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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ___________ to ___________
COMMISSION FILE NUMBER 1-10356
CRAWFORD & COMPANY
(Exact name of Registrant as specified in its charter)
GEORGIA 58-0506554
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5620 GLENRIDGE DRIVE, N.E.
ATLANTA, GEORGIA 30342
(Address of principal executive offices) (Zip Code)
(404) 256-0830
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
LARGE ACCELERATED FILER ACCELERATED FILER X NON-ACCELERATED FILER
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of April 30, 2006 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 24,651,604
CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,697,172
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CRAWFORD & COMPANY
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2006
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Income (unaudited)
Quarter ended March 31, 2006 and 2005..................... 3
Condensed Consolidated Balance Sheets March 31, 2006
(unaudited) and December 31, 2005......................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Quarter ended March 31, 2006 and 2005..................... 6
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 7
Report of Independent Registered Public Accounting Firm...... 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 34
Item 4. Controls and Procedures......................................... 34
Part II. Other Information:
Item 1. Legal Proceedings............................................... 35
Item 6. Exhibits........................................................ 35
Signatures .............................................................. 36
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
---------------------
MARCH 31, MARCH 31,
2006 2005
--------- ---------
REVENUES:
Revenues before reimbursements $201,606 $184,334
Reimbursements 20,066 15,309
-------- --------
TOTAL REVENUES 221,672 199,643
-------- --------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 156,476 144,919
Reimbursements 20,066 15,309
-------- --------
Cost of Services 176,542 160,228
Selling, general, and administrative expenses 35,079 34,234
Corporate interest expense, net of interest income
of $331 and $182, respectively 998 1,527
-------- --------
TOTAL COSTS AND EXPENSES 212,619 195,989
-------- --------
INCOME BEFORE INCOME TAXES 9,053 3,654
PROVISION FOR INCOME TAXES 3,205 1,293
-------- --------
NET INCOME $ 5,848 $ 2,361
======== ========
EARNINGS PER SHARE:
Basic $ 0.12 $ 0.05
Diluted $ 0.12 $ 0.05
======== ========
WEIGHTED-AVERAGE COMMON SHARES USED TO COMPUTE:
Basic Earnings Per Share 48,986 48,872
Diluted Earnings Per Share 49,301 49,381
======== ========
CASH DIVIDENDS PER SHARE:
Class A Common Stock $ 0.06 $ 0.06
Class B Common Stock $ 0.06 $ 0.06
======== ========
(See accompanying notes to condensed consolidated financial statements)
3
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED) *
MARCH 31, DECEMBER 31,
2006 2005
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,201 $ 49,441
Accounts receivable, less allowance for doubtful
accounts of $16,012 in 2006 and $15,986 in 2005 164,106 163,087
Unbilled revenues, at estimated billable amounts 109,549 109,319
Prepaid expenses and other current assets 17,151 14,964
-------- ---------
TOTAL CURRENT ASSETS 341,007 336,811
-------- ---------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 130,758 150,008
Less accumulated depreciation (97,885) (113,071)
-------- ---------
NET PROPERTY AND EQUIPMENT 32,873 36,937
-------- ---------
OTHER ASSETS:
Intangible assets arising from acquisitions, net 109,847 110,035
Capitalized software costs, net 34,466 33,068
Deferred income tax asset, net 38,148 38,217
Other 16,863 16,596
-------- ---------
TOTAL OTHER ASSETS 199,324 197,916
-------- ---------
TOTAL ASSETS $573,204 $ 571,664
======== =========
* derived from the audited Consolidated Balance Sheet.
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(IN THOUSANDS)
(UNAUDITED) *
MARCH 31, DECEMBER 31,
2006 2005
----------- ------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings $ 32,422 $ 28,888
Accounts payable 40,502 42,434
Accrued compensation and related costs 43,366 52,377
Deferred revenues 20,915 19,608
Self-insured risks 15,742 17,664
Accrued income taxes 19,937 17,880
Other accrued liabilities 25,961 25,670
Current installments of long-term debt 6,008 6,441
-------- --------
TOTAL CURRENT LIABILITIES 204,853 210,962
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current installments 45,792 45,810
Deferred revenues 10,379 10,409
Self-insured risks 12,438 9,122
Minimum pension liabilities 102,917 101,406
Postretirement medical benefit obligation 4,460 4,569
Other 10,245 10,355
-------- --------
TOTAL NONCURRENT LIABILITIES 186,231 181,671
-------- --------
SHAREHOLDERS' INVESTMENT:
Class A common stock, $1.00 par value; 50,000
shares authorized; 24,294 and 24,293 shares
issued and outstanding in 2006 and 2005,
respectively 24,294 24,293
Class B common stock, $1.00 par value; 50,000
shares authorized; 24,697 shares issued and
outstanding in 2006 and 2005, respectively 24,697 24,697
Additional paid-in capital 7,031 6,311
Unearned stock-based compensation -- (37)
Retained earnings 205,260 202,351
Accumulated other comprehensive loss (79,162) (78,584)
-------- --------
TOTAL SHAREHOLDERS' INVESTMENT 182,120 179,031
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $573,204 $571,664
======== ========
* derived from the audited Consolidated Balance Sheet.
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
QUARTER ENDED
---------------------
MARCH 31, MARCH 31,
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,848 $ 2,361
Reconciliation of net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,756 4,801
Loss on sales of property and equipment 56 31
Stock-based compensation 757 63
Changes in operating assets and liabilities:
Accounts receivable, net (824) (785)
Unbilled revenues, net (77) 2,954
Accrued or prepaid income taxes 2,054 (5,679)
Accounts payable and accrued liabilities (5,856) (12,435)
Deferred revenues 1,343 499
Accrued pension costs (1,937) (3,903)
Prepaid expenses and other (127) 291
------- --------
Net cash provided by (used in) operating activities 5,993 (11,802)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (2,650) (2,991)
Capitalization of computer software costs (2,627) (1,508)
Other investing activities (350) (90)
Proceeds from sales of property and equipment 71 129
------- --------
Net cash used in investing activities (5,556) (4,460)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,939) (2,933)
Proceeds from exercise of stock options 2 261
Increases in short-term borrowings 5,186 1,663
Payments on short-term borrowings (1,633) (593)
Payments on long-term debt and capital lease obligations (459) (513)
------- --------
Net cash provided by (used in) financing activities 157 (2,115)
------- --------
Effect of exchange rate changes on cash and cash equivalents 166 444
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 760 (17,933)
Cash and cash equivalents at beginning of period 49,441 43,571
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $50,201 $ 25,638
======= ========
(See accompanying notes to condensed consolidated financial statements)
6
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for
Crawford & Company ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the U.S. Securities and Exchange Commission's (SEC) regulations.
Accordingly, these condensed consolidated financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Certain previously reported amounts have
been reclassified to conform to the current presentation. Operating results for
the three-month period ended March 31, 2006 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2006 or other
future periods.
The Condensed Consolidated Balance Sheet presented herein for December 31, 2005
has been derived from the audited consolidated financial statements as of that
date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
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.
With the exception of stock-based compensation related to the Company's adoption
of Statement of Financial Accounting Standard ("SFAS") 123R, "Share Based
Payment" ("SFAS 123R") described in Notes 2 and 5, there have been no material
changes to the Company's major accounting and reporting policies as disclosed in
the Notes to Consolidated Financial Statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2005.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS 154
The Company adopted SFAS 154, "Accounting Changes and Error Corrections" ("SFAS
154") January 1, 2006. 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 involves adjustments to
previously issued financial statements similar to those generally applicable to
reporting an accounting change retrospectively. The
7
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
adoption of SFAS 154 did not have any impact on the Company's consolidated
financial statements. SFAS 123R, which the Company also adopted January 1, 2006,
contained explicit transitional guidance. Accordingly, the requirements of SFAS
154 did not apply to the Company's concurrent adoption of SFAS 123R.
SFAS 123R and related FASB Staff Positions
Prior to January 1, 2006, the Company accounted for its stock-based compensation
plans under the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations, as permitted by the original SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). Under APB 25, no stock-based
compensation expense was recognized in the Company's Consolidated Statements of
Income for stock options and employee stock purchase plans. The Company's
executive stock bonus plan, adopted in 2005, was subject to expense recognition
under APB 25, and thus compensation expense was recognized for that plan in the
Company's Consolidated Statement of Income for all reporting periods in 2005.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R and the related FASB Staff Positions, using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in the first quarter of 2006 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and (b) compensation cost
for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Under the modified-prospective-transition method, results for prior periods have
not been restated.
As a result of adopting SFAS 123R on January 1, 2006, the Company's income
before income taxes and net income for the quarter ended March 31, 2006 were
$266,000 and $240,000 lower, respectively, than if it had continued to account
for share-based compensation under APB 25. The related impact on earnings per
share was less than $0.01. These additional expenses are primarily related to
the Company's stock option plans and employee stock purchase plans since the
Company's executive stock bonus plan was already subject to expense recognition
for financial reporting purposes under APB 25.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits of
deductions resulting from stock-based compensation as operating cash flows in
the Consolidated Statements of Cash Flows. SFAS 123R requires the cash flows
related to the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for stock-based awards (excess tax benefits) to be
classified as financing cash flows. During the quarter ended March 31, 2006, the
Company had no such excess tax benefits.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of the original
SFAS 123 to all stock-based awards for all prior periods presented. For purposes
of this pro forma disclosure, the value of the options is estimated using the
Black-Scholes-Merton option-pricing formula and amortized to expense over the
vesting periods.
8
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three months ended
March 31, 2005
------------------
(in thousands, except per share data)
Net income as reported $2,361
Add: Stock-based compensation expense
included in reported net income, net of tax 41
Less: Stock-based compensation expense using the
fair value method, net of tax (346)
------
Pro forma net income $2,056
======
Earnings per share - basic:
As reported $ 0.05
======
Pro forma $ 0.04
======
Earnings per share - diluted:
As reported $ 0.05
======
Pro forma $ 0.04
======
3. EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted-average number of
total common shares outstanding during the respective periods. Unvested grants
of restricted stock, even though legally outstanding, are not included in the
weighted-average number of common shares for purposes of computing basic
earnings per share. Diluted earnings per share are computed based on the
weighted-average number of total common shares outstanding (excluding unvested
shares of restricted stock) plus the dilutive effect of outstanding stock
options, estimated shares issuable under employee stock purchase plans, and
estimated shares issuable under the executive stock bonus plan, using the
"treasury stock" method.
Below is the calculation of basic and diluted earnings per share for the three
months ended March 31, 2006 and 2005:
9
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three months ended
---------------------
March 31, March 31,
2006 2005
--------- ---------
(in thousands, except per share data)
Net income available to common shareholders $ 5,848 $ 2,361
======= =======
Weighted-average common shares outstanding 48,991 48,872
Weighted-average unvested common shares outstanding (5) --
------- -------
Weighted average common shares used to compute
basic earnings per share 48,986 48,872
Dilutive effects of stock-based compensation plans 315 509
------- -------
Weighted-average common shares used to compute
diluted earnings per share 49,301 49,381
======= =======
Basic earnings per share $ 0.12 $ 0.05
======= =======
Diluted earnings per share $ 0.12 $ 0.05
======= =======
Additional options to purchase 3,586,755 shares of the Company's Class A common
stock at exercise prices ranging from $6.36 to $19.13 per share were outstanding
at March 31, 2006, but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common shares. Additional options to purchase 531,000 shares
of the Company's Class A common stock at exercise prices ranging from $5.08 to
$5.60 were outstanding at March 31, 2006, but were not included in the
computation of diluted earnings per share because the options' exercise prices,
when added to the average unearned compensation costs measured under SFAS 123
and SFAS 123R, were greater than the average market price of the common shares.
To include them would have been antidilutive.
4. COMPREHENSIVE INCOME
For the three months ended March 31, 2006 and 2005, comprehensive income for the
Company consisted of the total of net income and foreign currency translation
adjustments. Below is the calculation of comprehensive income for the three
months ended March 31, 2006 and 2005:
Three months ended
---------------------
March 31, March 31,
2006 2005
--------- ---------
(in thousands)
Net income $5,848 $2,361
Foreign currency translation adjustment (578) 1,984
------ ------
Comprehensive income $5,270 $4,345
====== ======
10
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. ACCOUNTING FOR STOCK-BASED COMPENSATION
As disclosed in Note 2, the Company adopted SFAS 123R and the related FASB Staff
Positions, effective January 1, 2006. SEC Staff Accounting Bulletin 107 requires
certain disclosures be included for the interim period when SFAS 123R is first
adopted. These disclosures are provided below.
At March 31, 2006, the Company has three types of stock-based compensation
plans: stock options, executive stock bonus plan (performance shares and
restricted shares), and employee stock purchase plans. The fair value of an
equity award is estimated on the grant date without regard to service or
performance conditions. The fair value is recognized as compensation expense
over the requisite service period for all awards that vest. Estimates are made
for the number of awards that will vest, and subsequent adjustments are made to
reflect actual vesting. Compensation cost is not recognized for awards that do
not vest because service or performance conditions are not satisfied.
Compensation cost recognized at any date equals at least the portion of the
grant-date value of an award that is vested at that date. The pre-tax
compensation expense recognized for these plans was $757,000 and $63,000 for the
quarters ended March 31, 2006 and 2005, respectively.
The total income tax benefit recognized in the income statement for stock-based
compensation arrangements was $200,000 and $22,000 for the quarters ended March
31, 2006 and 2005, respectively. Some of the Company's stock-based compensation
awards are granted under plans which are designed not to be taxable as
compensation to the recipient based on tax laws of the United States or the
applicable country. Accordingly, the Company does not recognize tax benefits on
all of its stock-based compensation expense recognized for financial reporting
purposes.
Stock Option Plans
The Company has stock option plans for key employees and directors that provide
for nonqualified and incentive stock option grants. All stock options are for
shares of the Company's Class A common stock. Option awards are granted with an
exercise price equal to the market price of the Company's stock at the date of
grant. The Company's stock option plans are shareholder approved, although the
Company's Board of Directors is authorized to make specific grants of stock
options.
Under the key employee stock option plan, incentive and nonqualified options for
up to 6,250,000 shares may be granted. Employee stock options typically are
subject to graded vesting over five years (20% each year) and have a typical
life of ten years. Compensation cost for stock
11
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
options is recognized on a straight-line basis over the requisite service period
for the entire award. During the quarter ended March 31, 2006, $190,000 in
compensation expense was recognized for the key employee stock option plan.
Under the directors' plan, board members are granted options upon initial
election to the Board and upon annual re-election to the Board. Options for up
to 450,000 shares may be granted under the directors' plan. Directors' options
are fully vested at grant date and have a typical life of ten years. During the
quarter ended March 31, 2006, no compensation expense was recognized for
directors' options since all were fully vested at adoption of SFAS 123R on
January 1, 2006.
A summary of option activity as of March 31, 2006, and changes during the
quarter then ended, is presented below:
Weighted-Average Aggregate
Shares Weighted-Average Remaining Intrinsic Value
(000) Exercise Price Contractual Term (000)
------ ---------------- ---------------- ---------------
Outstanding at January 1, 2006 4,595 $10
Granted 25 6
Exercised -- --
Forfeited or expired (154) 11
-----
Outstanding at March 31, 2006 4,466 9 5.1 years $781
===== === ========= ====
Vested at March 31, 2006 3,006 11 4.2 years $380
===== === ========= ====
Exercisable at March 31, 2006 3,006 11 4.2 years $380
The weighted-average grant-date fair value of stock options granted during the
quarters ended March 31, 2006 and 2005 was $1.75 and $2.11, respectively. There
were no stock options exercised during the quarter ended March 31, 2006. The
total intrinsic value of stock options exercised during the quarter ended March
31, 2005 was $76,000. The total fair value of stock options vesting during the
quarters ended March 31, 2006 and 2005 was $700,000 and $679,000, respectively.
At March 31, 2006, there was $1,890,000 of total unrecognized compensation cost
related to nonvested stock options under the key employee stock option plan.
This cost is expected to be recognized over a weighted-average period of 2.2
years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes-Merton option-pricing formula, with the following assumptions:
12
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2006 2005
------- -------
Expected dividend yield 3.4% 4.2%
Expected volatility 37% 37%
Risk-free interest rate 4.9% 4.1%
Expected term of options 7 years 7 years
The expected dividend yield is based on the Company's historical dividend yield.
Expected volatility of the price of the Company's Class A common stock is based
on historical realized volatility. The risk-free interest rate is the implied
yield available on U.S. Treasury zero-coupon issues with terms equal to the
expected term used in the pricing formula. The expected term of the option takes
into account both the contractual term of the option and the effects of expected
exercise behavior.
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. The plan has
two components: the performance share component and the restricted share
component.
Under the performance share component, key employees of the Company are eligible
to earn shares of stock upon the achievement of certain individual and/or
corporate objectives. Share grants are determined at the discretion of the
Company's Board of Directors and are subject to graded vesting over periods
typically ranging from three to five years. Shares are not issued until the
vesting requirements have lapsed. Dividends are not paid or accrued on unvested
shares. The grant-date fair value of a performance share grant is based on the
market value of the Company's Class A common stock on the date of grant, reduced
for the present value of estimated dividends not received on the unvested shares
during the vesting period. If the award contains a performance vesting
condition, compensation expense for each vesting tranche in the award is
recognized ratably from the service inception date to the vesting date for each
tranche. Otherwise, compensation expense is recognized on a straight-line basis
over the requisite service period.
During 2005, a total of 130,300 performance shares were granted, 69,850 shares
were actually earned based on achievement of 2005 performance goals, and 13,970
(20%) of those earned shares vested at the end of 2005. During 2006, a total of
767,350 performance shares were granted and eligible to be earned based on
attainment of performance goals that extend through 2010 for certain awards.
Based on interim achievement rates for the performance goals at March 31, 2006,
the Company estimates that 597,000 performance shares will be earned for awards
granted in 2006.
13
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the status of the Company's nonvested performance shares as of
March 31, 2006, and changes during the quarter then ended, is presented below:
Weighted-
Average Grant
Date Fair
Shares Value
------- -------------
Nonvested at January 1, 2006 55,880 $6.38
Granted 767,350 5.01
Vested -- --
Forfeited or expired -- --
-------
Nonvested at March 31, 2006 823,230 5.10
=======
The total fair value of the 13,970 performance shares vested at March 31, 2006
was $89,000. For the quarter ended March 31, 2005, no performance shares were
vested.
Compensation expense recognized for all performance shares totaled $474,000 and
$63,000 for the quarters ended March 31, 2006 and 2005, respectively.
Compensation cost for these awards is net of estimated or actual award
forfeitures. As of March 31, 2006, there was $2,832,000 of total unearned
compensation cost related to nonvested performance shares that is expected to be
recognized over a weighted-average period of 2.9 years.
Under the restricted share component, the Board of Directors may elect to issue
restricted shares of stock in lieu of, or in addition to, cash bonus payments to
certain key employees. Employees receiving these shares have restrictions on the
ability to sell the shares. Such restrictions lapse ratably over vesting periods
typically ranging from two to five years. For grants of restricted shares,
vested and unvested shares issued are eligible to receive nonforfeitable
dividends. The grant-date fair value of a restricted share grant is based on the
market value of the stock on the date of grant. Compensation cost is recognized
on a straight-line basis over the requisite service period for the entire award
since the award only has a service condition.
A summary of the status of the Company's nonvested restricted shares as of March
31, 2006, and changes during the quarter then ended, is presented below:
Weighted-
Average Grant
Shares Date Fair Value
------ ---------------
Nonvested at January 1, 2006 5,000 $7.64
Granted 50,000 5.87
Vested -- --
Forfeited or expired -- --
------
Nonvested at March 31, 2006 55,000 6.03
======
14
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Compensation expense recognized for all restricted shares totaled $17,000 for
the quarter ended March 31, 2006. There were no restricted shares granted or
outstanding as of March 31, 2005. As of March 31, 2006, there was $314,000 of
total unearned compensation cost related to nonvested restricted shares, which
is expected to be recognized over a weighted-average period of 4.7 years.
Employee Stock Purchase Plans
At March 31, 2006, the Company has two employee stock purchase plans: the U.S.
Plan and the United Kingdom ("U.K.") Plan. The U.S. Plan is also available to
eligible employees in Canada, Puerto Rico, and the U.S. Virgin Islands. Both
plans are compensatory under SFAS 123R.
For both the U.S. and U.K. plans, the requisite service period is the period of
time over which the employees contribute to the plans through payroll
withholdings. For purposes of recognizing compensation expense, estimates are
made for the total withholdings expected over the entire withholding period. The
market price of a share of stock at the beginning of the withholding period is
then used to estimate the total number of shares that will be purchased using
the total estimated withholdings. Compensation cost is recognized ratably over
the withholding period.
Under the U.S. Plan, the Company is authorized to issue up to 1,500,000 shares
of the Company's Class A common stock to eligible employees. Participating
employees can elect each year to have up to $21,000 of their annual earnings
withheld to purchase shares at the end of the one-year withholding period. The
purchase price of the stock is 85% of the lesser of the closing price for a
share of stock on the first day or the last day of the withholding period.
Participating employees may cease payroll withholdings during the withholding
period and/or request a refund of all amounts withheld before any shares are
purchased.
Since the U.S. Plan involves a look-back option, the estimate of the fair value
for the option is separated into two components. The first component is
calculated as 15% (the employee discount) of a nonvested share of the Company's
Class A common stock. The second component involves using the Black-Scholes-
Merton option-pricing formula to value a one-year option on 85% of a share of
the Company's Class A common stock. The value is adjusted to reflect the effect
of the dividends that the employees do not receive during the life of the share
option.
At March 31, 2006, an estimated 104,000 shares can be purchased under the U.S.
Plan at the end of the current withholding period with a grant-date fair value
of $2.39 per share. During the quarter ended March 31, 2006, compensation
expense of $53,000 was recognized. At March 31, 2006, total estimated unearned
compensation cost of $66,000 is expected to be recognized through the end of the
current withholding period which ends June 30, 2006.
15
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Under the U.K. Plan, the Company is authorized to issue up to 500,000 shares of
the Company's Class A common stock. During the first quarter of 2006, the
Company's Board of Directors approved an amendment to add an additional 500,000
eligible shares to the U.K. Plan, subject to shareholder approval. Under the
U.K. Plan, eligible employees can elect to have up to 250 pounds withheld from
payroll each month to purchase shares at the end of a three-year withholding
period. The purchase price of a share of stock is 85% of the market price at the
beginning of the withholding period. Participating employees may cease payroll
withholdings and/or request a refund of all amounts withheld before any shares
are purchased.
Under the U.K. Plan, fair value is equal to 15% (the employee discount) of the
market price of a share of the Company's Class A common stock at the beginning
of the withholding period. No adjustment is made to reflect the effect of the
dividends that the employees do not receive during the life of the share option
since employees are credited with interest by a third party on their
withholdings during the withholding period. For purposes of estimating fair
value, this interest-paying feature is deemed to be materially equivalent to the
foregone dividends on the underlying shares of stock.
At March 31, 2006, an estimated 519,000 shares can be purchased under the U.K.
Plan at the end of the three active withholdings periods which began in 2003,
2004, and 2005, respectively. These estimates are subject to change based on
fluctuations in the value of the British pound against the U.S. dollar. The
discounted purchase price for a share of stock is $4.00, $5.84, and $5.97 under
the 2003, 2004, and 2005 withholding periods, respectively. For the quarter
ended March 31, 2006, compensation cost of $23,000 was recognized for the U.K.
Plan. At March 31, 2006, there was an estimated $119,000 of total unrecognized
compensation cost related to the U.K. Plan, which is expected to be recognized
through March 2008.
During the quarter ended March 31, 2006, a total of 232 shares of Class A
common stock were issued under the U.K. Plan.
6. PROPERTY AND EQUIPMENT HELD FOR SALE
At March 31, 2006, the Company is negotiating to sell the land and building
currently utilized as its world headquarters in Atlanta, Georgia. If these
assets are sold, the Company plans to relocate its headquarters after a
short-term leaseback of its current facilities. This disposal group of assets
has a fair value that exceeds its carrying amount; thus these assets are
reported at depreciated cost in accordance with the provisions of SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Property and
equipment with a net carrying amount of $3,012,000 have been reclassified from
Property and Equipment to Prepaid Expenses and Other Current Assets in the
accompanying Condensed Consolidated Balance Sheet at March 31, 2006. There are
no material liabilities associated with this disposal group. The Company is
unable at this time to estimate any gain that may be realized subsequent to
March 31, 2006. Additional information regarding the status of this property
subsequent to March 31, 2006 is provided in Note 11.
16
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. RETIREMENT PLANS
The Company and its subsidiaries sponsor various defined benefit and defined
contribution retirement plans covering substantially all employees. Effective
December 31, 2002, the Company elected to freeze its U.S. defined benefit
pension plan and replace it with a defined contribution plan. The Company's U.K.
defined benefit retirement plans have also been frozen for new employees, but
existing participants may still accrue additional benefits. Net periodic benefit
cost related to the U.S., U.K., and Holland defined benefit pension plans for
the three months ended March 31, 2006 and 2005 included the following
components:
Three months ended
---------------------
March 31, March 31,
2006 2005
--------- ---------
(in thousands)
Service cost $ 601 $ 514
Interest cost 7,941 7,843
Expected return on assets (8,478) (8,118)
Recognized net actuarial loss 2,484 1,875
------- -------
Net periodic benefit cost $ 2,548 $ 2,114
======= =======
8. SEGMENT INFORMATION
The Company has two reportable segments, one which provides claims 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. Inter-segment 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 net corporate interest expense,
stock option expense, and income taxes.
17
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
Financial information for the three months ended March 31, 2006 and 2005
covering the Company's reportable segments is presented below:
Three months ended
---------------------
March 31, March 31,
2006 2005
--------- ---------
(in thousands)
REVENUES:
U.S., before reimbursements $131,106 $112,507
International, before reimbursements 70,500 71,827
-------- --------
Total Segment Revenues before Reimbursements 201,606 184,334
Reimbursements 20,066 15,309
-------- --------
TOTAL REVENUES $221,672 $199,643
======== ========
SEGMENT OPERATING EARNINGS:
U.S $ 8,631 $ 1,836
International 1,686 3,345
-------- --------
TOTAL SEGMENT OPERATING EARNINGS 10,317 5,181
Deduct:
Stock option expense (266) --
Net corporate interest expense (998) (1,527)
-------- --------
INCOME BEFORE INCOME TAXES $ 9,053 $ 3,654
======== ========
9. COMMITMENTS AND CONTINGENCIES
The Company normally structures its acquisitions to include earnout payments,
which are contingent upon the acquired entity reaching certain revenue and
operating earnings targets. The amount of the contingent payments and length of
the earnout period varies for each acquisition, and the ultimate payments when
made will vary, as they are dependent on future events. Based on projected
levels of revenues and operating earnings, additional payments after March 31,
2006 under existing earnout agreements would approximate $2.2 million through
2009, as follows:
2006 2007 2008 2009
---- ---- ---------- --------
-- -- $2,032,000 $144,000
In the normal course of the claims administration services business, the Company
is named as a defendant in suits by insureds or claimants contesting decisions
made by the Company or its clients with respect to the settlement of claims.
Additionally, clients of the Company have brought actions for indemnification on
the basis of alleged negligence by the Company, its agents, or its employees in
rendering service to clients. The majority of these claims are of the type
covered by insurance maintained by the Company. However, the Company is
self-insured
18
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
for the deductibles under various insurance coverages. In the opinion of Company
management, adequate provisions have been made for such self-insured risks.
10. DEBT COVENANTS
The Company's 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. The Company was in compliance with its debt
covenants as of March 31, 2006.
11. SUBSEQUENT EVENTS
On March 22, 2006 the Company entered into a Purchase and Sale Agreement ( the
"Purchase Agreement") with a third party to sell the land and building located
at 5620 Glenridge Drive N. E., Atlanta, Georgia 30342 currently utilized as its
world headquarters for a total sales price of $12.0 million.
Under the Purchase Agreement, the purchaser had a 30 day inspection period with
the right to terminate the agreement if the purchaser, in its sole discretion,
determined that the results of the inspection were unsatisfactory. Subsequent to
March 31, 2006, the purchaser notified the Company that based on its inspection
of the property, the purchaser wants a reduction in the purchase price to $10
million in order to proceed to a closing under the Purchase Agreement.
The Company has not accepted this proposal and is currently negotiating with the
purchaser to arrive at terms agreeable to both parties. The Company can not
predict when these negotiations will be completed, if they will ultimately
result in a definitive agreement between the parties, or their effect on the
Company's financial condition, results of operations, or cash flows. As
disclosed in Note 6, these assets have a net carrying amount of $3,012,000 and
have been classified as held for sale in the Company's Condensed Consolidated
Balance Sheet at March 31, 2006.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Crawford & Company:
We have reviewed the condensed consolidated balance sheet of Crawford & Company
as of March 31, 2006, and the related condensed consolidated statements of
income for the three-month periods ended March 31, 2006 and 2005, and the
condensed consolidated statements of cash flows for the three-month periods
ended March 31, 2006 and 2005. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Crawford & Company as of December 31, 2005, and the related
consolidated statements of income and cash flows for the year then ended (not
presented herein) and in our report dated March 9, 2006, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2005, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Atlanta, Georgia
May 8, 2006
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This quarterly 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 declines in the volume of cases referred to us for
many of our service lines associated with the property and casualty insurance
industry, 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, the fact that our U. S. and U. K.
defined benefit pension plans are significantly underfunded, 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 risks associated with
doing business outside the U.S., possible legislation, our ability to comply
with debt covenants, the outcome of our legal proceedings, changes in market
conditions that may curtail or limit growth in product liability and securities
class actions, man-made disasters and natural disasters, the sale of our
corporate headquarters, and other risk factors in our 2005 Annual Report on Form
10-K and other documents that we file with the Securities and Exchange
Commission. Therefore, you should not place undue reliance on any
forward-looking statements.
21
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.
Accordingly, the volume of claim referrals to us is a key driver of our
revenues. When the insurance underwriting market is soft, insurance companies
are generally more aggressive in the risks they underwrite, and insurance
premiums and policy deductibles decline. This usually results in an increase in
industry-wide claim referrals which will increase claim referrals to us provided
we maintain at least our existing share of the overall claims 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
22
dependent on the delivery of superior quality service and effective, properly
focused sales efforts.
RESULTS OF CONSOLIDATED OPERATIONS
Consolidated net income was $5,848,000 for the first quarter of 2006 as compared
to $2,361,000 for the first quarter of 2005.
With the exception of net corporate interest expense, stock option expense and
income taxes, 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 net corporate
interest expense, stock option expense and income taxes.
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 $1.0 million and $1.5 million for the first quarters of 2006 and
2005, respectively.
STOCK OPTION EXPENSE
Stock option expense is mainly comprised of non-cash expenses related to
historically granted stock options under our various stock option and employee
stock purchase plans. Stock option expense of $266,000 was recognized for the
2006 first quarter under SFAS 123R. Stock option expense for the 2005 first
quarter was not recognized in our Condensed Statement of Income under the
provisions of APB 25.
INCOME TAXES
Taxes on income totaled $3.2 million and $1.3 million for the quarters ended
March 31, 2006 and 2005, 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 the first quarter of 2006 and 2005 was
35.4%.
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.
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 excludes net
corporate interest expense, stock option expense and income taxes.
23
Net corporate interest, stock option 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, stock option expense is a non-cash expense primarily related to
historically issued stock options, and income taxes are based on statutory rates
in effect in each of the locations where we provide services and vary throughout
the world. None of these costs relate directly to the performance of our
services, and therefore are excluded from segment operating earnings in order to
better assess the results of our segment operating activities on a consistent
basis.
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, net corporate
interest expense, stock option expense and income taxes.
Our discussion and analysis of operating expenses is comprised of two
components. Compensation and Fringe Benefits include all compensation, payroll
taxes, and benefits provided to our employees which, as a service company,
represents our most significant and variable expense. Expenses Other Than
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 condensed
consolidated financial statements and the accompanying notes.
24
Operating results for our U.S. and international operations, reconciled to net
income, were as follows:
Three Months Ended
March 31
-------------------
2006 2005
-------- --------
(in thousands)
REVENUES:
U.S., before reimbursements $131,106 $112,507
International, before reimbursements 70,500 71,827
-------- --------
Total, before reimbursements 201,606 184,334
Reimbursements 20,066 15,309
-------- --------
Total Revenues $221,672 $199,643
COMPENSATION & FRINGE BENEFITS:
U.S $ 80,768 $ 72,116
% of Revenues before reimbursements 61.6% 64.1%
International 50,665 50,545
% of Revenues before reimbursements 71.9% 70.3%
-------- --------
Total $131,433 $122,661
% of Revenues before reimbursements 65.2% 66.5%
EXPENSES OTHER THAN COMPENSATION & FRINGE BENEFITS:
U.S $ 41,707 $ 38,555
% of Revenues before reimbursements 31.8% 34.3%
International 18,149 17,937
% of Revenues before reimbursements 25.7% 25.0%
-------- --------
Total 59,856 56,492
% of Revenues before reimbursements 29.7% 30.6%
Reimbursements 20,066 15,309
-------- --------
Total $ 79,922 $ 71,801
% of Revenues 36.1% 36.0%
OPERATING EARNINGS:
U.S $ 8,631 $ 1,836
% of Revenues before reimbursements 6.6% 1.6%
International 1,686 3,345
% of Revenues before reimbursements 2.4% 4.7%
DEDUCT:
Net corporate interest expense (998) (1,527)
Stock option expense (266) --
Income taxes (3,205) (1,293)
-------- --------
Net income $ 5,848 $ 2,361
======== ========
25
U.S. OPERATIONS
REVENUES BEFORE REIMBURSEMENTS
U.S. revenues before reimbursements by market type, for the quarter ended March
31, 2006 and 2005 were as follows:
Quarter ended
--------------------------------
March 31, March 31,
2006 2005 Variance
--------- --------- --------
(in thousands)
Insurance companies $ 61,515 $ 53,979 14.0%
Self-insured entities 36,841 39,340 (6.4%)
Legal settlement administration 32,750 19,188 70.7%
-------- -------- ----
Total U.S. Revenues
before Reimbursements $131,106 $112,507 16.5%
======== ======== ====
Revenues before reimbursements from insurance companies increased 14.0% to $61.5
million for the three months ended March 31, 2006, compared to $54.0 million for
the 2005 period, due to an increase in storm-related revenues in our
catastrophe, property central, and technical services units. Revenues from
self-insured clients decreased 6.4% for the three months ended March 31, 2006 to
$36.8 million compared to $39.3 million for the 2005 period, 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. Legal
settlement administration revenues, including administration and inspection
services, increased 70.7% to $32.7 million for the three months ended March 31,
2006, compared to $19.2 million for the 2005 period. Legal settlement
administration revenues are project-based and can fluctuate significantly.
However, we have a backlog of projects awarded totaling approximately $35.6
million at March 31, 2006.
REIMBURSEMENTS INCLUDED IN TOTAL REVENUES
Reimbursements for out-of-pocket expenses included in total revenues for our
U.S. operations were $13.0 million for the quarter ended March 31, 2006,
increasing from $8.6 million in the comparable 2005 period. These increases are
primarily attributable to our legal settlement administration unit which had
higher out-of-pocket costs in the 2006 first quarter related to noticing work
performed on certain securities class action settlements.
Case Volume Analysis
Excluding the impact of legal settlement administration services, which has
project-based revenues that are not denominated by individual cases, U.S. unit
volume, measured principally by cases received, decreased 8.0% in the first
quarter of 2006 compared to the same 2005 period. This decrease was partially
offset by a 12.4% revenue increase from changes in the mix of services provided
and in the rates charged for those services, resulting in a net 4.4% increase in
U.S. revenues before reimbursements for the first quarter of 2006, excluding
revenues from legal settlement administration services. The decrease in
high-frequency, low-severity claims referred from our U.S. insurance company
clients and an increase in high-value commercial claims generated by the 2005
hurricanes combined to increase our average revenue per claim in the 2006 first
quarter. Growth in legal settlement administration services increased U.S.
revenues by 12.1% in the quarter ended March 31, 2006, compared to the same
quarter in 2005.
26
Excluding the impact of legal settlement administration services, U.S. unit
volume by major service line, as measured by cases received, for the three
months ended March 31, 2006 and 2005 was as follows:
Quarter ended
--------------------------------
March 31, March 31,
2006 2005 Variance
--------- --------- --------
(whole numbers)
Casualty 47,304 47,581 (0.6%)
Property 46,526 48,557 (4.2%)
Vehicle 26,755 32,929 (18.7%)
Workers' Compensation 31,506 36,016 (12.5%)
Other 5,212 5,889 (11.5%)
------- ------- -----
TOTAL U.S. CASES RECEIVED 157,303 170,972 (8.0%)
======= ======= =====
Conservative underwriting by insurance companies, including increases in policy
deductibles, and the absence of significant winter storm claims activity,
contributed to an industry-wide decline in property and casualty claims
frequency during the 2006 first quarter. The decline in vehicle claims during
the quarter ended March 31, 2006 was due to a decline in referrals of
high-frequency, low-severity claims from our insurance company clients. The
declines in workers' compensation and casualty claims during the quarter ended
March 31, 2006 were due primarily to a reduction in claims from our existing
clients and reflects continued weakness in reported workplace injuries.
COMPENSATION AND FRINGE BENEFITS
Our most significant expense is the compensation of employees, including related
payroll taxes and fringe benefits. U.S. compensation expense as a percent of
revenues before reimbursements decreased to 61.6% in the first quarter of 2006
as compared to 64.1% in the same 2005 quarter. This decrease was primarily due
to the utilization of operating capacity within our field operations branches as
we completed claims associated with Hurricanes Katrina, Wilma and Rita. There
was an average of 4,430 full-time equivalent employees (including 238
catastrophe adjusters) in the first three months of 2006, compared to an average
of 4,267 (including 188 catastrophe adjusters) in the same 2005 period.
U.S. salaries and wages totaled $66.5 million for the quarter March 31, 2006,
increasing 14.7% from $58.0 million in the comparable 2005 period, primarily as
a result of higher compensation associated with the increased revenues generated
by our catastrophe adjusters and legal settlement administration unit. Payroll
taxes and fringe benefits for U.S. operations totaled $14.3 million in the first
quarter of 2006, increasing slightly from 2005 costs of $14.1 million due
primarily to favorable experience in our self-insured workers' compensation
program in the 2006 quarter, which substantially offset increases in other
benefit costs resulting from the increase in salaries and wages.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits were 31.8% of revenues before reimbursements for the quarter
ended March 31, 2006, decreasing from 34.3% for the same quarter in 2005. These
decreases are primarily due to lower bad debt expense, lower automobile fleet
costs, and the greater utilization of operating capacity during the 2006 first
quarter resulting from the increase in revenue.
27
REIMBURSED EXPENSES
Reimbursed out-of-pocket expenses in our U.S. operations were $13.0 million for
the quarter ended March 31, 2006, increasing from $8.6 million in the comparable
2005 period. These increases are primarily attributable to our legal settlement
administration unit which had higher out-of-pocket costs in the 2006 first
quarter related to noticing work performed on certain securities class action
settlements.
INTERNATIONAL OPERATIONS
REVENUES BEFORE REIMBURSEMENTS
Substantially all international revenues are derived from the insurance company
market.
Revenues before reimbursements from our international operations decreased 1.8%,
from $71.8 million in the first quarter of 2005 to $70.5 million in the 2006
first quarter. International unit volume, measured principally by cases
received, decreased 3.4% in the quarter ended March 31, 2006, compared to the
same period in 2005. Revenues per claim increased 5.9% during the quarter ended
March 31, 2006, due to changes in the mix of services provided and in the rates
charged for those services. Revenues before reimbursements reflect a 4.3%
decrease during the quarter ended March 31, 2006 due to the negative effect of a
strong 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 slightly to $7.0 million for the quarter
ended March 31, 2006, from $6.7 million in the same 2005 period.
Case Volume Analysis
International unit volume by region for the quarter ended March 31, 2006 and
2005 was as follows:
Quarter ended
--------------------------------
March 31, March 31,
2006 2005 Variance
--------- --------- --------
(whole numbers)
United Kingdom 36,536 41,355 (11.7%)
Americas 29,750 29,381 1.3%
CEMEA 26,535 27,975 (5.1%)
Asia/Pacific 15,570 13,443 15.8%
------- ------- -----
TOTAL INTERNATIONAL CASES RECEIVED 108,391 112,154 (3.4%)
======= ======= =====
The decrease in the U.K. unit volume was due to the absence of weather-related
events during the first quarter of 2006 that were present in the 2005 period.
The decrease in Continental Europe, Middle East, & Africa ("CEMEA") was
primarily due to reductions in automobile claims in
28
France and low-value property claims in Germany. The Asia/Pacific increase was
primarily due to an increase in high frequency, low severity claims activity in
Singapore.
COMPENSATION AND FRINGE BENEFITS
As a percentage of revenues before reimbursements, compensation expense,
including related payroll taxes and fringe benefits, were 71.9% for the quarter
ended March 31, 2006 compared to 70.3% for the same quarter in 2005. This
increase primarily reflects a lack of storm-related claim activity in our
Caribbean and Asia-Pacific regions during the 2006 quarter as compared to the
2005 period, which increased our operating capacity during the 2006 period.
There was an average of 3,357 full-time equivalent employees in the first three
months of 2006 compared to an average of 3,251 in the same 2005 period.
Salaries and wages of international personnel decreased to $41.4 million for the
quarter ended March 31, 2006, from $42.1 million in the same 2005 quarter.
Increases associated with the growth in the number of full-time equivalent
employees were offset by the negative effect of a strong U.S. dollar, primarily
as compared to the British pound and euro. Payroll taxes and fringe benefits for
international operations totaled $9.3 million for the quarter ended March 31,
2006, compared to $8.4 million for the same period in 2005, primarily due to
increased defined contribution retirement costs.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than compensation and related payroll taxes and fringe benefits
were 25.7% of international revenues before reimbursements for the quarter ended
March 31, 2006, up from 25.0% for the same period in 2005, primarily due to an
increase in operating capacity during the 2006 period related to the decline in
revenues.
REIMBURSED EXPENSES
Reimbursed out-of-pocket expenses in our international operations increased
slightly to $7.0 million for the quarter ended March 31, 2006, from $6.7 million
in the same 2005 period.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At March 31, 2006, our working capital balance (current assets less current
liabilities) was $136.2 million, an increase from the December 31, 2005 balance
of $125.8 million. Cash and cash equivalents totaled $50.2 million at March 31,
2006 and $49.4 million at December 31, 2005.
CASH PROVIDED BY OPERATING ACTIVITIES
Cash provided from operating activities increased by $17.8 million, from cash
used in operating activities of $11.8 million in the first quarter of 2005 to
cash provided by operating activities of $6.0 million in the first quarter of
2006. Cash was generated in 2006 from improved collections within our legal
settlement administration unit and the collection of accounts receivable
generated from the hurricane-related claims administered in the 2005 fourth
quarter. Income tax payments were lower in the 2006 first quarter as compared to
the 2005 period due primarily to lower required estimated tax payments in the
U.S.
29
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities increased by $1.1 million, from $4.5 million
in the first quarter of 2005 to $5.6 million in the first quarter of 2006. This
increase was related to greater capitalization of computer software costs in the
2006 quarter.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash provided by financing activities increased by $2.3 million, from $2.1
million used in the first quarter of 2005 to cash provided by financing
activities of $157,000 in the first quarter of 2006. This increase was due to a
$2.5 million increase during the 2006 first quarter in net short-term borrowings
in our international operations over the level of borrowings for the same period
in 2005. Cash dividends to shareholders in both the 2006 and 2005 first quarters
approximated $2.9 million. As a percentage of net income, cash dividends totaled
50.3% for the 2006 first quarter, compared to 124.2% in the 2005 period.
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 $13,942,000 of our
retained earnings at March 31, 2006 is available for the payment of cash
dividends to shareholders during the remainder of 2006.
During the first quarter of 2006, we did not repurchase any shares of our Class
A or Class B Common Stock. As of March 31, 2006, 705,863 shares remain to be
repurchased under the discretionary 1999 share repurchase program authorized by
the Board of Directors. We believe it is unlikely that we will repurchase shares
under this program in the foreseeable future due to the decline in the funded
status of our defined benefit pension plans.
OTHER MATTERS CONCERNING LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
We maintain a $70.0 million revolving credit line with a syndication of banks in
order to meet seasonal working capital requirements and other financing needs
that may arise. This revolving credit line expires in September 2010. 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 $24.3 million at March 31, 2006. Our short-term 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 March 31, 2006 totaled $32.4 million, increasing from $28.9
million at the end of 2005. Long-term borrowings outstanding, including current
installments of $6.0 million, totaled $51.8 million as of March 31, 2006,
compared to $52.3 million at December 31, 2005. 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.
30
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 March 31, 2006 was $182.1 million, compared with
$179.0 million at the end of 2005. This increase was the result of net income,
partially offset by dividends paid to shareholders and net negative foreign
currency translations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses our condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates these
estimates and judgments based upon historical experience and on various other
factors that are believed to be reasonable under the circumstances. The results
of these evaluations form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
There have been no material changes to our critical policies and estimates since
December 31, 2005. For a detailed discussion regarding the application of our
critical accounting policies, see our Annual Report on Form 10-K for the year
ended December 31, 2005 filed with the Securities and Exchange Commission, under
the heading "Critical Accounting Policies and Estimates" in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations'
section.
NEW ACCOUNTING STANDARDS
Additional information related to new accounting standards adopted during the
first quarter of 2006 is provided in Notes 2 and 5 to our condensed consolidated
financial statements contained in this Form 10-Q.
We adopted Statement of Financial Accounting Standards 123R, "Share-Based
Payment" ("SFAS 123R") and the related FASB Staff Positions on January 1, 2006.
As required by the SEC's Staff Accounting Bulletin 107, we have provided all of
the required disclosures of SFAS 123R in the interim period of adoption.
During the first quarter of 2006, we recognized total pre-tax compensation
expense for stock-based awards in the amount of $757,000 under SFAS 123R,
compared to $63,000 for the first quarter of 2005 under Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees," ("APB 25").
Included in the expense for first quarter 2006 is $266,000 for our stock option
and employee stock purchase plans. These plans were not subject to expense
recognition in 2005 under APB 25.
Beginning in 2005, most new awards of stock-based compensation have been granted
under our executive stock bonus plan, which consists of grants of unvested
performance shares and
31
restricted shares of our Class A common stock. Awards under this plan were
compensatory under APB 25, although the methods used to measure and recognize
compensation costs differ somewhat from those under SFAS 123R. The adoption of
SFAS 123R did not have a significant impact on compensation cost recognized for
awards under our executive stock bonus plan. The increase in recognized
compensation cost for these awards, $491,000 in the first quarter of 2006
compared to $63,000 in the first quarter of 2005, was primarily due to the
number of awards granted in 2006 as compared to 2005.
FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS
Certain information presented in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" may include forward-looking
statements, the accuracy of which is subject to a number of risks, uncertainties
and assumptions. The section captioned "Cautionary Statement Concerning
Forward-Looking Statements" in this Form 10-Q and Item 1.A. of our Annual Report
on Form 10-K for the year ended December 31, 2005 discusses such risks,
uncertainties and assumptions and other key factors that could cause actual
results to differ materially from those expressed in such forward-looking
statements.
LEGAL PROCEEDINGS
As disclosed in Note 9, "Commitments and Contingencies," to the condensed
consolidated financial statements, we have potential exposure to certain legal
and regulatory matters.
CONTINGENT PAYMENTS
We normally structure acquisitions to include earnout payments, which are
contingent upon the acquired entity reaching certain revenue and operating
earnings targets. The amount of the contingent payments and length of the
earnout period varies for each acquisition, and the ultimate payments when made
will vary, as they are dependent on future events. Based on projected levels of
revenues and operating earnings, additional payments after March 31, 2006 under
existing earnout agreements would approximate $2.2 million through 2009, as
follows: 2006 - none; 2007 - none; 2008 - $2,032,000; and 2009 - $144,000.
At March 31, 2006, we have committed $13.3 million under letters of credit to
satisfy certain of our own contractual requirements. As noted below in our
discussion of Debt Covenants, these letters of credit commitments are a
component of our $70.0 million Amended Revolving Credit Agreement.
DEBT COVENANTS
In October 2003, we entered into a $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 March 31, 2006, there was $32.4 million
outstanding on the revolving credit line, including bank overdrafts of $3.7
million, with an average variable interest rate of 6.0%. 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
32
October 2006 and continuing semi-annually through 2009 with the final payment
due October 2010. The stock of Crawford & Company International, Inc. is pledged
as security under these agreements and our U.S. subsidiaries have guaranteed our
obligations under these agreements.
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.
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.
33
We were in compliance with these debt covenants as of March 31, 2006. 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 the remainder of 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.
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 March 31, 2006, we have not entered into any off-balance sheet arrangements
that could materially impact our operations, financial conditions, or cash
flows.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since the filing of our Annual Report on
Form 10-K for the year ended December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to management, including the Chief Executive
Officer and Interim Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Management necessarily applied its
34
judgment in assessing the costs and benefits of such controls and procedures,
which, by their nature, can provide only reasonable assurance regarding
management's control objectives. The Company's management, including the Chief
Executive Officer and Interim Chief Financial Officer, does not expect that our
disclosure controls can prevent all possible errors or fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. There are
inherent limitations in all control systems, including the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple errors or mistakes. Additionally, controls can be circumvented
by the individual acts of one or more persons. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and, while our disclosure controls and procedures are designed to
be effective under circumstances where they should reasonably be expected to
operate effectively, there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Because of the
inherent limitations in any control system, misstatements due to possible errors
or fraud may occur and not be detected.
As of the end of the period covered by this report, we performed an evaluation,
under the supervision and with the participation of management, including the
Chief Executive Officer and Interim Chief Financial Officer, of the
effectiveness of the design and operations of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon
the foregoing, the Chief Executive Officer along with the Interim Chief
Financial Officer concluded that our disclosure controls and procedures are
effective at providing reasonable assurance that all material information
relating to the Company (including consolidated subsidiaries) required to be
included in our Exchange Act reports is reported in a timely manner.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We have identified no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information on legal matters, see Note 9, "Commitments and Contingencies" to
the condensed consolidated financial statements included in this Form 10-Q which
is incorporated into this Item 1 by reference.
ITEM 6. EXHIBITS
See Index to Exhibits beginning on page 37.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAWFORD & COMPANY
(Registrant)
Date: May 8, 2006 /s/ Thomas W. Crawford
----------------------------------------
Thomas W. Crawford
President and Chief Executive Officer
(Principal Executive Officer)
and Director
Date: May 8, 2006 /s/ W. Bruce Swain, Jr.
----------------------------------------
W. Bruce Swain, Jr.
Senior Vice President, Controller and
Interim Chief Financial Officer
(Principal Financial Officer)
36
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
3.1 Restated Articles of Incorporation of the Registrant, as
amended April 23, 1991 (incorporated by reference to Exhibit
4.1 to the Registrant's Form S-8 filed with the Securities and
Exchange Commission on June 6, 2005)
3.2 Restated By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.1 to the Registrant's quarterly report
on Form 10-Q for the quarter ended March 31, 2004)
10.1 Purchase and Sale Agreement, dated March 22, 2006 (incorporated
by reference to Exhibit 10.1 to Registrant's Form 8-K filed
with the Securities and Exchange Commission March 28, 2006)
10.2 Terms of Employment Agreement for Jeffrey T. Bowman, dated
February 10, 2006 (incorporated by reference to Exhibit 10.1 to
the Registrant's Form 8-K filed with the Securities and
Exchange Commission on February 15, 2006)
15 Letter from Ernst & Young LLP
31.1 Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of principal executive officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of principal financial officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
37