or $0.01 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 pre-funded, remains with
29
the client. Accordingly, we do not incur significant credit risk in the
performance of these services.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures, which, by
their nature, can provide only reasonable assurance regarding management's
control objectives. The Company's management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that our disclosure
controls can prevent all possible errors or fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. There are inherent
limitations in all control systems, including the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
errors or mistakes. Additionally, controls can be circumvented by the individual
acts of one or more persons. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and, while
our disclosure controls and procedures are designed to be effective under
circumstances where they should reasonably be expected to operate effectively,
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Because of the inherent limitations
in any control system, misstatements due to possible errors or fraud may occur
and not be detected.
As of the end of the period covered by this report, we performed an evaluation,
under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operations of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the foregoing, the Chief
Executive Officer along with the Chief Financial Officer concluded that our
disclosure controls and procedures are effective at providing reasonable
assurance that all material information relating to the Company (including
consolidated subsidiaries) required to be included in our Exchange Act reports
is reported in a timely manner.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We have identified no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to our filing of Form 10-K for the year ended December 31, 2004,
developments identified below have occurred in the following legal proceedings.
For other information on legal matters, see Note 8, "Commitments and
Contingencies" to the condensed consolidated financial statements included in
this Form 10-Q.
We previously disclosed that we had received a subpoena from the State of New
York, Office of the Attorney General, requesting various documents relating to
our operations. We received notice that the subpoena does not apply to the
operations of our international division or our GCG class action administration
unit.
We previously disclosed that we had received notice and anticipated that we
would be the subject of an audit by the Audit Unit, Division of Workers'
Compensation, Department of Industrial Relations, State of California ("Audit
Unit"). We are now being audited by the Audit Unit. The Audit Unit is auditing
workers' compensation files which we handled on behalf of certain clients in our
El Segundo, California office in 2001 and 2002.
We previously disclosed that we had received and complied with two federal grand
jury subpoenas which we understood were both issued as part of a conflicts of
interest investigation involving a public entity client of one of our New York
offices for Risk Management Services and Healthcare Management. These subpoenas
did not relate to our billing practices. The Department of Justice has advised
our attorneys that this federal investigation is closed insofar as it relates to
us or any other individuals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on April 26, 2005 at our company
headquarters in Atlanta, Georgia. All director nominees and management proposals
were approved by our shareholders, as detailed below. There were no shareholder
proposals.
(a) Votes regarding the election of the persons named below as Directors
for a term expiring in 2006 were as follows:
For Withhold
--- --------
Jesse C. Crawford 23,586,876 575,496
Thomas W. Crawford 23,601,060 561,312
James D. Edwards 23,743,851 418,521
Robert T. Johnson 23,256,910 905,462
J. Hicks Lanier 22,552,767 1,609,605
Larry L. Prince 23,581,576 580,796
Clarence H. Ridley 23,258,610 903,762
John A. Williams 23,451,950 710,422
E. Jenner Wood, III 23,175,310 987,062
(b) Votes regarding ratification of the appointment of Ernst & Young LLP
as independent auditors of the Company to serve for the fiscal year
ending December 31, 2005 were as follows:
For: 23,950,029
Against: 206,806
Abstentions: 5,537
(c) Votes regarding approval of the Crawford & Company Executive Stock
Bonus Plan were as follows:
For: 20,843,112
Against: 1,680,393
Abstentions: 81,286
Broker Non-votes: 1,557,581
ITEM 6. EXHIBITS
See Index to Exhibits on page 33.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAWFORD & COMPANY
(Registrant)
Date: August 4, 2005 /s/ Thomas W. Crawford
---------------------------------------------
Thomas W. Crawford
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date: August 4, 2005 /s/ John F. Giblin
---------------------------------------------
John F. Giblin
Executive Vice President - Finance
(Principal Financial Officer)
Date: August 4, 2005 /s/ W. Bruce Swain
---------------------------------------------
W. Bruce Swain
Senior Vice President and Controller
(Principal Accounting Officer)
32
INDEX TO EXHIBITS
Exhibit
No. Description Page
- ------- ----------- ----
3.1 Restated Articles of Incorporation of the Registrant,
as amended (incorporated by reference to Exhibit 19.1
to the Registrant's quarterly report on Form 10-Q for
the quarter ended June 30, 1991) -
3.2 Restated By-laws of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the
Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 2004) -
15.1 Letter from Ernst & Young LLP 34
31.1 Certification of principal executive officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 35
31.2 Certification of principal financial officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 36
32.1 Certification of principal executive officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 37
32.2 Certification of principal financial officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 38
33