10-Q 1 g82888e10vq.txt CRAWFORD & COMPANY ================================================================================ 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, 2003 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____ to ____ COMMISSION FILE NUMBER 1-10356 CRAWFORD & COMPANY (Exact name of Registrant as specified in its charter) GEORGIA 58-0506554 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5620 GLENRIDGE DRIVE, N.E. ATLANTA, GEORGIA 30342 (Address of principal executive offices) (Zip Code) (404) 256-0830 (Registrant's telephone number, including area code) ------------------- Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO | | Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES |X| NO | | The number of shares outstanding of each of the issuer's classes of common stock, as of April 30, 2003 was as follows: Class A Common Stock, $1.00 par value: 23,925,383 Class B Common Stock, $1.00 par value: 24,697,172 ================================================================================ 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, 2003 2002 -------- -------- REVENUES: Revenues before reimbursements $ 167,258 $ 171,767 Reimbursements 9,615 8,634 --------- --------- TOTAL REVENUES 176,873 180,401 --------- --------- COSTS AND EXPENSES: Cost of services provided, before reimbursements 127,792 130,591 Reimbursements 9,615 8,634 --------- --------- Cost of Services 137,407 139,225 Selling, general, and administrative expenses 33,079 33,157 Special credit (1) -- (6,000) Corporate interest, net 1,279 1,178 --------- --------- TOTAL COSTS AND EXPENSES 171,765 167,560 --------- --------- INCOME BEFORE INCOME TAXES 5,108 12,841 PROVISION FOR INCOME TAXES 1,859 4,674 --------- --------- NET INCOME $ 3,249 $ 8,167 ========= ========= NET INCOME PER SHARE: Basic $ 0.07 $ 0.17 Diluted $ 0.07 $ 0.17 ========= ========= WEIGHTED-AVERAGE SHARES OUTSTANDING: Basic 48,622 48,541 Diluted 48,689 48,644 ========= ========= CASH DIVIDENDS PER SHARE: Class A Common Stock $ 0.06 $ 0.14 Class B Common Stock $ 0.06 $ 0.14 ========= ========= (1) Special credit related to a payment from a former vendor in full settlement of a business dispute. (See accompanying notes to condensed consolidated financial statements) 2 CRAWFORD & COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 32,097 $ 31,091 Accounts receivable, less allowance for doubtful accounts of $19,935 in 2003 and $19,633 in 2002 135,437 135,174 Unbilled revenues, at estimated billable amounts 101,919 93,792 Prepaid expenses and other current assets 10,889 11,968 --------- --------- TOTAL CURRENT ASSETS 280,342 272,025 --------- --------- PROPERTY AND EQUIPMENT: Property and equipment, at cost 147,249 144,706 Less accumulated depreciation (111,157) (108,607) --------- --------- NET PROPERTY AND EQUIPMENT 36,092 36,099 --------- --------- OTHER ASSETS: Intangible assets arising from acquisitions, net 100,103 97,798 Capitalized software costs, net 25,801 23,977 Deferred income tax asset 31,996 31,899 Other 13,905 12,978 --------- --------- TOTAL OTHER ASSETS 171,805 166,652 --------- --------- TOTAL ASSETS $ 488,239 $ 474,776 ========= ========= (See accompanying notes to condensed consolidated financial statements) 3 CRAWFORD & COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED (IN THOUSANDS)
(UNAUDITED) MARCH 31, DECEMBER 31, 2003 2002 ----------- ------------ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Short-term borrowings $ 34,293 $ 30,019 Accounts payable 30,743 31,956 Accrued compensation and related costs 25,800 26,454 Deferred revenues 19,733 18,516 Self-insured risks 16,991 15,833 Accrued income taxes 9,236 9,594 Other accrued liabilities 14,999 14,384 Current installments of long-term debt 1,704 1,493 --------- --------- TOTAL CURRENT LIABILITIES 153,499 148,249 --------- --------- NONCURRENT LIABILITIES: Long-term debt, less current installments 50,803 49,976 Deferred revenues 12,082 12,127 Self-insured risks 12,062 11,819 Minimum pension liability 79,044 76,747 Postretirement medical benefit obligation 6,201 6,289 Other 10,063 10,138 --------- --------- TOTAL NONCURRENT LIABILITIES 170,255 167,096 --------- --------- SHAREHOLDERS' INVESTMENT: Class A Common Stock, $1.00 par value; 50,000 shares authorized; 23,925 shares issued and outstanding in 2003 and 2002 23,925 23,925 Class B Common Stock, $1.00 par value; 50,000 shares authorized; 24,697 shares issued and outstanding in 2003 and 2002 24,697 24,697 Additional paid-in capital 523 523 Retained earnings 192,099 191,767 Accumulated other comprehensive loss (76,759) (81,481) --------- --------- TOTAL SHAREHOLDERS' INVESTMENT 164,485 159,431 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 488,239 $ 474,776 ========= =========
(See accompanying notes to condensed consolidated financial statements) 4 CRAWFORD & COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS)
QUARTER ENDED ------------------------ MARCH 31, MARCH 31, 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,249 $ 8,167 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 4,055 4,335 Deferred income taxes 221 (287) Loss on sales of property and equipment 71 7 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net 3,056 (1,005) Unbilled revenues (5,986) (3,512) Accrued or prepaid income taxes (1,012) 433 Accounts payable and accrued liabilities (2,961) (3,561) Deferred revenues 1,039 (1,174) Prepaid and accrued pension costs 3,946 3,485 Prepaid expenses and other assets 788 (3,592) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,466 3,296 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment (2,270) (2,611) Capitalization of computer software costs (3,167) (2,609) Proceeds from sales of property and equipment 42 56 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (5,395) (5,164) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (2,918) (6,796) Proceeds from exercise of stock options -- 55 Increase in short-term borrowings 4,063 11,490 Payments on short-term borrowings (1,923) (8,507) Increase in long-term debt 172 8 Payments on long-term debt (247) (38) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (853) (3,788) -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents 788 (197) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,006 (5,853) Cash and cash equivalents at beginning of period 31,091 21,966 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,097 $ 16,113 ======== ========
(See accompanying notes to condensed consolidated financial statements) 5 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The unaudited condensed consolidated financial statements of Crawford & Company (the "Company") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. 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. Such reclassifications had no effect on net income as previously reported. The results of operations for the quarter ended March 31, 2003 are not necessarily indicative of the results to be expected during the balance of the year ending December 31, 2003. These condensed financial statements should be read in conjunction with the audited financial statements and related notes contained in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2002. The Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation expense has been recognized for the option plans because the exercise prices of the stock options equal the market prices of the underlying stock on the dates of grant. Had compensation cost for these plans been determined based on the fair value at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: Quarter ended ---------------------- March 31, March 31, (in thousands, except per share data) 2003 2002 -------- --------- Net income as reported $ 3,249 $ 8,167 Less: compensation expense using the fair value method, net of tax 348 456 ------- ------- Pro forma net income $ 2,901 $ 7,711 ======= ======= Net income per share - basic: As reported $ 0.07 $ 0.17 ======= ======= Pro forma $ 0.06 $ 0.16 ======= ======= Net income per share - diluted: As reported $ 0.07 $ 0.17 ======= ======= Pro forma $ 0.06 $ 0.16 ======= ======= 6 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The fair value of options is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Quarter ended -------------------- March 31, March 31, 2003 2002 Expected dividend yield 3.6% 3.6% Expected volatility 33% 33% Risk-free interest rate 3.6% 3.7% Expected life of options 7 years 7 years 2. During the quarter ended March 31, 2003, the Company utilized $57,362 of its restructuring reserves for payments related to lease terminations. As of March 31, 2003, remaining restructuring reserves were $1.5 million, $1.3 million of which is included in other noncurrent liabilities. The noncurrent portion of accrued restructuring costs consists of long-term lease obligations related to various United Kingdom offices, which the Company has vacated and is currently attempting to sublease. Management periodically reviews the restructuring reserves and believes the remaining reserves are adequate to complete its plan. 3. Basic net income per share is computed based on the weighted-average number of total common shares outstanding during the respective periods. Diluted net income per share is computed based on the weighted-average number of total common shares outstanding plus the dilutive effect of outstanding stock options using the "treasury stock" method. Below is the calculation of basic and diluted net income per share for the quarters ended March 31, 2003 and 2002: Quarter ended ---------------------- March 31, March 31, (in thousands, except per share data) 2003 2002 Net income available to common shareholders $ 3,249 $ 8,167 ======= ======= Weighted-average common shares outstanding - Basic 48,622 48,541 Dilutive effect of stock options 67 103 ------- ------- Weighted-average common shares outstanding - Diluted 48,689 48,644 ======= ======= Basic net income per share $ 0.07 $ 0.17 ======= ======= Diluted net income per share $ 0.07 $ 0.17 ======= ======= 7 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Additional options to purchase 5,573,363 shares of Class A Common Stock at exercise prices ranging from $4.20 to $19.50 per share were outstanding at March 31, 2003, but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares. To include them would have been antidilutive. 4. Comprehensive income for the Company consists of the total of net income and foreign currency translation adjustments. Below is the calculation of comprehensive income for the quarters ended March 31, 2003 and 2002: Quarter ended ----------------------- March 31, March 31, (in thousands) 2003 2002 Net income $ 3,249 $ 8,167 Foreign currency translation adjustment 4,722 (1,797) ------- ------- Comprehensive income $ 7,971 $ 6,370 ======= ======= 5. The Company has two reportable segments, one which provides claims services through branch offices located in the United States ("U.S. Operations") and the other which provides similar services through branch or representative offices located in 66 other countries ("International Operations"). The Company's reportable segments represent components of the business for which separate financial information is available that is evaluated regularly by the chief decision maker in deciding how to allocate resources and in assessing performance. Intersegment sales are recorded at cost and are not material. The Company measures segment profit based on operating earnings, defined as earnings before special credit, net corporate interest, and income taxes. Financial information for the quarters ended March 31, 2003 and 2002 covering the Company's reportable segments is presented below: Quarter ended ----------------------- March 31, March 31, (in thousands) 2003 2002 -------- --------- Revenues before Reimbursements: U.S. $115,073 $126,610 International 52,185 45,157 -------- -------- Total Revenues $167,258 $171,767 ======== ======== Operating Earnings: U.S. $ 4,049 $ 6,279 International 2,338 1,740 -------- -------- Total Operating Earnings $ 6,387 $ 8,019 ======== ======== 8 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. During the quarter ended March 31, 2003, the Company made additional payments of $166,000 to the former owner of Greentree Investigations, Inc. pursuant to the 2000 purchase agreement. Additional contingent payments due under this agreement may be made through April of 2005. 7. 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 current levels of revenues and operating earnings, additional payments under existing earnout agreements would approximate $3.4 million through 2008, as follows: 2003 2004 2005 2006 2007 2008 ------------------------------------------------------------------- $269,000 $356,000 $279,000 $0 $0 $2,500,000 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated net income was $3,249,000 and $8,167,000 for the quarters ended March 31, 2003 and 2002, respectively. Consolidated net income for the 2002 period includes a payment received from a former vendor in full settlement of a business dispute of $3.8 million, net of related income tax expense. There were no such payments received in 2003. Operating earnings is one of the key performance measures used by our senior management and chief decision maker to evaluate the performance of our business and make resource allocation decisions. We believe this measure is useful to investors in that it allows them to evaluate our performance using the same criteria our management uses. Operating earnings (earnings before special credit, net corporate interest and taxes) in the 2003 first quarter totaled $6.4 million compared with $8.0 million in the comparable 2002 quarter. Following is a reconciliation of consolidated net income to operating earnings for the quarters ended March 31, 2003 and 2002 and the related margin as a percentage of revenues before reimbursements: Quarter ended ------------------------------------------- March 31, % March 31, % (in thousands) 2003 Margin 2002 Margin -------- ------ -------- ------ Net income $ 3,249 1.9% $ 8,167 4.8% Add/(deduct): Special credits -- -- (6,000) (3.5) Net corporate interest 1,279 0.8 1,178 0.7 Income taxes 1,859 1.1 4,674 2.7 ------- --- ------- --- Operating earnings $ 6,387 3.8% $ 8,019 4.7% ======= === ======= === The following is a discussion and analysis of the consolidated financial condition and results of operations of our two reportable segments: U.S. operations and international operations. Our reportable segments represent components of our business for which separate financial information is available that is evaluated regularly by our chief decision maker in deciding how to allocate resources and in assessing performance. Revenue amounts discussed exclude reimbursements for out-of-pocket expenses. Expense amounts discussed exclude the special credit, net corporate interest, and income taxes. Our discussion and analysis of operating expenses is comprised of two components. Compensation and fringe benefits include all compensation, payroll taxes, and benefits provided to our employees which, as a service company, represents our most significant and variable expense. Expenses other than reimbursements, compensation and fringe benefits include office rent and occupancy costs, other office operating expenses, and depreciation. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying footnotes. 10 RESULTS OF OPERATIONS Operating results for our U.S. and international operations for the quarters ended March 31, 2003 and 2002 are as follows: Quarter ended ------------------------ March 31, March 31, (In thousands) 2003 2002 -------- --------- REVENUES BEFORE REIMBURSEMENTS: U.S. $115,073 $126,610 International 52,185 45,157 -------- -------- TOTAL $167,258 $171,767 COMPENSATION & FRINGE BENEFITS: U.S. $ 74,344 $ 81,759 % of Revenues 64.6% 64.5% International 35,493 31,400 % of Revenues 68.0% 69.5% -------- -------- TOTAL $109,837 $113,159 % of Revenues 65.7% 65.9% EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION & FRINGE BENEFITS: U.S. $ 36,680 $ 38,572 % of Revenues 31.9% 30.5% International 14,354 12,017 % of Revenues 27.5% 26.6% -------- -------- TOTAL $ 51,034 $ 50,589 % of Revenues 30.5% 29.4% -------- -------- OPERATING EARNINGS (1): U.S. $ 4,049 $ 6,279 % of Revenues 3.5% 5.0% International 2,338 1,740 % of Revenues 4.5% 3.9% -------- -------- TOTAL $ 6,387 $ 8,019 % of Revenues 3.8% 4.7% (1) Earnings before special credit, net corporate interest, and income taxes. 11 U.S. OPERATIONS REVENUES U.S. revenues before reimbursements, by market type, for the quarters ended March 31, 2003 and 2002 are as follows:
Quarter ended ------------------------------------- March 31, March 31, (In thousands) 2003 2002 Variance --------- --------- -------- Insurance companies $ 58,651 $ 64,763 (9.4%) Self-insured entities 42,484 50,349 (15.6%) Class action services 13,938 11,498 21.2% -------- -------- TOTAL U.S. REVENUES BEFORE REIMBURSEMENTS $115,073 $126,610 (9.1%) ======== ========
Revenues from insurance companies decreased 9.4% to $58.7 million, due largely to continued softening in our referrals for high-frequency, low-severity claims and a decrease in catastrophic claim referrals. Lower medical bill auditing revenues associated with the previously reported non-renewal of a contract with a major domestic insurer contributed $3.1 million of this decline. Revenues from self-insured clients decreased 15.6% to $42.5 million in the quarter, due primarily to a decline in workers' compensation claim referrals. Class action revenues, which can fluctuate based on the timing of project awards, increased 21.2% to $13.9 million in the quarter. Case Volume Analysis Excluding the impact of class action services, U.S. unit volume, measured principally by cases received, decreased 13.6% in the first quarter of 2003 compared to the same period in 2002. This decrease was partially offset by a 2.6% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 11.0% decrease in U.S. revenues in the first quarter of 2003, excluding revenues from class action services. Growth in class action services increased U.S. revenues by 1.9% in the first quarter of 2003. Excluding the impact of class action services, U.S. unit volume by major product line, as measured by cases received, for the quarter ended March 31, 2003 and 2002 is as follows: Quarter ended ----------------------------------- March 31, March 31, (whole numbers) 2003 2002 Variance -------- --------- -------- Casualty 55,578 57,354 (3.1%) Workers' Compensation 48,915 61,196 (20.1%) Property 51,168 46,304 10.5% Vehicle 49,065 65,626 (25.2%) Other 5,383 12,765 (57.8%) ------- ------- Total U.S. Cases Received 210,109 243,245 (13.6%) ======= ======= Our decline in workers' compensation claim referrals has been primarily due to declines in U.S. employment levels and associated injury rates. The decline in vehicle claims for the quarter is primarily due to the decline we are experiencing related to U.S. insurance company referrals for 12 high-frequency, low- severity claims. Conservative underwriting, increases in policy deductibles, and mild weather during the first quarter of 2003 contributed to an industry-wide decline in property and casualty claims frequency. The increase in property claims is primarily related to increases in referrals to our Contractor Connection(SM) direct repair network. COMPENSATION AND FRINGE BENEFITS Our most significant expense is the compensation of employees, including related payroll taxes and fringe benefits. U.S. compensation expense as a percent of revenues increased slightly to 64.6% in the first quarter of 2003 as compared to 64.5% in 2002. In response to the ongoing decline in U.S. claims volume, we have reduced our level of U.S. full-time equivalent employees by nearly 11% as compared to first quarter 2002 levels. There were an average of 4,852 full-time equivalent employees in the 2003 first quarter, compared to an average of 5,451 in the 2002 period. U.S. salaries and wages decreased to $59.8 million for the quarter ended March 31, 2003, from $65.8 million in the comparable 2002 period. Payroll taxes and fringe benefits for U.S. operations totaled $14.5 million in the first quarter of 2003, decreasing 9.4% from 2002 costs of $16.0 million for the comparable period. These decreases reflect the reduction in full-time equivalent employees during the current quarter. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS U.S. expenses other than reimbursements, compensation and related payroll taxes and fringe benefits were 31.9% of revenues for the quarter ended March 31, 2003, up from 30.5% for the same period in 2002. This increase is due to higher professional indemnity self-insurance cost. REIMBURSEMENTS Reimbursements in our U.S. operations decreased to $3.7 million for the quarter ended March 31, 2003, from $4.5 million in the comparable 2002 period, reflecting the decline in case volume during 2003. INTERNATIONAL OPERATIONS REVENUES Revenues before reimbursements from our international operations increased 15.6%, from $45.2 million in the first quarter of 2002 to $52.2 million in the first quarter of 2003. Excluding acquisitions, international unit volume, measured principally by cases received, increased 10.3% in the first quarter of 2003 compared to the same period in 2002. Our third quarter 2002 acquisition of the loss adjusting business of Robertson and Company in Australia increased international revenues by 4.6% for the quarter ended March 31, 2003. Revenues reflect a 9.1% increase during the quarter ended March 31, 2003, due to the positive effect of a weak U.S. dollar, primarily as compared to the British Pound and Euro. 13 Excluding the impact of acquisitions, international unit volume by region for the quarters ended March 31, 2003 and 2002 was as follows: Quarter ended --------------------------------- March 31, March 31, (whole numbers) 2003 2002 Variance Americas 30,619 25,594 19.6% Continental Europe 19,664 18,897 4.1% Asia/Pacific 5,327 5,298 0.5% United Kingdom 22,644 21,188 6.9% ------ ------ Total International Cases Received 78,254 70,977 10.3% The increase in cases received in our Americas operation is primarily due to an increase in low-value property claims in Brazil. Our increase in the United Kingdom ("U.K.") is due to the receipt of claims from agreements entered into during the 2002 fourth quarter. The increase in Continental Europe is due to a large flood-related project in Central Europe during the 2003 first quarter. COMPENSATION AND FRINGE BENEFITS As a percent of revenues, compensation expense, including related payroll taxes and fringe benefits, decreased to 68.0% for the quarter ended March 31, 2003 from 69.5% for the same period in 2002, primarily due to a decrease in capacity in our U.K. and Canadian operating units due to an increase in case volume. There were an average of 3,112 full-time equivalent employees in the 2003 first quarter (including approximately 110 full-time equivalent employees added by our third quarter 2002 acquisition in Australia), compared to an average of 2,941 in the 2002 period. Salaries and wages of international personnel increased to $29.8 million for the quarter ended March 31, 2003, from $26.8 million in the comparable 2002 period. Payroll taxes and fringe benefits for international operations totaled $5.7 million in the first quarter of 2003, increasing from 2002 costs of $4.6 million for the comparable period. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS Expenses other than compensation and related payroll taxes and fringe benefits were 27.5% of international revenues for the quarter ended March 31, 2003, up from 26.6% for the same period in 2002, primarily due to higher automobile expenses and increased insurance expense. REIMBURSEMENTS Reimbursements in our international operations increased to $5.9 million for the quarter ended March 31, 2003, from $4.1 million in the comparable 2002 period. This increase is due to an increase in claims volume and a large flood-related project in Central Europe that required the extensive use of outside experts. 14 SPECIAL CREDIT, NET CORPORATE INTEREST, AND INCOME TAXES During the 2002 first quarter, we received a cash payment of $6.0 million from a former vendor in full settlement of a business dispute. This special credit, net of related income tax expense, increased net income per share by $0.08 during the 2002 first quarter. Net corporate interest increased to $1.3 million for the quarter ended March 31, 2003, from $1.2 million in the comparable 2002 period. The effect on net corporate interest from increases in total borrowings over the 2002 first quarter was partially offset by declines in interest rates in the 2003 first quarter, as compared to the 2002 period. Our effective tax rate was 36.4% of pretax income for the quarters ended March 31, 2003 and 2002. Taxes on income totaled $1.9 million for the quarter ended March 31, 2003, as compared to $4.7 million for the comparable 2002 period. FINANCIAL CONDITION At March 31, 2003, current assets exceeded current liabilities by approximately $126.8 million, an increase of $3.1 million from the working capital balance at December 31, 2002. Cash and cash equivalents at March 31, 2003 totaled $32.1 million, an increase of $1.0 million from the balance at December 31, 2002. Cash was generated primarily from operating activities and short-term borrowings, while the principal uses of cash were for investments in computer software, dividends paid to shareholders, acquisitions of property and equipment, and payments on short-term borrowings. Cash dividends to shareholders approximated 90% of net income in the first quarter of 2003, compared to 83% for the same period in 2002. The Board of Directors declares cash dividends to shareholders each quarter based on an assessment of current and projected earnings and cash flows. If we are able to achieve the cost reductions we have targeted for the 2003 second quarter (see Expense Reduction Initiative below), we believe that we will be able to preserve our current level of dividends for the remainder of 2003. During the first quarter of 2003, we did not repurchase any Class A or Class B Common Stock. As of March 31, 2003, 705,863 shares remain to be repurchased under the share repurchase program authorized by the Board of Directors. We believe it is unlikely that we will repurchase shares under this program in 2003 due to the decline in the funded status of our defined benefit pension plans. We maintain credit lines with banks in order to meet seasonal working capital requirements and other financing needs that may arise. Short-term borrowings outstanding as of March 31, 2003 totaled $34.3 million, increasing from $30.0 million at December 31, 2002. Long-term borrowings outstanding, excluding current installments, as of March 31, 2003 totaled $50.8 million compared to $50.0 million at the end of 2002. We believe that our current financial resources, together with funds generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations. We do not engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the operating results of our foreign subsidiaries. Foreign currency denominated debt is maintained primarily to hedge the currency exposure of our net investment in foreign operations. 15 Shareholders' investment at March 31, 2003 was $164.5 million, compared with $159.4 million at December 31, 2002. This increase is primarily due to foreign currency translation adjustments in the 2003 first quarter. APPLICATION OF CRITICAL ACCOUNTING POLICIES The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgements based upon historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a complete discussion regarding the application of our critical accounting policies, see our Form 10-K, for the year ended December 31, 2002 filed with the Securities and Exchange Commission, under the heading "Application of Critical Accounting Policies" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section. FACTORS THAT MAY AFFECT FUTURE RESULTS FORWARD LOOKING STATEMENTS Certain information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations may include forward-looking statements, the accuracy of which is subject to a number of risks, uncertainties and assumptions. Our Form 10-K for the year ended December 31, 2002, 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 In the normal course of the claims administration services business, we are named as a defendant in suits by insureds or claimants contesting decisions made by us or our clients with respect to the settlement of claims. Additionally, our clients have brought actions for indemnification on the basis of alleged negligence on our part, our agents, or our employees in rendering service to clients. The majority of these claims are of the type covered by insurance we maintain; however, we are self-insured for the deductibles under various insurance coverages. In our opinion, adequate reserves have been provided for such self-insured risks. In 2000, we received federal grand jury subpoenas requesting certain business and financial records dating back to 1992. Additional document requests and grand jury subpoenas were received in 2001 and 2002. We have been advised by the U.S. Department of Justice Fraud Section that the subpoenas issued by the Fraud Section and local U.S. Attorney offices were issued in connection with a nationwide investigation into the billings for services in some of the U.S. Claims Management and Healthcare Management Services branch offices. We are cooperating fully with the government's inquiry and have retained outside counsel to conduct an 16 internal investigation into our billing practices under the direction of the Board of Directors. In addition, we have issued written corporate billing policies in order to clarify our billing practices and eliminate inconsistencies in their application, and are continuing to strengthen our internal audit and branch inspection procedures. We are currently attempting to negotiate a settlement with the Department of Justice, but we cannot predict when the government's investigation or the settlement discussions will be completed, their ultimate outcome or their effect on our financial condition or results of operations. However, the investigation and its ultimate resolution could cause disruption in the delivery of our services, and ultimately result in the imposition of civil, administrative or criminal fines or sanctions, as well as potential reimbursements to clients and loss of existing or prospective clients or business opportunities. While we believe that we will have cash flows from operating activities and borrowing capabilities sufficient to pay any fine or other penalty imposed, any such result could have a material adverse effect on our financial condition and results of operations. Expenses associated with the investigation, net of related tax benefits, were $441,000 and $747,000, or $0.01 and $0.02 per share for the first quarter of 2003 and 2002, respectively. EXPENSE REDUCTION INITIATIVE We are currently taking aggressive steps to reduce our U.S. annual operating costs from their current level. We have targeted cost reductions of approximately $1.3 million per month to be achieved during the 2003 second quarter. INSURANCE RENEWAL We are currently negotiating the renewal of our various insurance coverages effective June 2003. We will likely incur increased premiums and higher self-insured retentions upon renewal. It is not possible at this time to determine the impact this will have on our consolidated results of operations, financial position, or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK DERIVATIVES We have not entered into any transactions using derivative financial instruments or derivative commodity instruments. FOREIGN CURRENCY EXCHANGE Our international operations expose us to foreign currency exchange rate changes that could impact translations of foreign-denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. Revenues from our international operations were 31.2% and 26.3% of total revenues at March 31, 2003 and 2002, respectively. Except for borrowing in foreign currencies, we do not presently engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of our foreign subsidiaries. We measure currency earnings risk related to our international operations based on changes in foreign currency rates using a sensitivity analysis. The sensitivity analysis measures the potential 17 loss in earnings based on a hypothetical 10% change in currency exchange rates. Exchange rates and currency positions as of March 31, 2003 were used to perform the sensitivity analysis. Such analysis indicates that a hypothetical 10% change in foreign currency exchange rates would have decreased pretax income by approximately $184,000 during the first three months of 2003, had the U.S. dollar exchange rate increased relative to the currencies with which we had exposure. INTEREST RATES We are exposed to interest rate fluctuations on certain variable rate borrowings. Depending on general economic conditions, we use variable rate debt for short-term borrowings and fixed rate debt for long-term borrowings. At March 31, 2003, we had $34.3 million in short-term loans outstanding with an average variable interest rate of 4.9%. If the average interest rate were to change by 1%, the impact to first quarter 2003 pretax income would be approximately $343,000. 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. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that the design and operation of our disclosure controls and procedures are effective. CHANGES IN INTERNAL CONTROLS There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Crawford & Company: We have reviewed the accompanying condensed consolidated balance sheet of CRAWFORD & COMPANY (a Georgia corporation) as of March 31, 2003, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements at March 31, 2003 and for the three-month period then ended for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of CRAWFORD & COMPANY as of December 31, 2002, and the related consolidated statements of income and cash flows for the year then ended and in our report dated January 27, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2002, 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 April 24, 2003 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In 2000, we received federal grand jury subpoenas requesting certain business and financial records dating back to 1992. Additional document requests and grand jury subpoenas were received in 2001 and 2002. We have been advised by the U.S. Department of Justice Fraud Section that the subpoenas issued by the Fraud Section and local U.S. Attorney offices were issued in connection with a nationwide investigation into the billings for services in some of the U.S. Claims Management and Healthcare Management Services branch offices. We are cooperating fully with the government's inquiry and have retained outside counsel to conduct an internal investigation into our billing practices under the direction of the Board of Directors. In addition, we have issued written corporate billing policies in order to clarify our billing practices and eliminate inconsistencies in their application, and are continuing to strengthen our internal audit and branch inspection procedures. We are currently attempting to negotiate a settlement with the Department of Justice, but we cannot predict when the government's investigation or the settlement discussions will be completed, their ultimate outcome or their effect on our financial condition or results of operations. However, the investigation and its ultimate resolution could cause disruption in the delivery of our services, and ultimately result in the imposition of civil, administrative or criminal fines or sanctions, as well as potential reimbursements to clients and loss of existing or prospective clients or business opportunities. While we believe that we will have cash flows from operating activities and borrowing capabilities sufficient to pay any fine or other penalty imposed, any such result could have a material adverse effect on our financial condition and results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 15.1 Letter from Ernst & Young LLP 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the period covered by this report. 20 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 13, 2003 /s/ Grover L. Davis ---------------------------------------- Grover L. Davis Chief Executive Officer (Principal Executive Officer) Date: May 13, 2003 /s/ John F. Giblin ---------------------------------------- John F. Giblin Executive Vice President - Finance (Principal Financial Officer) Date: May 13, 2003 /s/ W. Bruce Swain ---------------------------------------- W. Bruce Swain Senior Vice President and Controller (Principal Accounting Officer) 21 CERTIFICATIONS I, Grover L. Davis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Crawford & Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Grover L. Davis --------------------------------- Grover L. Davis Chief Executive Officer (Principal Executive Officer) 22 I, John F. Giblin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Crawford & Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ John F. Giblin ------------------------------------ John F. Giblin Executive Vice President - Finance (Principal Financial Officer) 23 INDEX TO EXHIBITS Exhibit No. Description Sequential Page No. 15.1 Letter from Ernst & Young LLP 25 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 26 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 27 24