.
.
.
Exhibit 13
2005 Financial Review
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Management's Statement on Responsibility for
Financial Reporting 37
Management's Report on Internal Control over
Financial Reporting 38
Report of Independent Registered Public Accounting
Firm on Management's Assessment of Internal Control
over Financial Reporting 39
Report of Independent Registered Public Accounting
Firm on Financial Statements 40
Consolidated Statements of Income 41
Consolidated Balance Sheets 42
Consolidated Statements of Shareholders' Investment 44
Consolidated Statements of Cash Flows 45
Notes to Consolidated Financial Statements 46
Selected Financial Data 65
Quarterly Financial Data (unaudited)
Dividend Information and Common Stock Quotations 66
Shareholder Information, Board of Directors and Officers IBC
CRAWFORD & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This annual report contains and incorporates by reference forward-looking
statements within the meaning of that term in the Private Securities Litigation
Reform Act of 1995 (the "1995 Act"). We desire to take advantage of the "safe
harbor" provisions of the 1995 Act. The 1995 Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide information without
fear of litigation so long as those statements are identified as forward-looking
and are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
projected.
Statements contained in this report that are not historical in nature are
forward-looking statements made pursuant to the "safe harbor" provisions of the
1995 Act. These statements are included throughout this report, and in the
documents incorporated by reference in this report, and relate to, among other
things, projections of revenues, earnings, earnings per share, cash flows,
capital expenditures, working capital or other financial items, output,
expectations, or trends in revenues or expenses. These statements also relate to
our business strategy, goals and expectations concerning our market position,
future operations, margins, case volumes, profitability, contingencies, debt
covenants, liquidity, and capital resources. The words "anticipate", "believe",
"could", "would", "should", "estimate", "expect", "intend", "may", "plan",
"goal", "strategy", "predict", "project", "will" and similar terms and phrases
identify forward-looking statements in this report and in the documents
incorporated by reference in this report.
Additional written and oral forward-looking statements may be made by us from
time to time in information provided to the Securities and Exchange Commission,
press releases, our website, or otherwise.
Although we believe the assumptions upon which these forward-looking statements
are based are reasonable, any of these assumptions could prove to be inaccurate
and the forward-looking statements based on these assumptions could be
incorrect. Our operations and the forward-looking statements related to our
operations involve risks and uncertainties, many of which are outside our
control, and any one of which, or a combination of which, could materially
affect our results of operations and whether the forward-looking statements
ultimately prove to be correct. Included among, but not limited to, the risks
and uncertainties we face are global economic conditions, interest
rates, foreign exchange rates, regulations and practices of various governmental
authorities, the competitive environment, the financial conditions of our
clients, regulatory changes related to funding of defined benefit pension plans,
changes in the degree to which property and casualty insurance carriers
outsource their claims handling functions, changes in overall employment levels
and associated workplace injury rates in the U. S., the ability to identify new
revenue sources not tied to the insurance underwriting cycle, the ability to
develop or acquire information technology resources to support and grow our
business, the ability to attract and retain qualified personnel, renewal of
existing major contracts with clients on satisfactory financial terms, general
1
risks associated with doing business outside the U.S., possible legislation or
changes in market conditions that may curtail or limit growth in product
liability and securities class actions, man-made disasters and natural
disasters.
Actual results and trends in the future may differ materially from those
suggested or implied by the forward-looking statements. We undertake no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events anticipated or
unanticipated. All future written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by the cautionary statements made herein.
BUSINESS OVERVIEW
Based in Atlanta, Georgia, Crawford & 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. Our
major service lines include property and casualty claims management, integrated
claims and medical management for workers' compensation, legal settlement
administration including class action and warranty inspections, and risk
management information services. Our shares are traded on the New York Stock
Exchange under the symbols CRDA and CRDB.
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 legal settlement administration 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. Such services are generally referred to
by us as class action services.
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. Accordingly, we cannot predict case volumes which may be
referred to us in the future.
We generally earn our revenues on an individual fee-per-claim basis.
Accordinglly, 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
2
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 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 CONSOLIDATED OPERATIONS
Consolidated net income was $12,881,000 for 2005 as compared to $25,172,000 in
2004 and $7,662,000 in 2003. Consolidated net income for 2004 included a special
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 was reduced by a
nondeductible payment of $8.0 million under an agreement with the U.S.
Department of Justice to resolve an investigation into our billing practices.
With the exception of income taxes, net corporate interest expense, and special
credits and charges, our results of operations are discussed and analyzed by our
two operating segments: U.S. Operations and International Operations. The
discussion and analysis of our two operating segments follows the sections on
income taxes, net corporate interest expense, and special credit and charge.
INCOME TAXES
Taxes on income totaled $7.1 million, $12.3 million, and $9.0 million for 2005,
2004, and 2003, respectively. Our consolidated effective tax rate may change
periodically due to changes in enacted tax rates, fluctuations in the mix of
income earned from our various international operations, and our ability to
utilize net operating loss carryforwards in certain of our international
subsidiaries. Our effective tax rate for 2005 was 35.4%. Our effective tax rate
for 2004 was 37.4%, excluding a tax refund claim of $1.7 million. In 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. Our effective tax rate for 2003 was
36.4%, excluding the effect of a special $8.0 million after-tax charge. During
November 2003, we made a nondeductible payment of $8.0 million in connection
with the settlement of a U.S. Department of Justice investigation.
NET CORPORATE INTEREST EXPENSE
Net corporate interest expense is comprised of interest expense that we incur on
our short- and long-term borrowings, partially offset by interest income we earn
on available cash balances. These amounts vary based on interest rates,
borrowings outstanding, and the amounts of invested cash. Net corporate interest
expense totaled $5.1 million, $3.5 million, and $5.4 million for 2005, 2004, and
2003, respectively. For 2004, net corporate interest expense included interest
income of $1.8 million associated with the tax refund claim discussed above.
3
SPECIAL CREDIT AND SPECIAL CHARGE
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. The note
receivable has been paid in its entirety.
During November 2003, we made a nondeductible 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.
SEGMENT OPERATING EARNINGS
Our reportable segments, U.S. Operations and International Operations, 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 the front inside cover of 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.
Operating earnings, a non-GAAP (generally accepted accounting principles)
financial measure, is one of the key performance measures our senior management
and chief decision maker use to evaluate the performance of our operating
segments and make resource allocation decisions. We believe this measure is
useful to investors in that it allows them to evaluate our operating performance
using the same criteria our management uses. Operating earnings exclude income
tax expense, net corporate interest expense, and special credits and charges.
Net corporate interest expense and income taxes are recurring components of our
net income, but they are not considered part of our segment operating earnings
since they are managed on a corporate-wide basis. Net corporate interest expense
results from capital structure decisions made by management, and income taxes
are based on statutory rates in effect in each of the locations where we provide
services and vary throughout the world. Neither of these costs relates directly
to the performance of our services, and therefore both are excluded from segment
operating earnings in order to better assess the results of our segment
operating activities on a consistent basis. Special credits and charges
represent events that are not considered part of our segment operating earnings
since they historically have not impacted our performance and are not expected
to impact our performance within the next two years.
In the normal course of our business, we sometimes pay for certain out-of-pocket
expenses that are reimbursed by our clients. Under GAAP, these out-of-pocket
expenses and associated reimbursements are reported as revenues and expenses in
our Consolidated Statements of Income. In some of the discussion and analysis
that follows, we do not believe it is informative to include the GAAP required
gross up of our revenues and expenses for these reimbursed expenses. The amounts
of reimbursed expenses and related revenues offset each other in our
Consolidated Statements of Income with no impact to our net income. Except where
noted, 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.
4
Our discussion and analysis of operating expenses is comprised of two
components. Compensation and Fringe Benefits include all compensation, payroll
taxes, and benefits provided to our employees which, as a service company,
represents our most significant and variable expense. Expenses Other Than
Compensation and Fringe Benefits include outsourced services, office rent and
occupancy costs, other office operating expenses, cost of risk, and amortization
and depreciation.
This discussion and analysis should be read in conjunction with our consolidated
financial statements and the accompanying notes.
5
Operating results for our U.S. and international operations, reconciled to net
income, were as follows:
(in thousands)
% Change
From Prior Year
--------------------
Years Ended December 31 2005 2004 2003 2005 2004
- ----------------------- -------- -------- -------- ------ ------
REVENUES:
U.S., before reimbursements $486,570 $478,137 $471,847 1.8% 1.3%
International, before reimbursements 285,413 255,430 219,086 11.7% 16.6%
-------- -------- --------
Total, before reimbursements 771,983 733,567 690,933 5.2% 6.2%
Reimbursements 82,784 78,095 77,077 6.0% 1.3%
-------- -------- --------
Total Revenues $854,767 $811,662 $768,010 5.3% 5.7%
COMPENSATION & FRINGE BENEFITS:
U.S. $304,188 $290,804 $290,135 4.6% 0.2%
% of Revenues before reimbursements 62.5% 60.8% 61.5%
International 199,421 175,538 152,231 13.6% 15.3%
% of Revenues before reimbursements 69.9% 68.7% 69.5%
-------- -------- --------
Total $503,609 $466,342 $442,366 8.0% 5.4%
% of Revenues before reimbursements 65.2% 63.6% 64.0%
EXPENSES OTHER THAN COMPENSATION &
FRINGE BENEFITS:
U.S. $170,625 $166,533 $158,423 2.5% 5.1%
% of Revenues before reimbursements 35.1% 34.8% 33.6%
International 72,664 68,306 60,104 6.4% 13.6%
% of Revenues before reimbursements 25.4% 26.8% 27.4%
-------- -------- --------
Total 243,289 234,839 218,527 3.6% 7.5%
% of Revenues before reimbursements 31.5% 32.0% 31.6%
Reimbursements 82,784 78,095 77,077 6.0% 1.3%
-------- -------- --------
Total $326,073 $312,934 $295,604 4.2% 5.9%
% of Revenues 38.1% 38.6% 38.5%
OPERATING EARNINGS:
U.S. $ 11,757 $ 20,800 $ 23,289 (43.5%) (10.7%)
% of Revenues before reimbursements 2.4% 4.4% 4.9%
International 13,328 11,586 6,751 15.0% 71.6%
% of Revenues before reimbursements 4.7% 4.5% 3.1%
ADD/(DEDUCT):
SPECIAL CREDIT (CHARGE) -- 8,573 (8,000) (100.0%) 207.2%
NET CORPORATE INTEREST EXPENSE (5,145) (3,536) (5,414) 45.5% (34.7%)
INCOME TAXES (7,059) (12,251) (8,964) (42.4%) 36.7%
-------- -------- --------
NET INCOME $ 12,881 $ 25,172 $ 7,662 (48.8%) 228.5%
======== ======== ========
6
U.S. OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004
REVENUES BEFORE REIMBURSEMENTS
U.S. revenues before reimbursements, by market type, for 2005 and 2004 were as
follows:
(in thousands) 2005 2004 Variance
- -------------- -------- -------- --------
Insurance companies $222,515 $233,531 (4.7%)
Self-insured entities 152,523 158,190 (3.6%)
Class action services 111,532 86,416 29.1%
-------- --------
TOTAL U.S. REVENUES BEFORE REIMBURSEMENTS $486,570 $478,137 1.8%
======== ========
Revenues before reimbursements from insurance companies decreased 4.7% to $222.5
million in 2005 compared to $233.5 million in 2004, which reflected a $6.1
million decline in catastrophe-related revenues from the 2004 period when we
were responding to the hurricanes that struck the southeastern United States.
Revenues generated by our catastrophe adjusters totaled $36.4 million in 2005
compared to $42.5 million in 2004. The decrease in revenues from insurance
company clients was also due to a continued softening in referrals for
high-frequency, low-severity claims during 2005. Revenues from self-insured
entities decreased 3.6%, to $152.5 million in 2005 from $158.2 million in 2004,
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 29.1%, from $86.4 million in 2004 to $111.5
million in 2005 due to several major securities class action projects. Class
action services revenues are project-based and can fluctuate significantly.
REIMBURSEMENTS INCLUDED IN TOTAL REVENUES
Reimbursements for out-of-pocket expenses included in total revenues for our
U.S. operations were $52.9 million in 2005, increasing from $49.1 million in
2004. This increase was primarily attributable to our class action services unit
which had higher out-of-pocket costs in 2005 related to the increase in class
action services revenues.
7
CASE VOLUME ANALYSIS
Excluding class action services revenues, U.S. unit volume, measured principally
by cases received, decreased 10.7% from 2004 to 2005. This decrease was
partially offset by a 7.2% revenue increase from changes in the mix of services
provided and in the rates charged for those services, resulting in a net 3.5%
decrease in U.S. revenues before reimbursements from 2004 to 2005. The decrease
in referrals of high-frequency, low-severity claims increased our average
revenue per claim in 2005. Growth in class action services revenues, which are
project-based, increased U.S. revenues before reimbursements by 5.3% in 2005.
Excluding class action services, U.S. unit volume by major service line, as
measured by cases received, for 2005 and 2004 was as follows:
(whole numbers) 2005 2004 Variance
- --------------- ------- ------- --------
Property 216,813 255,030 (15.0%)
Casualty 190,287 209,110 (9.0%)
Workers' Compensation 139,670 148,902 (6.2%)
Vehicle 126,486 144,306 (12.3%)
Other 21,367 20,808 2.7%
------- -------
TOTAL U.S. CASES RECEIVED 694,623 778,156 (10.7%)
======= =======
During 2004, property claims increased significantly due to the four hurricanes
that struck Florida and other southeastern states. Hurricanes Katrina, Rita, and
Wilma did not generate the same claims volume for us in 2005. The declines in
casualty and workers' compensation claims in 2005 were 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. The decline in
vehicle claims during 2005 was due to a decline in referrals of high-frequency,
low-severity claims from our insurance company clients.
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 before reimbursements increased to 62.5% in 2005 as compared to 60.8%
in 2004. This increase primarily reflected an increase in capacity in our U.S.
claims management operations due to the decline in claims volume. We have
maintained our existing service capabilities in our U.S. field operations as we
continue to focus on growing market share in our U.S. markets. Average full-time
equivalent employees totaled 4,287 in 2005, up slightly from 4,263 in 2004.
U.S. salaries and wages increased 4.7%, to $251.7 million in 2005 from $240.5
million in 2004. This increase was primarily a result of merit salary increases
granted during the year. Payroll taxes and fringe benefits for U.S. operations
totaled $52.5 million in 2005, increasing 4.4% from 2004 costs of $50.3 million.
The increase for 2005 was primarily due to higher costs in our self-insured
workers' compensation and employee group medical benefit programs.
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 before reimbursements to
35.1% in 2005 from 34.8% in 2004. This increase reflected higher outsourced
administration fees associated with growth in class action services revenues
during 2005.
8
REIMBURSED EXPENSES
Reimbursed out-of-pocket expenses included in total expenses for our U.S.
operations were $52.9 million in 2005, increasing from $49.1 million in 2004.
This increase was primarily attributable to our class action services unit which
had higher out-of-pocket costs in 2005 related to the increase in class action
services revenues.
YEARS ENDED DECEMBER 31, 2004 AND 2003
REVENUES BEFORE REIMBURSEMENTS
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 before Reimbursements $478,137 $471,847 1.3%
======== ========
Revenues before reimbursements 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 that 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 generated by 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 net 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. Class action services revenues are project-based
and can fluctuate significantly.
REIMBURSEMENTS INCLUDED IN TOTAL REVENUES
Reimbursements for out-of-pocket expenses included in total revenues for our
U.S. operations increased slightly to $49.1 million in 2004 from $49.0 million
in 2003.
CASE VOLUME ANALYSIS
Excluding class action services revenues, 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 before reimbursements from 2003 to 2004. Growth in class action
services revenues, which are project-based, increased U.S. revenues before
reimbursements by 2.5% in 2004.
Excluding 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
- --------------- ------- ------- --------
Property 255,030 224,432 13.6%
Casualty 209,110 213,980 (2.3%)
Workers' Compensation 148,902 180,787 (17.6%)
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.
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 hurricane-related claims.
Our decline in workers' compensation
9
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. The decline in
vehicle claims was due to a decline in referrals of high-frequency, low-severity
claims from our insurance company clients.
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 before reimbursements decreased to 60.8% in 2004 as compared to 61.5%
in 2003, reflecting greater utilization of our operating capacity due to the
increase in catastrophe claims in the second half of 2004. In response to the
overall 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.
U.S. salaries and wages increased 2.1%, to $240.5 million in 2004 from $235.6
million in 2003. This increase reflected higher compensation expense in our
catastrophe unit due to the hurricanes that 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 expenses of
$54.5 million. This decrease primarily reflected a reduction in pension expense
of $5.4 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 before reimbursements to
34.8% in 2004 from 33.6% in 2003. This increase reflected higher outsourced
administration fees associated with growth in class action services revenues
during 2004.
REIMBURSED EXPENSES
Reimbursed expenses included in total expenses for our U.S. operations increased
slightly to $49.1 million in 2004 from $49.0 million in 2003.
INTERNATIONAL OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004
REVENUES BEFORE REIMBURSEMENTS
Substantially all international revenues were derived from the insurance company
market.
Revenues before reimbursements from our international operations totaled $285.4
million in 2005, an 11.7% increase from the $255.4 million reported in 2004.
Excluding acquisitions, international unit volume, measured principally by cases
received, increased 21.1% in 2005 compared to 2004. Our third quarter 2004
acquisition of the net assets of Cabinet Mayoussier, Cabinet Tricaud, and TMA in
France increased international revenues by 0.8% in 2005. Revenues before
reimbursements decreased 14.6% due to changes in the mix of services provided
and in the rates charged for those services. Growth in high-frequency,
low-severity claims 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 during 2005. However,
10
this decline in average revenue per claim was offset by higher unit volume,
resulting in an overall revenue increase in 2005. See the following analysis of
international cases received. Revenues before reimbursements reflected a 4.4%
increase during 2005 due to the positive effect of a weak U.S. dollar, primarily
as compared to the British pound and the euro.
REIMBURSEMENTS INCLUDED IN TOTAL REVENUES
Reimbursements for out-of-pocket expenses included in total revenues for our
international operations increased to $29.9 million in 2005 from $29.0 million
in 2004. This increase was primarily due to the positive effect of a weak U.S.
dollar, as compared to the British pound and the euro.
CASE VOLUME ANALYSIS
International unit volume by region for 2005 and 2004 was as follows:
(whole numbers) 2005 2004 Variance
- --------------- ------- ------- --------
United Kingdom 142,313 110,361 29.0%
Americas 125,192 113,701 10.1%
CEMEA 116,569 88,802 31.3%
Asia/Pacific 39,082 36,488 7.1%
------- -------
TOTAL INTERNATIONAL CASES RECEIVED 423,156 349,352 21.1%
======= =======
The increase in the U.K. during 2005 was due to claims received from new
contracts entered into during 2004 and 2005. The increase in the Americas was
primarily due to flood-related claims activity in Canada during the 2005 third
and fourth quarters. The increase in CEMEA was primarily due to weather-related
claims in Sweden received from two new clients and an increase in claims
received from new contracts entered into during 2004 and 2005. The increase in
Asia/Pacific was due to weather-related claims in various countries.
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues before reimbursements, compensation expense, including
related payroll taxes and fringe benefits, increased to 69.9% in 2005 from 68.7%
in 2004. This increase was due to higher incentive compensation expense related
to the increase in international operating earnings, primarily in the U.K. There
was an average of 3,238 full-time equivalent employees in 2005, up from 3,158 in
2004.
Salaries and wages of international personnel increased 12.7% to $167.2 million
in 2005 compared to $148.3 million in 2004, increasing as a percent of revenues
before reimbursements from 58.1% in 2004 to 58.6% in 2005. Payroll taxes and
fringe benefits increased 18.4% to $32.2 million in 2005 compared to $27.2
million in 2004, increasing as a percent of revenues before reimbursements from
10.6% in 2004 to 11.3% in 2005. 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 2005.
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 before reimbursements from
26.8% in 2004 to 25.4% in 2005. This decrease was primarily due to lower bad
debt expense resulting
11
from improved collections and also due to greater utilization of our leased
office space in response to the increase in incoming cases in the U.K. and
CEMEA.
REIMBURSED EXPENSES
Reimbursed expenses for out-of-pocket costs included in total expenses for our
international operations increased to $29.9 million in 2005 from $29.0 million
in 2004. This increase was due to a decline in the value of the U.S. dollar
against other major currencies.
YEARS ENDED DECEMBER 31, 2004 AND 2003
REVENUES BEFORE REIMBURSEMENTS
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 before reimbursements by 0.7% in 2004.
Revenues before reimbursements increased 4.3% due to changes in the mix of
services provided and in the rates charged for those services. Revenues before
reimbursements 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.
REIMBURSEMENTS INCLUDED IN TOTAL REVENUES
Reimbursements for out-of-pocket expenses included in total revenues for our
international operations increased to $29.0 million in 2004 from $28.1 million
in 2003. This increase was due to a greater use of outside experts associated
with handling hurricane-related claims in the Caribbean during 2004.
CASE VOLUME ANALYSIS
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
- --------------- ------- ------- --------
United Kingdom 110,361 96,429 14.4%
Americas 113,701 117,789 (3.5%)
CEMEA 84,831 86,504 (1.9%)
Asia/Pacific 36,488 39,475 (7.6%)
------- -------
Total International Cases Received 345,381 340,197 1.5%
======= =======
The increase in the U.K. was largely due to additional 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 in the Americas was partially offset by an increase in weather-related
claims in the Caribbean. The decrease in 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.
12
COMPENSATION AND FRINGE BENEFITS
As a percent of revenues before reimbursements, compensation expense, including
related payroll taxes and fringe benefits, decreased to 68.7% in 2004 from 69.5%
in 2003 due primarily to greater utilization of operating capacity within the
U.K. as a result of an increase in claims volume. 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 15.0% to $148.3 million
in 2004 compared to $129.0 million in 2003, decreasing as a percent of revenues
before reimbursements from 58.9% in 2003 to 58.1% 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 before
reimbursements at 10.6% in 2004 and 2003. 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 before reimbursements from
27.4% in 2003 to 26.8% 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.
REIMBURSED EXPENSES
Reimbursed expenses for out-of-pocket costs included in total expenses for our
international operations increased to $29.0 million in 2004 from $28.1 million
in 2003. This increase was due to the greater use of outside experts associated
with handling hurricane-related claims in the Caribbean during 2004.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At December 31, 2005, our working capital balance (current assets less current
liabilities) was approximately $125.8 million, a decrease of $5.0 million from
the working capital balance at December 31, 2004. Cash and cash equivalents at
the end of 2005 totaled $49.4 million, increasing $5.9 million from $43.6
million at the end of 2004.
13
CASH PROVIDED BY OPERATING ACTIVITIES
Cash provided from operations increased by $4.1 million, from $35.8 million in
2004 to $39.8 million in 2005, despite lower net income in 2005 compared to
2004. Cash was generated in 2005 by the collections of accounts receivable
related to the hurricanes that struck the southeastern U.S. and Caribbean region
late in 2004 and by improved collections in our class action services unit.
These collections were partially offset by higher income tax payments in 2005.
Income tax payments in 2005 were $10.6 million compared to net refunds received
of $2.0 million in 2004. Cash provided by operations in 2005 included $2.1
million of reimbursements received from lessors for leasehold improvements we
made to several of our offices under operating leases. During 2005, we made cash
contributions of $6.7 million to our U.S. defined contribution retirement plan
compared to $6.4 million in 2004. We plan to make contributions of $6.5 million
in 2006 to this plan. Cash of $3.7 million was used to fund our defined benefit
pension plans in 2005 compared to $4.1 million in 2004. During 2006, we expect
to contribute $5.6 million to our defined benefit pension plans. Proposed
legislation in the U.S. Congress and recent regulatory changes in the U.K. could
significantly increase required future funding of our U.S. and U.K. defined
benefit pension plans.
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities declined by $1.9 million, from $16.6 million
in 2004 to $14.7 million in 2005. Net of the $2.1 million in leasehold
improvements funded by lessors, cash used to acquire property and equipment,
including capitalized software, increased $2.1 million from $18.2 million in
2004 to $20.3 million in 2005. We estimate our capital additions in 2006,
including capitalized software, will approximate 2005 levels. Also in 2005, we
received $7.6 million in full payment of a note receivable related to the 2004
sale of an undeveloped parcel of land.
CASH USED IN FINANCING ACTIVITIES
Cash used in financing activities declined by $3.4 million, from $22.2 million
in 2004 to $18.8 million in 2005. Net debt reduction, primarily for short-term
borrowings, was $8.0 million in 2005 compared to $11.3 million in 2004. During
2006, we are required to make a $5.6 million installment payment on our senior
$50.0 million note payable. Cash dividends to shareholders in 2005 were not
significantly different than 2004, approximating $11.7 million for each year. As
a percentage of net income, cash dividends totaled 91.2% in 2005, compared to
58.7% (before special credit) in 2004.
The Board of Directors declares cash dividends to shareholders each quarter
based on an assessment of current and projected earnings and cash flows. Our
ability to pay future dividends could be impacted by many factors including the
funding requirements for our defined benefit pension plans, repayments of
outstanding borrowings, and future levels of cash generated by our operating
activities.
Our senior debt and revolving credit agreement contain various provisions that
limit the incurrence of certain liens, encumbrances, and disposition of assets
in excess of defined amounts, none of which we expect to restrict future
operations. Based on these provisions, a maximum amount of $16,881,000 of our
retained earnings at December 31, 2005 is available for the payment of cash
dividends to shareholders in 2006.
During 2005, we did not repurchase any shares of our Class A or Class B Common
Stock. As of December 31, 2005, 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
14
future due to the decline in the funded status of our defined benefit pension
plans (see Note 2 of the consolidated financial statements).
OTHER MATTERS CONCERNING LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
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 was renewed
on September 30, 2005, and the expiration date of the credit line was extended
to September 2010. The renewal did not change the dollar amount of the credit
line or interest rate terms. As a component of this credit line, we maintain a
letter of credit facility to satisfy certain of our own contractual obligations.
Including $13.3 million committed under the letter of credit facility, the
balance of our unused line of credit totaled $27.8 million at December 31, 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 December 31, 2005
totaled $28.9 million, decreasing from $36.7 million at the end of 2004.
Long-term borrowings outstanding, including current installments, totaled $52.3
million as of December 31, 2005, compared to $53.4 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 our MD&A for further discussion and analysis 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 12 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 the end of 2005 was $179.0 million, compared with
$194.8 million at the end of 2004. This decline was the result of dividends paid
to shareholders and an increase in our minimum pension liabilities, partially
offset by net income and net positive currency translations.
During 2005, we recorded an adjustment to Accumulated Other Comprehensive Loss,
a component of Shareholders' Investment, to increase our minimum pension
liabilities by $17.1 million, net of related tax benefit. During 2004, we
recorded an adjustment to increase our minimum pension liabilities by $2.2
million, net of related tax benefit. These non-cash items resulted primarily
from fluctuations in the fair market value of our pension investments as of the
plans' respective measurement dates and an overall decline in applicable
interest rates used to discount the plans' liabilities during 2005 and 2004.
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
15
financial statements requires us 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, we evaluate these estimates and judgments 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
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.
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 risks 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 a
historical evaluation of actual claim closing rates by major lines of coverage.
Additionally, recent claim closing rates are evaluated to ensure that current
claim closing history does not indicate a significant deterioration or
improvement in the longer-term historical closing rates used.
Our fixed-fee service arrangements typically call for us to handle claims on
either a one- or two-year basis, or for the lifetime of the claim. In cases
where we handle a claim on a non-lifetime basis, we typically receive an
additional fee on each anniversary date that the claim remains open. For service
arrangements where we provide services for the life of the claim, we are only
paid one fee for the life of the claim, regardless of the ultimate duration of
the claim. As a result, our deferred revenues for claims handled for one or two
years are not as sensitive to changes in claim closing rates since the revenues
are ultimately recognized in the near future and additional fees are generated
for handling long-lived claims. Deferred revenues for lifetime claim handling
are considered more sensitive to changes in claim closing rates since we are
obligated to handle these claims to their ultimate conclusion with no additional
fees for long-lived claims.
Based upon our historical averages, we close approximately 99% of all cases
referred
16
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, 2005, deferred revenues related to lifetime claim handling
arrangements approximated $15.4 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 $392,000, which
is less than a $0.01 impact on net income per share, for the year ended December
31, 2005. If our average claim closing rates for lifetime claims increased by
1%, we would have recognized additional revenues of approximately $331,000,
which is less than a $0.01 impact on net income per share, for the year ended
December 31, 2005.
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 for estimated losses resulting from
the inability of our clients to make required payments and adjustments clients
may make to invoiced amounts. Losses resulting from the inability of clients to
make required payments are accounted for as bad debt expense, while adjustments
to invoices made by clients are accounted for as reductions to revenues. 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, 2005, our allowance for doubtful accounts totaled $16.0
million or approximately 8.9% of gross billed 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 receivables, reflecting
either an increase or decrease in expected future write-offs, the impact to 2005
pretax income would have been approximately $1.8 million, or $0.02 on net income
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
17
possible impairment, we perform 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. We believe goodwill and other long-lived assets were appropriately
valued and not impaired at December 31, 2005.
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 segments as determined by discounting future projected
cash flows. Based upon our analysis completed in the 2005 fourth quarter, we did
not have an impairment of goodwill in 2005. The estimated market values of our
segments are based upon certain assumptions made by us. 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 revenue
growth rate assumption used to value our operating segments decreased to zero
from 3.5%, or our weighted-average cost of capital assumption increased by 300
basis points from 10% 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 similar 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., U.K., and Holland
which cover a substantial number of employees in each location. We use a
September 30 measurement date to determine pension expense under SFAS 87,
"Employers' Accounting for Pensions" ("SFAS 87"), for our U.S. defined benefit
pension plan and an October 31 measurement date for our international defined
benefit pension plans. Our U.S. defined benefit retirement plan was frozen on
December 31, 2002. Our U.K. defined benefit retirement plans have also been
frozen for new employees, but existing participants may still accrue additional
benefits. Benefits payable under our U.S. and Holland defined benefit retirement
plans 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 securities and fixed
income investments, with a target allocation of approximately 40% to 80% in
equity securities and 20% to 60% in fixed income investments.
We use the services of independent actuaries for our defined benefit pension
plans. We review the actuarial assumptions on an annual basis and select the
assumptions to be used by the actuaries. The major assumptions used in
accounting for the plans in 2005 were a discount rate of 5.79% and an expected
return on plan assets ranging from 7.40% to 8.50%. For the annual discount rate
assumption, we have adopted an appropriate single discount rate based on a
portfolio of investment grade corporate bonds matched to the future payment of
the benefit obligations. The expected long-term rates of return on plan assets
are based on the plans' asset mix, actual historical returns on equity
securities and fixed income investments held by the plans, and an assessment of
expected future returns.
18
The estimated liabilities for our defined benefit pension plans are 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
2005 pretax income would have been approximately $2.1 million, or $0.03 on net
income per share. If our assumption for the discount rate changed by 0.25%,
representing either an increase or decrease in interest rates used to value
pension plan liabilities, the impact to 2005 pretax income would have been
approximately $1.6 million, or $0.02 on net income 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 liabilities, 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 enacted statutory tax rates
for the year in which we estimate these differences will reverse.
We must estimate the timing of the reversal of temporary differences, as well as
whether taxable income in future periods will be sufficient to fully recognize
any gross deferred tax assets. Other factors which influence the effective tax
rate include changes in enacted statutory tax rates, changes in the composition
of taxable income from the countries in which we operate, and our ability to
utilize net operating loss carryforwards in certain of our international
subsidiaries.
Our effective tax rate was 35.4% of pretax income for 2005. If our effective tax
rate changed by 1%, we would have recognized an increase or decrease to income
tax expense of approximately $199,000, or less than a $0.01 impact on net income
per share, for the year ended December 31, 2005.
The estimate for income taxes is a critical accounting estimate for both our
U.S. and international segments.
SELF-INSURED RISKS
We self insure certain insurable risks consisting primarily of professional
liability, employee medical and disability, workers' compensation, and auto
liability. Insurance
19
coverage is obtained for catastrophic property and casualty exposures, including
professional liability on a claims-made basis, and those risks required to be
insured by law or contract. Provisions for claims incurred under self-insured
programs are made based on our estimates of the aggregate liabilities for claims
incurred, losses that have occurred but have not been reported to us, and the
adverse development of reserves on reported losses. These estimated liabilities
are calculated based on historical claim payment experience, the expected life
of the claims, and the reserves established on the claims. The liabilities for
claims incurred under our self-insured workers' compensation and employee
disability programs are discounted at the prevailing risk-free rate for
government issues of an appropriate duration. All other self-insured liabilities
are undiscounted. Each quarter we evaluate the adequacy of the assumptions used
in developing these estimated liabilities and make adjustments as necessary.
Changes in estimates are recognized in the period in which they are determined.
As of December 31, 2005, our estimated liability for self-insured risks totaled
$26.8 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 our provisions for self-insured losses are adequate to
cover the ultimate net cost of losses incurred. However, these provisions are
estimates and amounts ultimately settled may be significantly greater or less
than the provisions established. If the average discount rate we used to
determine the present value of our self-insured workers' compensation and
employee disability liabilities had changed by 1%, reflecting either an increase
or decrease in underlying interest rates, our estimated liabilities for these
self-insured risks would have been impacted by approximately $417,000, resulting
in an increase or decrease to 2005 net income of approximately $269,000, or
$0.01 per share.
The estimate for self-insured risks is a critical accounting estimate for our
U.S. segment.
NEW ACCOUNTING STANDARDS
Information related to new accounting standards adopted during 2005, 2004, and
2003 is provided in Note 1 to our consolidated financial statements contained in
this Annual Report. Information related to our pending adoptions of new
accounting standards is provided in the "Factors That May Affect Future Results"
section of this MD&A.
MARKET RISK
DERIVATIVES
We did not enter into any transactions using derivative financial instruments or
derivative commodity instruments during the years ended December 31, 2005, 2004,
or 2003.
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 before reimbursements from international
operations were 37.0%, 34.8%, and 31.7% of total revenues before reimbursements
for 2005, 2004, and 2003, 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.
20
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, 2005 were used to perform the sensitivity analysis.
Such analysis indicated that a hypothetical 10% change in foreign currency
exchange rates would have increased or decreased pretax income by approximately
$1,097,000, or $0.01 on net income per share, during 2005 had the U.S. dollar
exchange rate increased or decreased 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. As of
December 31, 2005, we had $28.9 million in short-term borrowings outstanding,
including bank overdraft facilities, with an average variable interest rate of
5.9%. If the average interest rate increased or decreased by 1%, the impact to
2005 pretax income would have been approximately $289,000, or less than a $0.01
impact on net income per share.
Changes in the projected benefit obligations of our defined benefit pension
plans are largely dependent on changes in prevailing interest rates that we use
to value these obligations under SFAS 87 as of the plans' respective measurement
dates. 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 pension plans would have changed by
approximately $19.3 million. The impact of this change to 2005 pretax income
would have been approximately $1.6 million, or $0.02 on net income 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 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
On December 9, 2004, we received a subpoena from the State of New York, Office
of the Attorney General, requesting various documents relating to our
operations. We responded to that subpoena in early 2005 and the Office of the
Attorney General requested no additional documents. We anticipate that we will
have no further involvement in this matter. The actions taken by the Office of
the Attorney General have had no material impact on our financial condition,
results of operations, or cash flows.
21
We do not anticipate that this matter will have any effect on our financial
condition, results of operations, or cash flows in the future.
We were recently audited 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 focused its audit
on workers' compensation files which we handled on behalf of our clients in our
El Segundo, California office in 2001 and 2002. We have agreed in principle to
resolve the issues being reviewed by the Audit Unit and are currently
documenting an agreement. Based on discussions with representatives of the
Division of Workers' Compensation and the terms of the proposed agreement with
the Division, we do not believe that the resolution of the matter will have a
material effect on our financial condition, results of operations, or cash
flows.
CONTINGENT PAYMENTS
We normally structure business 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 2005 levels of
revenues and operating earnings, additional payments under existing earnout
agreements approximate $2.0 million through 2009, as follows: 2006 - $0; 2007 -
$0; 2008 - $1.858 million; and 2009 - $142,000.
At December 31, 2005, we have committed $13.3 million under letters of credit to
satisfy certain of our own 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
As of December 31, 2005, the impact that our contractual obligations (excluding
payments for interest and short-term borrowings) are expected to have on our
liquidity and cash flow in future periods is as follows:
Payments Due by Period
----------------------------------------------------------
Less than More than 5
(in thousands) 1 Year 1-3 Years 3-5 Years Years Total
- -------------- --------- --------- --------- ----------- --------
Long-term debt, including current
portions (Note 5) $ 6,091 $22,651 $22,525 $ 114 $ 51,381
Operating lease obligations (Note 4) 29,908 42,963 26,558 28,538 127,967
Capital lease obligations (Note 5) 350 381 128 11 870
Outsourced services obligation 12,194 2,541 -- -- 14,735
------- ------- ------- ------- --------
Total $48,543 $68,536 $49,211 $28,663 $194,953
======= ======= ======= ======= ========
The obligation for outsourced services relates to certain information technology
functions performed by a third-party provider under a contract with an initial
term that will expire during the first quarter of 2007.
22
PENSION EXPENSE AND FUNDING
Net periodic benefit costs for our defined benefit pension plans totaled
$7,795,000, $6,705,000 and $12,068,000 in 2005, 2004, and 2003, respectively.
Effective December 31, 2002, we froze our U.S. defined benefit pension plan and
replaced it with a defined contribution retirement plan. Future cash funding of
our U.S. and international defined benefit pension plans will depend largely on
future investment performance, interest rates, and regulatory requirements. The
unrecognized net loss on our defined benefit pension plans totaled $133,211,000
and $108,774,000 at the end of 2005 and 2004, respectively. This increase was
primarily due to a decline in long-term interest rates used to discount our
defined benefit pension liabilities. For 2006, we expect to make contributions
of approximately $5.6 million to our U.K. and Holland defined benefit pension
plans. We are currently not required to make any contributions to the U.S.
defined benefit pension plan in 2006. Pension costs for 2006 are expected to be
$8.9 million for our defined benefit pension plans. Cash contributions to our
U.S. defined contribution plan of approximately $6.5 million will be made in the
2006 first quarter.
PROPOSED LEGISLATION
We are aware of proposed U.S. 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 proposed 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 proposed
legislation has not been finalized or enacted into law. Our defined benefit
pension plans are significantly underfunded based on current long-term interest
rates used to discount our pension liabilities, and any future required
contributions to these plans could be substantial. The proposed U.S. legislation
affecting pension plan funding could result in the need for additional cash
payments by us into our U.S. defined benefit pension plan.
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, 2005, there was
$28.9 million outstanding on the revolving credit line, including bank
overdrafts of $0.7 million, with an average variable interest rate of 5.9%. In
addition, letters of credit of $13.3 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 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.
On September 30, 2005, we executed a First Amended and Restated Credit Agreement
("Amended Revolving Credit Agreement") to our existing $70.0 million Revolving
Credit Agreement dated October 2003. The Amended Revolving Credit Agreement does
not change the dollar amount of the credit line or interest rate terms. The
expiration date is extended to September 29, 2010.
23
On September 30, 2005, we also executed a Waiver and Amendment (the "Amended
Note Purchase Agreement") to our original Note Purchase Agreement of October
2003 involving our $50.0 million 6.08% senior notes payable. The Amended Note
Purchase Agreement does not change the interest rate, payment schedule, or
maturity date of the 6.08% senior notes.
Both the original Revolving Credit Agreement and the original Note Purchase
Agreement contained various provisions which required us to maintain defined
leverage ratios, fixed charge coverage ratios, and minimum net worth thresholds.
As a result of the amended agreements, the material provisions in the original
agreements were modified at September 30, 2005 as follows:
1) We must maintain, on a rolling four quarter basis, a leverage ratio of
consolidated debt to earnings before interest expense, income taxes,
depreciation, amortization, certain non-recurring charges, and
capitalization of internally developed software costs ("EBITDA") of no
more than 2.75 times EBITDA. This ratio is reduced to 2.50 times
EBITDA effective for the quarter ended September 30, 2006, and to 2.25
times EDITDA effective for the quarter ended September 30, 2007.
2) We must also maintain, on a rolling four quarter basis, a fixed charge
coverage ratio of EBITDA plus lease expenses ("EBITDAR") to total
fixed charges, consisting of interest expense and lease expense, of no
less than 1.5 times fixed charges through the quarter ended September
30, 2007. Effective the quarter ended December 31, 2007, this ratio
changes to no less than 1.75 times fixed charges.
3) We are also required to maintain a minimum net worth equal to
$167,200,000 plus 50% of our cumulative positive consolidated net
income earned after June 30, 2005, plus 100% of the net proceeds from
any equity offering, subject to terms and conditions. For purposes of
determining minimum net worth, any non-cash adjustments after June 30,
2005 related to our pension liabilities, goodwill, or foreign currency
translation are excluded.
4) During 2006, we are authorized to pay dividends to holders of our
common stock up to an amount not to exceed the sum of 2005
consolidated net income plus $4,000,000. All other original provisions
regarding the payments of dividends during the terms of these original
and amended agreements remain unchanged.
5) Prior to June 30, 2006, we are allowed to sell, or sell and lease
back, the real estate that comprises our corporate headquarters in
Atlanta, Georgia.
We were in compliance with these debt covenants as of December 31, 2005. 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 projected operating results for 2006, we expect to remain in compliance
with the financial covenants contained in the Amended Revolving Credit Agreement
and the Amended Notes Purchase Agreement throughout 2006.
24
However, there can be no assurance that our actual financial results will match
our planned results or that we will not violate the covenants.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2005, we have not entered into any off-balance sheet
arrangements that could materially impact our operations, financial conditions,
or cash flows.
PENDING ADOPTION OF NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued 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."
Additionally, the FASB issued three Staff Positions in 2005 related to SFAS
123R. In March 2005, the SEC issued Staff Accounting Bulletin 107, "Share-Based
Payments", which expresses the SEC staff's views on various SFAS 123R
implementation issues for public companies.
Generally, the approach in SFAS 123R is similar to the approach described in
SFAS 123. However, SFAS 123R requires companies to measure and recognize
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) to all prior periods presented, or (b) to
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 ("ESPP")
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 net 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
25
approximated the impact of SFAS 123 as described in the disclosure of pro forma
net income and earnings per share under "Stock-Based Compensation" in Note 1 to
the consolidated financial statements. Based on ESPP activity and stock options
issued through December 31, 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 $1,037,000 in 2006, 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 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.
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 error 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 errors 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.
26
CRAWFORD & COMPANY
MANAGEMENT'S STATEMENT 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. The 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, but not absolute, 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, were selected by the Audit Committee of the Board of Directors and approved
by shareholder vote. 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
accounting, disclosure and financial reporting 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 9, 2006
27
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Crawford & Company is responsible for establishing and
maintaining adequate internal control 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 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. The Company's internal control
over financial reporting includes 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 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.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005. 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.
Based on this assessment, management determined that the Company maintained
effective internal control over financial reporting as of December 31, 2005.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
report dated March 9, 2006, 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 9, 2006
28
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 Control Over Financial Reporting, that Crawford
& Company maintained effective internal control over financial reporting as of
December 31, 2005, 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's 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, 2005, is
fairly stated, in all material
29
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, 2005, 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, 2005 and 2004, and the related
consolidated statements of income, shareholders' investment, and cash flows for
each of the three years in the period ended December 31, 2005, and our report
dated March 9, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 9, 2006
30
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, 2005 and 2004, and the related consolidated
statements of income, shareholders' investment, and cash flows for each of the
three years in the period ended December 31, 2005. 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, 2005 and 2004, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2005, 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, 2005,
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 9, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 9, 2006
31
CRAWFORD & COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 2003
- -------------------------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Revenues before reimbursements $771,983 $733,567 $690,933
Reimbursements 82,784 78,095 77,077
-------- -------- --------
TOTAL REVENUES 854,767 811,662 768,010
-------- -------- --------
COSTS AND EXPENSES:
Costs of services provided, before reimbursements 607,951 565,863 530,362
Reimbursements 82,784 78,095 77,077
-------- -------- --------
COSTS OF SERVICES 690,735 643,958 607,439
Selling, general, and administrative expenses 138,947 135,318 130,531
Special (credit) and charge (Note 8) -- (8,573) 8,000
Corporate interest expense, net of interest income
of $714, $2,363, and $444, respectively 5,145 3,536 5,414
-------- -------- --------
TOTAL COSTS AND EXPENSES 834,827 774,239 751,384
-------- -------- --------
INCOME BEFORE INCOME TAXES 19,940 37,423 16,626
PROVISION FOR INCOME TAXES 7,059 12,251 8,964
-------- -------- --------
NET INCOME $ 12,881 $ 25,172 $ 7,662
======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.26 $ 0.52 $ 0.16
======== ======== ========
Diluted $ 0.26 $ 0.51 $ 0.16
======== ======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 48,930 48,773 48,668
======== ======== ========
Diluted 49,347 48,996 48,776
======== ======== ========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.24 $ 0.24 $ 0.24
======== ======== ========
Class B Common Stock $ 0.24 $ 0.24 $ 0.24
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
CRAWFORD & COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 2004
- ------------------ --------- ---------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,441 $ 43,571
Accounts receivable, less allowance for doubtful accounts
of $15,986 in 2005 and $21,859 in 2004 163,087 176,187
Unbilled revenues, at estimated billable amounts 109,319 103,586
Prepaid expenses and other current assets 14,964 21,363
--------- ---------
TOTAL CURRENT ASSETS 336,811 344,707
--------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 150,008 154,553
Less accumulated depreciation (113,071) (120,054)
--------- ---------
NET PROPERTY AND EQUIPMENT 36,937 34,499
--------- ---------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 110,035 109,410
Capitalized software costs, net 33,068 32,894
Deferred income tax assets 38,217 32,172
Other 16,596 17,578
--------- ---------
TOTAL OTHER ASSETS 197,916 192,054
--------- ---------
$ 571,664 $ 571,260
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
33
CRAWFORD & COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 2004
- ------------------ -------- --------
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 28,888 $ 36,731
Accounts payable 42,434 41,730
Accrued compensation and related costs 52,377 45,961
Self-insured risks 17,664 17,827
Accrued income taxes 17,880 22,760
Other accrued liabilities 25,670 24,062
Deferred revenues 19,608 22,682
Current installments of long-term debt and capital leases 6,441 2,056
-------- --------
TOTAL CURRENT LIABILITIES 210,962 213,809
-------- --------
NONCURRENT LIABILITIES:
Long-term debt and capital leases, less current installments 45,810 51,389
Deferred revenues 10,409 10,179
Self-insured risks 9,122 10,958
Minimum pension liabilities 101,406 73,893
Post-retirement medical benefit obligation 4,569 5,544
Other 10,355 10,655
-------- --------
TOTAL NONCURRENT LIABILITIES 181,671 162,618
-------- --------
SHAREHOLDERS' INVESTMENT:
Class A common stock, $1.00 par value, 50,000 shares authorized;
24,293 and 24,157 shares issued and outstanding in 2005 and 2004 24,293 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 6,311 5,606
Unearned stock-based compensation (37) --
Retained earnings 202,351 201,213
Accumulated other comprehensive loss (78,584) (60,840)
-------- --------
TOTAL SHAREHOLDERS' INVESTMENT 179,031 194,833
-------- --------
$571,664 $571,260
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
CRAWFORD & COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(in thousands) COMMON STOCK ACCUMULATED
------------------------ UNEARNED ADDITIONAL OTHER TOTAL
CLASS A CLASS B STOCK-BASED PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
NON-VOTING VOTING COMPENSATION CAPITAL EARNINGS LOSS INVESTMENT
------------ ---------- ------------ --------- --------- ----------------------------
Balance at December 31, 2002 -
(See Note 1) $ 23,925 $ 24,697 $ - $ 4,688 $ 191,767 $ (85,646) $ 159,431
Comprehensive income:
Net income - - - - 7,662 - 7,662
Currency 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 - 5,005 187,747 (68,882) 172,594
Comprehensive income:
Net income - - - - 25,172 - 25,172
Currency 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 - 5,606 201,213 (60,840) 194,833
Comprehensive loss:
Net income - - - - 12,881 - 12,881
Currency translation adjustment - - - - - (656) (656)
Minimum pension liability
adjustment (net of $7.7
million income tax benefit) - - - - - (17,088) (17,088)
------------ ---------- ----------- --------- --------- ------------ -----------
Total comprehensive loss (4,863)
Dividends paid - - - - (11,743) - (11,743)
Restricted shares issued 5 - (37) 32 - - -
Tax benefit from exercises
of stock options - - - 90 - - 90
Stock-based compensation - - - 92 - - 92
Shares issued in connection
with employee benefit plans 131 - - 491 - - 622
------------ ---------- ----------- --------- --------- ------------ -----------
Balance at December 31, 2005 $ 24,293 $ 24,697 $ (37) $ 6,311 $ 202,351 $ (78,584) $ 179,031
============ ========== =========== ========= ========= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
35
CRAWFORD & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 2003
- -------------------------------- -------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,881 $ 25,172 $ 7,662
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization 19,183 18,177 16,642
Deferred income taxes 3,926 3,758 1,603
Stock-based compensation 92 -- --
Loss (gain) on sales of land, property, and equipment 271 (7,786) 54
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net 12,422 (30,726) 18
Unbilled revenues (6,085) 3,191 1,042
Prepaid or accrued income taxes (7,230) 11,246 (4,640)
Accounts payable and accrued liabilities 6,509 9,444 11,689
Deferred revenues (3,105) 2,947 345
Prepaid and accrued pension costs 2,725 1,647 5,600
Prepaid expenses and other (1,766) (1,319) (2,814)
-------- -------- --------
Net cash provided by operating activities 39,823 35,751 37,201
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (15,328) (10,666) (11,136)
Acquisitions of businesses, net of cash acquired (121) (617) (277)
Capitalization of software costs (7,040) (7,574) (12,681)
Proceeds from 2004 sale of undeveloped land 7,562 2,028 --
Proceeds from sales of property and equipment 330 250 373
Other investing activity (112) -- --
-------- -------- --------
Net cash used in investing activities (14,709) (16,579) (23,721)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (11,743) (11,706) (11,682)
Proceeds from exercise of stock options 622 731 419
Increase in short-term borrowings 1,799 84 39,790
Payments on short-term borrowings (8,426) (10,031) (33,094)
Proceeds from long-term debt -- -- 50,272
Payments on long-term debt and capital leases (1,389) (1,347) (50,973)
Capitalized loan costs 313 31 891
-------- -------- --------
Net cash used in financing activities (18,824) (22,238) (4,377)
-------- -------- --------
Effects of exchange rate changes on cash and cash equivalents (420) 832 1,768
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,870 (2,234) 10,871
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,571 45,805 34,934
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 49,441 $ 43,571 $ 45,805
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
36
CRAWFORD & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MAJOR ACCOUNTING AND REPORTING POLICIES
NATURE OF OPERATIONS AND INDUSTRY CONCENTRATION
Based in Atlanta, Georgia, Crawford & 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 property and casualty claims management, integrated claims
and medical management for workers' compensation, legal settlement
administration including class action and warranty inspections, and risk
management information services. The Company's shares are traded on the New York
Stock Exchange under the symbols CRDA and CRDB. 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 other than 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.
Under Financial Accounting Standards Board ("FASB") Interpretation No.
46-Revised ("FIN 46R"), the Company consolidates the liabilities of its deferred
compensation plan and the related assets, which are held in a rabbi trust and
considered a variable interest entity of the Company under FIN 46R. At December
31, 2005, the liabilities under this deferred compensation plan were $8,064,000,
and the fair value of the assets held in the related rabbi trust were
$13,436,000. This variable interest entity is included in the Company's
consolidated financial statements.
PRIOR YEAR RECLASSIFICATIONS AND CORRECTIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
As previously disclosed in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2005, the Company recorded a
reclassification during the third quarter of 2005. This reclassification is
described below.
During 2002, the Company recorded in Accumulated Other Comprehensive Loss a tax
benefit of $4,165,000 related to exercises of stock options. During the third
quarter 2005, the Company reclassified this $4,165,000 tax benefit from
Accumulated Other Comprehensive Loss to Additional Paid-In Capital within
Shareholders' Investment as required by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued
37
to Employees" ("APB 25"). This reclassification, which is a correction of a
prior error, had no net impact on the Company's net income, financial position,
shareholders' investment, or cash flows. This reclassification has been
reflected in the accompanying Consolidated Balance Sheets and Consolidated
Statements of Shareholders' Investment as of December 31, 2002.
Related to this reclassification, the following revisions have been made to the
Company's Consolidated Statements of Shareholders' Investment and Consolidated
Balance Sheets:
Additional Accumulated Other
Paid-In Capital Comprehensive Loss
------------------------- -------------------------
As originally As originally
(in thousands) reported Corrected reported Corrected
- -------------- ------------- --------- ------------- ---------
Balance at:
December 31, 2002 $ 523 $4,688 $(81,481) $(85,646)
December 31, 2003 840 5,005 (64,717) (68,882)
December 31, 2004 1,441 5,606 (56,675) (60,840)
Total Accumulated Other Comprehensive Loss as reported in Note 1, Major
Accounting and Reporting Policies, to the Company's consolidated financial
statements originally issued for the years ended December 31, 2004 and 2003 has
been revised as follows to reflect this reclassification:
(in thousands) 2004 2003
- --------------- --------- ---------
Minimum pension liabilities $(107,281) $(103,741)
Tax benefit on minimum pension liabilities 39,083 37,761
--------- ---------
Minimum pension liabilities, net of tax benefit (68,198) (65,980)
Cumulative translation adjustment 7,358 (2,902)
--------- ---------
Total accumulated other comprehensive loss $ (60,840) $ (68,882)
========= =========
38
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. As previously disclosed in the Company's amended Annual Report on Form
10-K/A for the year ended December 31, 2003, the Company revised its
Consolidated Statement of Income for the year ended December 31, 2003 in order
to correctly reflect total reimbursements. The Company originally recorded
certain of these reimbursements as a reduction of cost of services rather than
reimbursement revenues. The impact of these revisions increased reimbursement
revenues and expenses by $35,129,000 for the year ending December 31, 2003.
These revisions had no effect on the Company's consolidated revenues before
reimbursements, net income, financial position, or cash flows as originally
reported.
The following table reconciles the Company's total revenues as originally
reported in 2003 to total revenues after reflecting the effects of the
revisions:
(in thousands) 2003
- -------------- --------
Total revenues, as originally reported $732,881
Effect of revision 35,129
--------
Total revenues, revised $768,010
========
The following table reconciles the Company's costs of services as originally
reported in 2003 to costs of services after reflecting the effects of the
revisions:
(in thousands) 2003
- -------------- --------
Costs of services, as originally reported $572,310
Effect of revision 35,129
--------
Costs of services, revised $607,439
========
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 current
liabilities, including cash and cash equivalents, accounts receivable, accounts
payable, and short-term borrowings, approximates carrying value due to the
short-term maturity of the instruments. The fair value of long-term debt
approximates carrying value based on the effective interest rates compared to
current market rates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and marketable securities with
original maturities of three months or less.
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 estimated allowance for doubtful accounts. Accounts outstanding longer than
the contractual payment terms are considered past due.
The Company maintains an allowance for doubtful accounts for estimated losses
resulting primarily from the inability of clients to make required payments and
for adjustments clients may make to invoiced amounts. Losses resulting from the
inability of clients to make required payments are accounted for as bad debt
expense, while adjustments to invoices made by clients are accounted for as
reductions to revenue. 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
39
uncollectible, and any payments subsequently received are accounted for as
recoveries. The Company's allowance for doubtful accounts on billed accounts
receivables was $15,986,000, $21,859,000, $20,832,000, and $19,633,000 at
December 31, 2005, 2004, 2003, and 2002, respectively.
For the years ended December 31, 2005, 2004, and 2003, the Company's adjustments
to revenues associated with client adjustments totaled $8.3 million, $7.5
million and $8.8 million, respectively. Provisions for bad debt expense for the
years ended December 31, 2005, 2004, and 2003 totaled $1.4 million, $3.9
million, and $3.1 million, respectively. Bad debt write-offs totaled $7.1
million, $3.1 million, and $2.1 million for the years ended December 31, 2005,
2004, and 2003, respectively.
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
Property and equipment, including capital leases, consisted of the following at
December 31, 2005 and 2004:
(in thousands) 2005 2004
- -------------- --------- ---------
Land $ 1,407 $ 1,394
Buildings and improvements 25,260 22,832
Furniture and fixtures 56,899 62,226
Data processing equipment 61,072 62,521
Automobiles 5,370 5,580
--------- ---------
Total property and equipment 150,008 154,553
Less accumulated depreciation (113,071) (120,054)
--------- ---------
Net property and equipment $ 36,937 $ 34,499
========= =========
Additions to property and equipment under capital leases totaled $253,000,
$441,000, and $276,000 for 2005, 2004, and 2003, respectively.
40
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 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 property under capital
leases and amortization of leasehold improvements, was $12,385,000, $12,233,000,
and $11,711,000 for 2005, 2004, and 2003, respectively.
CAPITALIZED SOFTWARE
Capitalized software reflects costs related to internally developed or purchased
software used internally by the Company that has future economic benefits. Only
internal and external costs incurred during the application stage of development
are capitalized in accordance with AICPA Statement of Position ("SOP") 98-1,
"Accounting for Computer Software Developed or Obtained for Internal Use." Costs
incurred during the preliminary project and post implementation stages,
including training and maintenance costs, are expensed as incurred. The majority
of these capitalized software costs consists of internal payroll costs and
external payments for software purchases and related services. These capitalized
computer software costs are amortized over periods ranging from three to ten
years, depending on the estimated life of each software application. At least
annually, the Company evaluates capitalized software for impairment in
accordance with SFAS 144. Amortization expense for capitalized software was
$6,798,000, $5,944,000 and $4,931,000 for 2005, 2004, and 2003, respectively.
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, and
those risks required to be insured by law or contract. Provisions for claims
under the self-insured programs are made based on the Company's estimates of the
aggregate liabilities for claims incurred, losses that have occurred but have
not been reported to the Company, and for the adverse development of reserves on
reported losses. The estimated liabilities are calculated based on historical
claims payment experience, the expected lives of the claims, and the reserves
established on the claims. The liabilities for claims incurred under the
Company's self-insured workers' compensation and employee disability programs
are discounted at the prevailing risk-free rate for government issues of an
appropriate duration. All other self-insured liabilities are undiscounted. At
December 31, 2005 and 2004, accrued self-insured risks totaled $26,786,000 and
$28,785,000, respectively, including current liabilities of $17,664,000 and
$17,827,000, respectively.
DEFINED BENEFIT PENSION PLANS
The Company uses SFAS 87, "Employers' Accounting for Pensions" ("SFAS 87"), and
related guidance to account for its defined benefit pension plans. The principal
objective of SFAS 87 is to measure compensation cost associated with defined
benefit pension plans and to recognize that cost over the employees' service
periods. The benefits earned and costs recognized over the employees' service
periods are computed by an independent actuary using the pension plan's benefit
formula. For balance sheet
41
purposes, SFAS 87 uses a minimum liability approach. The minimum liability is
the excess of the accumulated benefit obligation (ABO), which is actuarially
determined, over the fair value of plan assets. The ABO and plan assets are not
included in the Company's Consolidated Balance Sheets. The minimum liability
recorded on the Company's Consolidated Balance Sheets is first recognized by
recording an offsetting intangible asset up to the amount of unrecognized prior
service cost. Any additional minimum liability recorded is considered a loss and
is reported, net of income taxes, in Other Comprehensive Income (Loss). External
trusts are maintained to hold assets of the plans. 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.
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 liabilities, 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 enacted statutory tax rates
for the year in which the Company estimates these differences will reverse.
The Company must estimate the timing of the reversal of temporary differences,
as well as whether taxable income in future periods will be sufficient to fully
recognize any gross deferred tax assets. Other factors which influence the
effective tax rate include changes in enacted statutory tax rates, changes in
the composition of taxable income from the
42
countries in which the Company operates, and the ability of the Company to
utilize net operating loss carryforwards 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. Nonvested
restricted shares issued and outstanding are not included in the
weighted-average number of total common shares outstanding used to compute basic
net income per share under SFAS 128, "Earnings Per Share." 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, nonvested restricted shares issued
and contingently issuable shares under the executive stock bonus program, if
any, using the "treasury stock" method.
Below is the calculation of basic and diluted net income per share:
(in thousands, except per share data) 2005 2004 2003
- ------------------------------------- ------- ------- -------
Net income available to common shareholders $12,881 $25,172 $ 7,662
======= ======= =======
Weighted-average common shares outstanding - basic 48,930 48,773 48,668
Dilutive effect of stock-based compensation 417 223 108
------- ------- -------
Weighted-average common shares outstanding - diluted 49,347 48,996 48,776
======= ======= =======
Basic net income per share $ 0.26 $ 0.52 $ 0.16
======= ======= =======
Diluted net income per share $ 0.26 $ 0.51 $ 0.16
======= ======= =======
Additional options to purchase 2,906,215 shares of the Company's Class A Common
Stock at $6.89 to $19.50 per share were outstanding at December 31, 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 these shares would have been antidilutive.
FOREIGN CURRENCY
Realized net gains from foreign currency transactions totaled $369,000 and
$405,000 for the years ended December 31, 2005 and 2004, respectively.
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.
43
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the Company consists of the total of net income,
foreign currency translations, 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
Balance Sheet and Consolidated Statements of Shareholders' Investment were as
follows:
(in thousands) 2005 2004 2003
- -------------- --------- --------- ---------
Minimum pension liabilities $(132,021) $(107,281) $(103,741)
Net tax benefit on minimum pension liabilities 46,735 39,083 37,761
--------- --------- ---------
Minimum pension liabilities, net of tax benefit (85,286) (68,198) (65,980)
Cumulative translation adjustment 6,702 7,358 (2,902)
--------- --------- ---------
Total accumulated other comprehensive loss $ (78,584) $ (60,840) $ (68,882)
========= ========= =========
STOCK-BASED COMPENSATION
As permitted by SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Company accounts for stock-based compensation utilizing the intrinsic
value method in accordance with the provisions of Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Accordingly, no compensation expense has been recognized for
the 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 non-compensatory under APB 25.
The Company obtains income tax benefits related to certain exercises of
non-qualified stock options by the recipients of the options. The Company is
usually entitled to a deduction for income tax purposes of the amount that a
recipient reports as ordinary income, and the deduction is allowed to the
Company in the year in which the amount is included in the gross income of the
recipient. Since the Company does not record any compensation expense for its
stock option plans under APB 25, no related income tax expense is recognized by
the Company for financial reporting purposes. However, since these income tax
deductions do reduce the Company's ultimate tax liability, they are added to
Additional Paid-In Capital when deducted by the Company for income tax purposes.
The Company's executive stock bonus plan is considered compensatory under APB
25. Variable accounting and the accelerated expense attribution method are used
to recognize compensation cost. For the year ended December 31, 2005 the Company
recognized pre-tax compensation cost of approximately $92,000 for this plan.
44
The Company provides the annual disclosure 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, 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) 2005 2004 2003
- ------------------------------------- ------- ------- -------
Net income as reported $12,881 $25,172 $ 7,662
Add: Stock-based employee compensation included
in reported net income, net of tax 60 -- --
Less: Stock-based compensation expense using
the fair value method, net of tax (1,480) (946) (1,384)
------- ------- -------
Pro forma net income $11,461 $24,226 $ 6,278
======= ======= =======
Net income per share - basic:
As reported $ 0.26 $ 0.52 $ 0.16
======= ======= =======
Pro forma $ 0.23 $ 0.50 $ 0.13
======= ======= =======
Net income per share - diluted:
As reported $ 0.26 $ 0.51 $ 0.16
======= ======= =======
Pro forma $ 0.23 $ 0.49 $ 0.13
======= ======= =======
ADOPTION OF NEW ACCOUNTING STANDARDS
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 post-retirement 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 accounting guidance on revenue recognition
for SEC registrants. The adoption of SAB 104 did not have a material impact on
the Company's consolidated results of operations, financial position, or cash
flows.
FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN
46"), requires the primary beneficiary of a variable interest entity ("VIE") to
include the assets, liabilities, and results of the activities of the VIE in its
consolidated financial statements, as well as disclosure of information about
the assets and liabilities, and the nature, purpose, and activities of
consolidated VIEs. In December 2003, the FASB issued FIN 46 Revised ("FIN 46R")
which modified and clarified certain provisions of FIN 46 as originally issued.
Additionally, the FASB issued five Staff Positions related to FIN 46R. The
Company's adoption of FIN 46 and FIN 46R did not have a material impact on the
Company's consolidated 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." 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. 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
45
by approximately $2.0 million, resulting in an unrecognized net gain to the
Company's post-retirement medical plan. This unrecognized net gain is being
amortized over the remaining life expectancy of the plan participants and for
the years ended December 31, 2005 and 2004, such amortization reduced the
Company's post-retirement liability and expense by $698,000 and $96,000,
respectively.
In June 2005, the Emerging Issues Task Force ("EITF") of the FASB issued EITF
05-6, "Determining the Amortization Period for Leasehold Improvements." EITF
05-6 requires leasehold improvements purchased subsequent to the inception of a
lease or acquired in a business combination to be amortized over the lesser of
the useful life of the asset or the lease term that includes reasonably assured
lease renewals as determined on the date of the acquisition of the leasehold
improvement. EITF 05-6 was effective for leasehold improvements acquired in
periods beginning after July 1, 2005. The adoption of EITF 05-6 did not have a
material impact on the Company's results of operations, financial position, or
cash flows.
PENDING ADOPTION OF NEW ACCOUNTING STANDARDS
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." Additionally, the FASB
issued three Staff Positions in 2005 related to SFAS 123R. In March 2005, the
SEC issued Staff Accounting Bulletin 107, "Share-Based Payments," which
expresses the SEC staff's views on various SFAS 123R implementation issues for
public companies.
Generally, the approach in SFAS 123R is similar to the approach described in
SFAS 123. However, SFAS 123R requires companies to measure and recognize
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.
The Company is adopting 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) to all prior periods presented or (b) to
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 and
related guidance, the Company recognizes compensation cost for stock grants, but
generally recognizes no compensation cost for employee stock options and
employee stock purchase plans
46
("ESPPs") 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 net 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 "Stock-Based
Compensation" in Note 1 to the consolidated financial statements. Based on ESPP
activity and stock options issued through December 31, 2005, and the adoption of
SFAS 123R at the beginning of 2006 by use of the modified prospective method,
the Company expects the adoption of SFAS 123R to reduce net income by
approximately $1,037,000 in 2006, 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.
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 error 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 errors 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 January 1, 2006, contains explicit transitional
guidance. Accordingly, the requirements of SFAS 154 will not apply to the
Company's pending adoption of SFAS 123R.
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 defined contribution plan. The Company's United Kingdom
("U.K.") defined benefit retirement plans have also been frozen for new
employees, but existing participants may still accrue additional benefits.
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 defined
contribution plans totaled $14,661,000, $14,153,000, and $13,683,000 in 2005,
2004, and 2003, respectively.
Benefits payable under the Company's U.S. and Holland defined benefit pension
plans are generally based on career compensation, while its U.K. plans are
generally based on an employee's final salary. The U.S. plan has a September 30
measurement date and the
47
international plans (U.K. and Holland) have an October 31 measurement date. 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 2006. Cash contributions to the Company's
international defined benefit plans are expected to total approximately
$5,562,000 during 2006.
48
The following schedule reconciles the funded status of the U.S. and
international defined benefit plans with amounts reported in the Company's
Consolidated Balance Sheets at December 31, 2005 and 2004:
(in thousands) 2005 2004
- -------------- --------- --------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at beginning of year $ 510,774 $479,205
Service cost 2,430 1,719
Interest cost 31,193 29,940
Employee contributions 672 743
Actuarial loss 45,755 11,995
Benefits paid (23,047) (22,285)
Foreign currency effects (4,113) 9,457
--------- --------
Benefit obligations at end of year 563,664 510,774
--------- --------
CHANGE IN PLANS' ASSETS:
Fair value of plans' assets at beginning of year 433,437 409,544
Actual return on plans' assets 47,017 32,629
Employer contributions 3,688 4,093
Employee contributions 672 743
Benefits paid (23,047) (22,285)
Foreign currency effects (3,598) 8,713
--------- --------
Fair value of plans' assets at end of year 458,169 433,437
--------- --------
Funded status of plans (105,495) (77,337)
Unrecognized net loss 133,211 108,774
Unrecognized prior service cost 84 174
--------- --------
Net amount recognized $ 27,800 $ 31,611
--------- --------
Amounts recognized in the Consolidated Balance Sheets consist of:
Minimum pension liability - U.S. pension plan $ (89,179) $(62,991)
Minimum pension liability - International pension plans (12,227) (10,902)
Pension obligations included in other accrued liabilities (4,089) (3,444)
Intangible assets included in other assets 1,274 1,667
Accumulated other comprehensive loss 132,021 107,281
--------- --------
Net amount recognized $ 27,800 $ 31,611
========= ========
Net periodic benefit cost related to the U.S. and international defined benefit
pension plans in 2005, 2004, and 2003 included the following components:
(in thousands) 2005 2004 2003
- -------------- -------- -------- --------
Service cost $ 2,430 $ 1,719 $ 1,983
Interest cost 31,193 29,940 29,791
Expected return on assets (33,438) (31,980) (31,494)
Net amortization 346 -- 1,607
Recognized net actuarial loss 7,264 7,026 10,181
-------- -------- --------
Net periodic benefit cost $ 7,795 $ 6,705 $ 12,068
======== ======== ========
49
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) 2005 2004
- -------------- -------- --------
Projected benefit obligations $563,778 $510,888
Accumulated benefit obligations 563,664 510,774
Fair value of plans' assets 458,169 433,437
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:
2005 2004
------------- -------------
Discount rate 5.79% 6.30%
Expected returns on plans' assets 7.40% - 8.50% 6.60% - 8.50%
The expected long-term rates of return on plan assets were based on the plans'
asset mix, historical returns on equity securities and fixed income investments,
and an assessment of expected future returns. Plan assets are invested in equity
securities and fixed income investments, with a target allocation of
approximately 40% to 80% in equity securities and 20% to 60% in fixed income
investments. The plans' asset allocations at the respective measurement dates,
by asset category for the Company's U.S. and international defined benefit
pension plans, were as follows:
2005 2004
----- -----
Equity securities 72.4% 67.6%
Fixed income investments 26.9% 28.7%
Cash 0.7% 3.7%
----- -----
Total asset allocation 100.0% 100.0%
===== =====
Plan assets at December 31, 2005 and 2004 included shares of the Company's
common stock with a fair value of $4,851,000 and $4,150,000, respectively.
The following benefit payments are expected to be paid from the Company's U.S.
and international defined benefit pension plans:
EXPECTED BENEFIT
PAYMENTS
YEAR (in thousands)
- -------------- ----------------
2006 $ 23,505
2007 24,481
2008 25,530
2009 26,868
2010 28,271
2011 - 2015 169,001
Certain U.S. retirees and a fixed number of U.S. long-term employees are
entitled to receive post-retirement medical benefits under the Company's various
medical benefit plans. The post-retirement medical benefit obligation was
$4,569,000 and $5,544,000 at December 31, 2005 and 2004, respectively. The
Company accounts for this obligation by using SFAS 106 "Employers' Accounting
for Postretirement Benefits Other than Pensions" and FASB Staff Position 106-2.
See "Adoption of New Accounting
50
Standards" in Note 1.
3. INCOME TAXES
Income before provision for income taxes consisted of the following:
(in thousands) 2005 2004 2003
- -------------- ------- ------- -------
U.S. $ 8,310 $27,779 $12,153
Foreign 11,630 9,644 4,473
------- ------- -------
Income before taxes $19,940 $37,423 $16,626
======= ======= =======
The provision (benefit) for income taxes consisted of the following:
(in thousands) 2005 2004 2003
- -------------- ------- ------- -------
Current:
U.S. federal and state $(1,350) $ 5,775 $ 4,545
Foreign 4,483 2,718 2,816
Deferred:
U.S. federal and state 3,147 3,149 2,602
Foreign 779 609 (999)
------- ------- -------
Provision for income taxes $ 7,059 $12,251 $ 8,964
======= ======= =======
Net cash payments (refunds) for income taxes were $10,561,000 in 2005,
$(1,989,000) in 2004, and $12,867,000 in 2003.
The provision for income taxes is reconciled to the federal statutory rate of
35% as follows:
(in thousands) 2005 2004 2003
- -------------- ------- ------- -------
Federal income taxes at statutory rate $ 6,979 $13,098 $ 5,819
State income taxes, net of federal benefit 324 791 216
Effect of nondeductible government settlement -- -- 2,912
Foreign taxes 807 (572) 912
Research credit settlement -- (1,745) --
Net operating loss utilization (455) -- (1,073)
Credits and other (596) 679 178
------- ------- -------
Provision for income taxes $ 7,059 $12,251 $ 8,964
======= ======= =======
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, 2005, such undistributed earnings
totaled $72,971,000. 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. The Company reviewed
recent 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. tax
payer. After review of the Act and the related clarifications, the Company
decided not to utilize the special repatriation provision of the
51
Act and concluded that no material changes were warranted to its current policy
on undistributed earnings of its foreign subsidiaries.
Deferred income taxes consisted of the following at December 31, 2005 and 2004:
(in thousands) 2005 2004
- -------------- -------- --------
Accrued compensation $ 6,484 $ 6,003
Minimum pension liabilities 46,735 39,083
Self-insured risks 10,469 11,296
Deferred revenues 5,728 5,770
Post-retirement benefits 1,672 2,074
Net operating loss carryforwards 8,401 9,358
Other 1,851 723
-------- --------
Gross deferred tax assets 81,340 74,307
-------- --------
Accounts receivable allowance 6,965 4,533
Prepaid pension cost 8,605 10,116
Unbilled revenues 20,789 17,277
Depreciation and amortization 13,067 11,064
Installment sale -- 2,528
Other 598 513
-------- --------
Gross deferred tax liabilities 50,024 46,031
-------- --------
Net deferred tax assets before valuation allowance 31,316 28,276
Less: valuation allowance (7,635) (8,091)
-------- --------
Net deferred tax asset $ 23,681 $ 20,185
======== ========
Amounts recognized in the Consolidated Balance Sheets
consist of :
Current deferred tax assets included in
accrued income taxes $ 13,816 $ 13,048
Current deferred tax liabilities included in
accrued income taxes (28,352) (25,035)
Long-term deferred tax assets included in
deferred income tax assets 51,284 43,235
Long-term deferred tax liabilities included in
deferred income tax assets (13,067) (11,063)
-------- --------
Net deferred tax assets $ 23,681 $ 20,185
======== ========
At December 31, 2005, the Company has a deferred tax asset related to net
operating loss carryforwards of $8.4 million. Approximately $5.6 million of the
deferred tax asset will not expire, and $2.8 million will expire over the next
20 years if not utilized by the Company. 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. At December 31, 2005, the Company has a $7.6 million valuation
allowance related to certain net operating loss carryforwards generated in its
international operations. The remaining net operating loss deferred tax asset of
$766,000 is not subject to a valuation allowance, and is expected to be fully
utilized by the Company before its expiration in 2010.
52
4. COMMITMENTS UNDER OPERATING LEASES
The Company and its subsidiaries lease certain office space, computer equipment,
and automobiles under operating leases. For office leases that contain scheduled
rent increases or rent concessions, the Company recognizes monthly rent expense
based on a calculated average monthly rent amount that considers the rent
increases and rent concessions over the life of the lease term. Leasehold
improvements of a capital nature that are made to leased office space under
operating leases are amortized over the shorter of the term of the lease or the
estimated useful life of the improvement. License and maintenance costs related
to the leased vehicles are paid by the Company. Rental expenses, net of
amortization of any incentives provided by lessors, for operating leases
consisted of the following:
(in thousands) 2005 2004 2003
- -------------- ------- ------- -------
Office space $28,775 $30,071 $30,483
Automobiles 7,764 7,884 9,040
Computers and equipment 305 284 274
------- ------- -------
Total operating leases $36,844 $38,239 $39,797
======= ======= =======
At December 31, 2005, future minimum payments under non-cancelable operating
leases with terms of more than 12 months are as follows: 2006 - $29,908,000;
2007 - $23,625,000; 2008 - $19,338,000; 2009 - $14,530,000; 2010 - $12,028,000;
and thereafter - $28,538,000.
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 was renewed
on September 30, 2005 and the expiration date of the credit line was extended to
September 2010. The renewal did not change the dollar amount of the credit line
or interest rate terms. As a component of this credit line, the Company
maintains a letter of credit facility to satisfy certain of its own contractual
obligations. Including $13,259,000 committed under the letter of credit
facility, the unused balance of the line of credit totaled $27,853,000 at
December 31, 2005. Short-term borrowings, including bank overdraft facilities,
totaled $28,888,000 and $36,731,000 at December 31, 2005 and 2004, respectively.
The weighted-average interest rate on world-wide short-term borrowings was 5.9%
during 2005 and 5.2% during 2004.
Long-term debt consisted of the following at December 31, 2005 and 2004:
(in thousands) 2005 2004
- -------------- ------- -------
Senior debt, semi-annual principal repayments of $5,556 due each April and
October, beginning October 2006 through October 2010, and interest payable
semi-annually at 6.08% $50,000 $50,000
Term loans payable to banks:
Principal and interest at 4.55%, payable monthly through March 2006 271 1,390
Principal and interest at 4.75%, payable monthly through April 2006 129 263
Principal and interest at 3.97%, payable monthly through December 2010 506 670
Principal and interest at 7.5%, payable monthly through April 2009 475 --
Capital lease obligations 870 1,122
------- -------
Total long-term debt and capital leases 52,251 53,445
Less: current installments (6,441) (2,056)
------- -------
Total long-term debt and capital leases, less current installments $45,810 $51,389
======= =======
The Company's capital leases are primarily comprised of leased automobiles with
terms ranging from 24 to 60 months.
53
The senior debt and revolving credit agreement 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, a maximum of $16,881,000 of the
Company's retained earnings at December 31, 2005 is available for the payment of
cash dividends to shareholders in 2006. The Company was in compliance with its
debt covenants as of December 31, 2005.
Scheduled principal repayments of long-term debt, including capital leases, as
of December 31, 2005 are as follows:
Payments Due by Period
---------------------------------------------
Less More
than 1-3 3-5 than 5
(in thousands) 1 Year Years Years Years Total
- -------------- ------ ------- ------- ------ -------
Long-term debt, including current portions $6,091 $22,651 $22,525 $114 $51,381
Capital lease obligations 350 381 128 11 870
------ ------- ------- ---- -------
Total $6,441 $23,032 $22,653 $125 $52,251
====== ======= ======= ==== =======
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
$5,859,000, $5,899,000, and $5,858,000 for 2005, 2004, and 2003, respectively.
Interest paid on the Company's short-term and long-term borrowings was
$5,901,000, $5,892,000, and $5,513,000 for 2005, 2004, and 2003, respectively.
54
6. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: one which provides various claims
administration services through offices located in the United States ("U.S.
Operations") and the other which provides similar services through offices or
representatives 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, a non-GAAP
financial measure defined as earnings before special credits and charges, net
corporate interest expense, and income taxes.
Financial information as of and for the years ended December 31, 2005, 2004, and
2003 covering the Company's reportable segments is presented below:
U.S. International Consolidated
(in thousands) Operations Operations Totals
- -------------- ---------- ------------- ------------
2005
REVENUES BEFORE REIMBURSEMENTS $486,570 $285,413 $771,983
OPERATING EARNINGS 11,757 13,328 25,085
DEPRECIATION AND AMORTIZATION 11,992 7,191 19,183
CAPITAL EXPENDITURES 15,715 6,653 22,368
ASSETS 319,444 252,220 571,664
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
The total of both reportable segments' revenues reconciled to total consolidated
revenues for the years ended December 31, 2005, 2004, and 2003 is presented
below:
(in thousands) 2005 2004 2003
- -------------- -------- -------- --------
Segments' revenues before reimbursements $771,983 $733,567 $690,933
Reimbursements 82,784 78,095 77,077
-------- -------- --------
Total consolidated revenues $854,767 $811,662 $768,010
======== ======== ========
The total of both reportable segments' operating earnings reconciled to
consolidated income before income taxes for the years ended December 31, 2005,
2004, and 2003 is presented below:
(in thousands) 2005 2004 2003
- -------------- ------- ------- -------
Operating earnings of both segments $25,085 $32,386 $30,040
Net corporate interest expense (5,145) (3,536) (5,414)
Special credit (charge) -- 8,573 (8,000)
------- ------- -------
Income before income taxes $19,940 $37,423 $16,626
======= ======= =======
55
The Company's most significant international operations are in the U.K. and
Canada, as presented below:
(in thousands) U.K. Canada Other Total
- -------------- -------- ------- -------- --------
2005
REVENUES BEFORE REIMBURSEMENTS $101,529 $68,489 $115,395 $285,413
LONG-LIVED ASSETS 57,919 28,427 18,049 104,395
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
Revenues before reimbursements by market type for the years ended December 31,
2005, 2004, and 2003 are presented below:
(in thousands) 2005 2004 2003
- -------------- -------- -------- --------
Insurance companies $222,515 $233,531 $229,781
Self-insured entities 152,523 158,190 167,526
Class action services 111,532 86,416 74,540
-------- -------- --------
Total U.S. revenues 486,570 478,137 471,847
Total international revenues 285,413 255,430 219,086
-------- -------- --------
Total revenues before reimbursements 771,983 733,567 690,933
Reimbursements 82,784 78,095 77,077
-------- -------- --------
Total revenues $854,767 $811,662 $768,010
======== ======== ========
Substantially all international revenues were derived from the insurance company
market.
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 where
the Company is required to consolidate the acquired entity into the Company's
financial statements. The Company considers the purchase price allocations of
all acquisitions to be preliminary for the 12 months following the acquisition
date, and the allocations 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 may be earned based on the Company's operating
performance in France 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
56
$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 acquisition of SVS Experts B.V. ("SVS"), a
Dutch independent adjuster. 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 SVS agreement.
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 $121,000, $203,000, $296,000, $230,000, $239,000 and $42,000 in
2005, 2004, 2003, 2002, 2001, and 2000, respectively, were paid to the former
owner of Greentree, pursuant to the purchase agreement. There are no additional
contingent payments due under the Greentree agreement.
The goodwill recognized, fair values of assets acquired, liabilities assumed,
and net cash paid for the acquisitions detailed above were as follows:
(in thousands) 2005 2004 2003
- -------------- ------- ------- -------
Goodwill recognized:
U.S. operations $ 121 $ 492 $ 296
International operations -- 1,704 36
------- ------- -------
Total goodwill recognized 121 2,196 332
Fair values of assets acquired -- 1,164 87
Other liabilities assumed -- (2,743) (142)
------- ------- -------
Cash paid, net of cash acquired $ 121 $ 617 $ 277
======= ======= =======
57
The changes in the carrying amount of goodwill for the years ended December 31,
2005 and 2004 were as follows:
U.S. International
(in thousands) Segment Segment Total
- -------------- ------- ------------- --------
Balance at December 31, 2003 $27,759 $76,764 $104,523
Acquired goodwill 492 1,704 2,196
Foreign currency effects -- 2,691 2,691
------- ------- --------
Balance at December 31, 2004 28,251 81,159 109,410
ACQUIRED GOODWILL 121 -- 121
FOREIGN CURRENCY EFFECTS -- 504 504
------- ------- --------
BALANCE AT DECEMBER 31, 2005 $28,372 $81,663 $110,035
======= ======= ========
8. SPECIAL CREDIT AND CHARGE
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
person who, at the time of the sale, was a member of the Company's Board of
Directors. The purchase price was $9.7 million. This purchase price represented
a premium over an independent appraised value of the property. The Company
received cash, net of transaction expenses, 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 in 2004 on the sale. This special credit, net of
related income tax expense, increased net income per share by $0.11 during 2004.
The note receivable was paid in its entirety in June 2005.
During November 2003, the Company made a nondeductible payment of $8,000,000
under an agreement reached with the U.S. Department of Justice to resolve an
investigation of the Company's billing practices. This payment reduced net
income per share by $0.16 in 2003.
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 $206,554,000 and
$217,910,000 at December 31, 2005 and 2004, 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 vary for each acquisition, and the ultimate
payments when made will vary, as they are dependent on future events. Based on
2005 levels of revenues and operating earnings, additional payments under
existing earnout agreements approximate $2,000,000 through 2009, as follows:
2006 - $0; 2007 - $0; 2008 - $1,858,000; and 2009 - $142,000.
As part of the $70.0 million revolving credit agreement, the Company maintains a
letter of credit facility to satisfy certain of its own contractual
requirements. At December 31, 2005, the aggregate amount committed under the
facility was $13,259,000.
In the normal course of the claims management services business, the Company is
named as a defendant in suits by insureds or claimants contesting decisions by
the Company or
58
its clients with respect to the settlement of claims. Additionally, clients of
the Company have brought actions for indemnification on the basis of alleged
negligence on the part of the Company, its agents or 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 its various insurance coverages. Based on information
available to the Company, adequate liabilities have been recorded for such
self-insured risks.
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. As described below,
certain Class A Common Stock shares are issued with restrictions under executive
compensation plans.
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, 2005, 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 2005, 2004, or 2003.
EMPLOYEE STOCK PURCHASE PLANS
Under the 1996 Employee Stock Purchase Plan, the Company is authorized to issue
up to 1,500,000 shares of the Company's Class A Common Stock to eligible
employees in the U.S., Canada, Puerto Rico, and the Virgin Islands. 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 2005, 2004, and 2003, the Company issued 91,218, 94,454,
and 101,520 shares, respectively, to employees under this plan.
Under the 1999 U.K. Sharesave Scheme, the Company is authorized to issue up to
500,000 shares of the Company's 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, 2005, there were 6,193 shares issued under this scheme.
EXECUTIVE STOCK BONUS PLAN
Under the Company's Executive Stock Bonus Plan, the Company is authorized to
issue up to 4,000,000 shares of the Company's Class A Common Stock. This plan,
accounted for under APB 25, became effective and was approved by the Company's
shareholders in 2005. The plan has two components: the Performance Share Plan
and the Restricted Share Plan.
Under the Performance Share Plan, key employees of the Company are eligible to
earn shares of the Company's Class A Common Stock upon the achievement of
certain individual and corporate objectives. Shares grants are determined at the
discretion of the
59
Company's Board of Directors each year and vest ratably over five years. Shares
are not issued until the vesting requirements have lapsed. Dividends are not
paid or accrued on unvested shares. For 2005, approximately 130,000 shares were
eligible to be earned by key employees based on the achievement of corporate and
personal goals. At December 31, 2005, an estimated 44,000 shares are
contingently issuable with a fair value of $5.80 per share, subject to final
determination of achievement rates for corporate and personal goals.
Under the Restricted Share Plan, the Company's Board of Directors may elect to
issue restricted shares of the Company's Class A Common Stock in lieu of, or in
addition to, cash bonus payments to certain key employees of the Company.
Employees receiving these shares have restrictions on the ability to sell the
shares. Such restrictions lapse ratably over vesting periods ranging from two to
five years. Under this component of the plan, vested and unvested shares issued
are eligible to receive dividends. At December 31, 2005, 5,000 unvested
restricted shares have been issued with a grant-date fair value of $7.64 per
share.
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 anniversary of the grant date of the options. At
December 31, 2005, there were 2,180,645 shares available for future option
grants under the plans.
The fair values of options were estimated on the dates of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2005 2004 2003
------- ------- -------
Expected dividend yield 4.2% 3.2% 3.6%
Expected volatility 37% 36% 34%
Risk-free interest rate 4.1% 3.8% 3.6%
Expected life of options 7 years 7 years 7 years
60
All of the outstanding and exercisable options as of December 31, 2005 were for
Class A Common Stock. A summary of the status of the Company's stock option
plans is as follows:
2005 2004 2003
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
(shares in thousands) SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------- ------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of year 5,223 $ 10 5,320 $ 11 5,495 $ 12
Options granted 109 7 1,597 6 456 5
Options exercised (35) 5 (36) 3 -- --
Options forfeited and expired (702) 12 (1,658) 11 (631) 12
----- ------ -----
Outstanding, end of year 4,595 9 5,223 10 5,320 11
===== ====== =====
Exercisable, end of year 2,790 11 2,548 12 2,015 12
===== ====== =====
Weighted-average fair value of
options granted during the year:
Incentive stock options $2.11 $1.27 $1.27
Nonqualified stock options 2.21 1.48 1.21
The following table summarizes information about stock options outstanding at
December 31, 2005 (shares in thousands):
Options Outstanding
---------------------------------------- Options Exercisable
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES 12/31/05 LIFE PRICE AT 12/31/05 PRICE
- ---------------- -------------- ----------- --------- ----------- ---------
$ 2.40 to $ 8.50 1,816 8.0 $ 5.85 561 $ 5.67
8.51 to 12.50 1,802 4.0 10.35 1,252 10.62
12.51 to 17.50 854 1.8 13.86 854 13.86
17.51 to 19.50 123 2.2 18.91 123 18.91
----- --- ------ ----- ------
2.40 to 19.50 4,595 5.2 9.45 2,790 10.98
61
CRAWFORD & COMPANY
Selected Financial Data
FOR THE YEARS ENDED DECEMBER 31, 2005 2004 2003 2002 2001
- -------------------------------- -------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues Before Reimbursements $771,983 $733,567 $690,933 $699,390 $725,539
Reimbursements 82,784 78,095 77,077 58,228 54,244
-------- -------- -------- -------- --------
Total Revenues 854,767 811,662 768,010 757,618 779,783
-------- -------- -------- -------- --------
U.S. Operating Earnings (1) 11,757 11,586 6,751 7,986 12,773
International Operating Earnings (1) 13,328 20,800 23,289 29,261 43,255
Special Credits (Charges) -- 8,573 (8,000) 6,000 --
Net Corporate Interest Expense (5,145) (3,536) (5,414) (4,706) (4,779)
Amortization of Goodwill -- -- -- -- (3,448)
Income Taxes (7,059) (12,251) (8,964) (14,029) (18,356)
-------- -------- -------- -------- --------
Net Income 12,881 25,172 7,662 24,512 29,445
-------- -------- -------- -------- --------
Net Income Margin 1.51% 3.10% 1.00% 3.24% 3.78%
Net Income Per Share:
Basic 0.26 0.52 0.16 0.50 0.61
Diluted 0.26 0.51 0.16 0.50 0.61
Current Assets 336,811 344,707 302,663 272,025 261,284
Total Assets 571,664 571,260 517,239 474,776 431,415
Current Liabilities 210,962 213,809 187,171 148,249 156,307
Long-Term Debt, Less Current Installments 45,810 51,389 50,664 49,976 36,378
Total Debt 81,139 90,176 96,777 81,488 73,144
Shareholders' Investment 179,031 194,833 172,594 159,431 188,300
Total Capital 260,170 285,009 269,371 240,919 261,444
Current Ratio 1.6:1 1.6:1 1.6:1 1.8:1 1.7:1
Total Debt-to-Total Capital 31.2% 31.6% 35.9% 33.8% 28.0%
Return on Average Shareholders' Investment 6.9% 13.7% 4.6% 14.1% 14.5%
Cash Flows from Operating Activities 39,823 35,751 37,201 52,031 63,072
Cash Flows from Investing Activities (14,709) (16,579) (23,721) (33,371) (28,275)
Cash Flows from Financing Activities (18,824) (22,238) (4,377) (11,099) (34,126)
Shareholders' Equity Per Share 3.65 3.99 3.54 3.28 3.88
Cash Dividends Per Share:
Class A Common Stock 0.24 0.24 0.24 0.32 0.56
Class B Common Stock 0.24 0.24 0.24 0.32 0.56
Weighted-Average Shares Outstanding:
Basic 48,930 48,773 48,668 48,580 48,492
Diluted 49,347 48,996 48,776 48,664 48,559
(1) This is a non-GAAP financial measure representing earnings before special
credits and charges, amortization of goodwill, net corporate interest
expense, and income taxes.
62
CRAWFORD & COMPANY
QUARTERLY FINANCIAL DATA (UNAUDITED)
DIVIDEND INFORMATION AND COMMON STOCK QUOTATIONS
FULL
2005 FIRST SECOND THIRD FOURTH YEAR
- ---- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
REVENUES BEFORE REIMBURSEMENTS $184,334 $186,002 $184,720 $216,927 $771,983
REIMBURSEMENTS 15,309 20,779 21,500 25,196 82,784
-------- -------- -------- -------- --------
TOTAL REVENUES: 199,643 206,781 206,220 242,123 854,767
PRETAX INCOME 3,654 4,151 2,921 9,214 19,940
U.S. OPERATING EARNINGS (1) 1,836 1,810 1,236 6,875 11,757
INTERNATIONAL OPERATING EARNINGS (1) 3,345 3,696 3,019 3,268 13,328
NET CORPORATE INTEREST EXPENSE (1,527) (1,355) (1,334) (929) (5,145)
INCOME TAXES (1,293) (1,470) (1,034) (3,262) (7,059)
-------- -------- -------- -------- --------
NET INCOME 2,361 2,681 1,887 5,952 12,881
NET INCOME PER SHARE - BASIC 0.05 0.05 0.04 0.12 0.26
NET INCOME PER SHARE - DILUTED 0.05 0.05 0.04 0.12 0.26
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: (3)
CLASS A - HIGH 7.26 7.58 7.90 7.80 7.90
CLASS A - LOW 6.70 6.55 6.06 5.50 5.50
CLASS B - HIGH 7.45 7.82 8.39 8.15 8.39
CLASS B - LOW 6.85 6.78 6.03 5.53 5.53
Full
2004 First Second Third Fourth Year
- ---- -------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues:
Revenues before reimbursements $169,855 $172,016 $185,870 $205,826 $733,567
Reimbursements 14,881 14,517 31,638 17,059 78,095
-------- -------- -------- -------- --------
Total revenues: 184,736 186,533 217,508 222,885 811,662
Pretax income 3,757 6,265 15,478 11,923 37,423
U.S. operating earnings (1) 2,892 3,826 7,023 7,059 20,800
International operating earnings (1) 2,202 1,905 1,348 6,131 11,586
Special credit -- -- 8,573 -- 8,573
Net corporate interest expense (1,337) 534 (1,466) (1,267) (3,536)
Income taxes (1,368) (725) (5,953) (4,205) (12,251)
-------- -------- -------- -------- --------
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 (2) 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:(3)
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
(1) This is a non-GAAP financial measure representing earnings before special
credit, net corporate interest expense, and income taxes.
(2) Due to the method used in calculating per share data as prescribed by SFAS
128, "Earnings Per Share," the quarterly per share data may not total to
the full year per share data.
(3) 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, as reported on the New York Stock Exchange Composite
Tape.
The approximate number of record holders of the Company's stock as of
December 31, 2005: Class A - 2,035 and Class B - 686.
63