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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 June 30, 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. 30342
ATLANTA, GEORGIA (Zip Code)
(Address of principal executive offices)
(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 July 31, 2006 was as follows:
CLASS A COMMON STOCK, $1.00 PAR VALUE: 24,783,649
CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,697,172
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1
CRAWFORD & COMPANY
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2006
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Income (unaudited)
Six Months ended June 30, 2006 and 2005 ................... 3
Condensed Consolidated Statements of Income (unaudited)
Quarters ended June 30, 2006 and 2005 ..................... 4
Condensed Consolidated Balance Sheets
June 30, 2006 (unaudited) and December 31, 2005 ........... 5
Condensed Consolidated Statements of Cash Flows (unaudited)
Six Months ended June 30, 2006 and 2005 ................... 7
Notes to Condensed Consolidated Financial Statements
(unaudited) ............................................... 8
Report of Independent Registered Public Accounting Firm ...... 23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk ... 40
Item 4. Controls and Procedures ...................................... 40
Part II. Other Information:
Item 1. Legal Proceedings ............................................ 41
Item 1.A Risk Factors ................................................. 41
Item 4. Submission of Matters to a Vote of Security Holders .......... 41
Item 6. Exhibits ..................................................... 41
Signatures .............................................................. 42
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
------------------------------------------
JUNE 30, JUNE 30,
2006 2005
------------------------------------------
REVENUES:
Revenues before reimbursements $394,209 $370,336
Reimbursements 37,230 36,088
------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 431,439 406,424
------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 304,959 292,254
Reimbursements 37,230 36,088
------------------------------------------------------------------------------------------------------------------------------
Cost of Services 342,189 328,342
Selling, general, and administrative expenses 72,032 67,395
Corporate interest expense, net of interest income
of $1,103 and $331, respectively 1,592 2,882
------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 415,813 398,619
------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,626 7,805
PROVISION FOR INCOME TAXES 5,565 2,763
------------------------------------------------------------------------------------------------------------------------------
NET INCOME $10,061 $5,042
==============================================================================================================================
EARNINGS PER SHARE:
Basic $0.20 $0.10
Diluted $0.20 $0.10
==============================================================================================================================
AVERAGE NUMBER OF SHARES USED TO COMPUTE:
Basic Earnings Per Share 49,137 48,878
Diluted Earnings Per Share 49,318 49,388
==============================================================================================================================
CASH DIVIDENDS PER SHARE:
Class A Common Stock $0.12 $0.12
Class B Common Stock $0.12 $0.12
==============================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
3
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
------------------------------------------
JUNE 30, JUNE 30,
2006 2005
------------------------------------------
REVENUES:
Revenues before reimbursements $192,603 $186,002
Reimbursements 17,164 20,779
------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 209,767 206,781
------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of services provided, before reimbursements 148,483 147,335
Reimbursements 17,164 20,779
------------------------------------------------------------------------------------------------------------------------------
Cost of Services 165,647 168,114
Selling, general, and administrative expenses 36,953 33,161
Corporate interest expense, net of interest income
of $772 and $149, respectively 594 1,355
------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 203,194 202,630
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INCOME BEFORE INCOME TAXES 6,573 4,151
PROVISION FOR INCOME TAXES 2,360 1,470
------------------------------------------------------------------------------------------------------------------------------
NET INCOME $4,213 $2,681
==============================================================================================================================
EARNINGS PER SHARE:
Basic $0.09 $0.05
Diluted $0.09 $0.05
==============================================================================================================================
AVERAGE NUMBER OF SHARES USED TO COMPUTE:
Basic Earnings Per Share 49,286 48,884
Diluted Earnings Per Share 49,396 49,391
==============================================================================================================================
CASH DIVIDENDS PER SHARE:
Class A Common Stock $0.06 $0.06
Class B Common Stock $0.06 $0.06
==============================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED) *
JUNE 30, DECEMBER 31,
2006 2005
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ASSETS
-------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $64,980 $49,441
Accounts receivable, less allowance for doubtful
accounts of $15,319 in 2006 and $21,179 in 2005 172,751 163,087
Unbilled revenues, at estimated billable amounts 102,388 109,319
Prepaid expenses and other current assets 18,958 14,964
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TOTAL CURRENT ASSETS 359,077 336,811
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PROPERTY AND EQUIPMENT:
Property and equipment, at cost 132,957 150,008
Less accumulated depreciation (99,842) (113,071)
-------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 33,115 36,937
-------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill, net 110,833 110,035
Capitalized software costs, net 34,700 33,068
Deferred income tax asset, net 37,976 38,217
Other 16,665 16,596
-------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 200,174 197,916
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $592,366 $571,664
===============================================================================================================================
* derived from the audited Consolidated Balance Sheet.
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(IN THOUSANDS)
(UNAUDITED) *
JUNE 30, DECEMBER 31,
2006 2005
------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $30,354 $28,888
Accounts payable 39,317 42,434
Accrued compensation and related costs 42,534 52,377
Deposit on sale of real estate 8,000 -
Deferred revenues 25,739 19,608
Self-insured risks 15,898 17,664
Accrued income taxes 24,479 17,880
Other accrued liabilities 23,662 25,670
Current installments of long-term debt 11,427 6,441
------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 221,410 210,962
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NONCURRENT LIABILITIES:
Long-term debt, less current installments 40,212 45,810
Deferred revenues 10,268 10,409
Self-insured risks 11,300 9,122
Minimum pension liabilities 103,425 101,406
Postretirement medical benefit obligation 4,352 4,569
Other 14,151 10,355
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TOTAL NONCURRENT LIABILITIES 183,708 181,671
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SHAREHOLDERS' INVESTMENT:
Class A common stock, $1.00 par value; 50,000 shares authorized; 24,675 and
24,293 shares issued and
outstanding in 2006 and 2005, respectively 24,675 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 8,421 6,311
Unearned stock-based compensation - (37)
Retained earnings 205,989 202,351
Accumulated other comprehensive loss (76,534) (78,584)
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TOTAL SHAREHOLDERS' INVESTMENT 187,248 179,031
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $592,366 $571,664
==============================================================================================================================
* derived from the audited Consolidated Balance Sheet.
(See accompanying notes to condensed consolidated financial statements)
6
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
SIX-MONTH PERIOD ENDED
------------------------------------------
JUNE 30, JUNE 30,
2006 2005
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,061 $5,042
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 9,484 9,631
Loss on sales of property and equipment, net 32 15
Stock-based compensation 1,248 99
Changes in operating assets and liabilities:
Accounts receivable, net (11,335) 2,891
Unbilled revenues, net 10,999 2,664
Accrued or prepaid income taxes 6,433 (5,360)
Accounts payable and accrued liabilities (10,401) (1,328)
Deferred revenues 6,124 (2,596)
Accrued retirement costs 240 (1,745)
Prepaid expenses and other (1,325) (1,416)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,560 7,897
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (5,651) (7,308)
Proceeds from sales of property and equipment 99 208
Capitalization of computer software costs (4,606) (2,626)
Deposit received on sale of real estate 8,000 -
Cash received from 2004 sale of undeveloped land - 7,562
Other investing activities (388) (90)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,546) (2,254)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (5,900) (5,866)
Proceeds from stock issued to employees under incentive plans 1,281 310
Increases in short-term borrowings 6,797 2,325
Payments on short-term borrowings (5,381) (1,933)
Payments on long-term debt and capital lease obligations (721) (975)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,924) (6,139)
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 449 480
------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,539 (16)
Cash and cash equivalents at beginning of period 49,441 43,571
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $64,980 $43,555
==============================================================================================================================
(See accompanying notes to condensed consolidated financial statements)
7
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. Operating results for the quarter and
six-month period ended June 30, 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 6, 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 adoption of SFAS 154 did not
have any impact on the Company's consolidated financial
8
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
position, results of operations, or cash flows. 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 half 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 for the quarter and six months ended June 30, 2006 was
$351,000 and $617,000 lower, respectively, and net income for the same periods
was $299,000 and $539,000 lower, respectively, than if it had continued to
account for share-based compensation under APB 25. Basic and diluted earnings
per share ("EPS") for the six-month period ended June 30, 2006 were $.02 and
$.01 lower, respectively, than if the Company had continued to account for
share-based compensation under APB 25. For the quarter ended June 30, 2006,
basic and diluted EPS were both lower by less than $.01 than if the Company had
continued to account for share-based compensation under APB 25. The recognition
of these additional costs under SFAS 123R is 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 and six-month period
ended June 30, 2006, the Company had no such excess tax benefits.
The following table illustrates the effect on net income and EPS if the Company
had applied the
9
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Quarter ended Six months ended
June 30, June 30,
(in thousands, except earnings per share) 2005 2005
------------- ----------------
Net income as reported $2,681 $5,042
Add: Stock-based compensation expense
included in reported net income, net of tax 23 64
Less: Stock-based compensation expense using
the fair value method, net of tax (391) (737)
------ ------
Pro forma net income $2,313 $4,369
====== ======
Earnings per share - basic:
As reported $ 0.05 $ 0.10
====== ======
Pro forma $ 0.05 $ 0.09
====== ======
Earnings per share - diluted:
As reported $ 0.05 $ 0.10
====== ======
Pro forma $ 0.05 $ 0.09
====== ======
3. PENDING ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board (FASB) Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"), is effective for fiscal years
beginning after December 15, 2006. FIN 48 will be applicable to all routine and
nonroutine positions for taxes accounted for under SFAS 109, "Accounting for
Income Taxes," by creating a single model to address uncertainties in tax
positions. FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. In addition, FIN 48 removes
income taxes from the scope of SFAS 5, "Accounting for Contingencies." Due to
the recent issuance of FIN 48, the Company is still evaluating the potential
impact that FIN 48 will have on its consolidated financial position, results of
operations, and cash flows.
For FASB Interpretation No. 46-R, "Consolidation of Variable Interest Entities"
("FIN 46-R"), the FASB recently issued a Staff Position ("FSP"), "Determining
the Variability to be Considered in Applying FIN 46-R" ("FSP FIN 46-R"). This
Staff Position addresses how a company should determine the variability of
expected losses and expected residual returns in applying FIN 46-R. The
variability that is considered in applying FIN 46-R affects the determination of
(a) whether an entity is a variable interest entity ("VIE"), (b) which interests
in the entity are variable interests, and c) which party, if any, is the primary
beneficiary of the VIE.
10
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FSP FIN 46-R is effective for reporting periods (including interim periods)
beginning after June 15, 2006. Early application is permitted for periods for
which financial statements have not yet been issued. The Company's adoption of
FSP FIN 46-R on July 1, 2006 will not have any impact on the reporting or
consolidation of entities that are currently subject to the Company's
application of FIN 46-R.
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") 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 EPS. Diluted EPS are computed under the "treasury stock" method
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 nonvested shares under the executive stock bonus plan that
vest based on service conditions or on performance conditions that have been
achieved.
Below is the calculation of basic and diluted EPS for the quarters and six
months ended June 30, 2006 and 2005:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands, except earnings 2006 2005 2006 2005
per share) -------- -------- -------- --------
Net income available to common
shareholders $ 4,213 $ 2,681 $10,061 $ 5,042
======= ======= ======= =======
Weighted-average common shares
outstanding 49,334 48,884 49,163 48,878
Less: Weighted-average unvested
common shares outstanding 48 -- 26 --
------- ------- ------- -------
Weighted-average common shares
used to compute basic earnings
per share 49,286 48,884 49,137 48,878
Dilutive effects of stock-based
compensation plans 110 507 181 510
----- ------ ------- ------
Weighted-average common shares used
to compute diluted earnings per
share 49,396 49,391 49,318 49,388
======= ======= ======= =======
Basic earnings per share $ 0.09 $ 0.05 $ 0.20 $ 0.10
======= ======= ======= =======
Diluted earnings per share $ 0.09 $ 0.05 $ 0.20 $ 0.10
======= ======= ======= =======
Certain stock options are antidilutive. Additional options to purchase 3,465,355
shares of the Company's Class A common stock at exercise prices ranging from
$6.36 to $19.13 per share were outstanding at June 30, 2006 but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common shares. Additional
options to purchase 25,000 shares of the Company's Class A common stock at an
exercise price of $5.60 were outstanding at June 30, 2006, but were not included
in the computation of diluted EPS because the options' exercise prices, when
added to the average unearned compensation costs, were greater than the average
market price of the common shares.
11
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
For the quarters and six months ended June 30, 2006 and 2005, comprehensive
income for the Company consisted of net income and net foreign currency
translation adjustments. Below is the calculation of comprehensive income for
the quarters and six months ended June 30, 2006 and 2005:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands) 2006 2005 2006 2005
-------- -------- -------- --------
Net income $4,213 $2,681 $10,061 $5,042
Foreign currency translation adjustments 2,628 473 2,050 2,457
------ ------ ------- ------
Comprehensive income $6,841 $3,154 $12,111 $7,499
====== ====== ======= ======
6. 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. SFAS 123R requires certain disclosures for
annual reporting periods. However, SEC Staff Accounting Bulletin 107 requires
registrants to provide these same disclosures for the interim period in which
SFAS 123R was adopted, and for any subsequent interim periods in the first year
of adoption.
At June 30, 2006, the Company has three types of stock-based compensation plans
subject to SFAS 123R: stock option plans, an executive stock bonus plan
(performance shares and restricted shares), and employee stock purchase plans.
Under SFAS 123R, 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. For awards granted prior to January 1, 2006 that were not previously
subject to expense recognition under APB 25, compensation expense under SFAS
123R is recognized only for the portions of these awards that were unvested at
the adoption of SFAS 123R. Expense for these awards is recognized ratably
beginning January 1, 2006 over the remaining vesting life of each award.
The pre-tax compensation expense recognized for all plans was $491,000 and
$1,248,000 for the quarter and six months ended June 30, 2006, respectively. For
the same periods in 2005, pre-tax compensation expense recognized under APB 25
was $35,000 and $98,000, respectively.
12
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The total income tax benefit recognized in the income statement for stock-based
compensation arrangements was $101,000 and $301,000 for the quarter and six
months ended June 30, 2006, respectively. For the same periods in 2005, the
total income tax benefit recognized was $13,000 and $35,000, 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 approved by shareholders, 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. Under SFAS 123R, compensation cost for stock options is
recognized on a straight-line basis over the requisite service period for the
entire award. For awards granted prior to the adoption of SFAS 123R,
compensation expense is recognized only for the portion of the award that was
unvested at the adoption of SFAS 123R on January 1, 2006. During the quarter and
six months ended June 30, 2006, compensation expense of $161,000 and $351,000,
respectively, 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 and six months ended June 30, 2006, compensation expense of $91,000 was
recognized for directors' options under SFAS 123R.
A summary of option activity as of June 30, 2006, and changes during the quarter
and six months then ended, is presented below:
13
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Shares Exercise Contractual Value
(000) Price 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
----- === ========= ======
Granted 24 6
Exercised (10) 5
Forfeited or expired (148) 8
-----
Outstanding at June 30, 2006 4,332 9 4.7 years $1,409
===== === ========= ======
Vested at June 30, 2006 2,966 $11 3.9 years $ 582
===== === ========= ======
Exercisable at June 30, 2006 2,966 $11 3.9 years $ 582
===== === ========= ======
The weighted-average grant-date fair value of stock options granted during the
quarter and six months ended June 30, 2006 was $6.00 and $5.80, respectively.
For the same periods in 2005, the weighted-average grant-date fair value of
stock options granted was $7.40 and $7.25, respectively. The total intrinsic
value of stock options exercised during the quarter and six months ended June
30, 2006 was $14,000. For the same periods in 2005, the total intrinsic value of
stock options exercised was $3,000 and $78,000, respectively. The total fair
value of stock options vesting during the quarter and six months ended June 30,
2006 was $64,000 and $764,000, respectively. For the same periods in 2005, the
total fair value of stock options vesting was $142,000 and $821,000,
respectively.
At June 30, 2006, there was $1,681,000 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 2.1
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 weighted-average
assumptions:
Six Months Ended
-----------------------------
June 30, 2006 June 30, 2005
------------- -------------
Expected dividend yield 3.4% 3.3%
Expected volatility 37% 34%
Risk-free interest rate 5.0% 4.1%
Expected term of options 7 years 7 years
14
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The expected dividend yield is based on the Company's historical dividend yield.
The 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 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 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 earned based on achievement of 2005 performance goals, and 13,970 (20%) of
those earned shares vested at the end of 2005. The remaining 2005 performance
shares that were earned will vest ratably over the next four years subject only
to service conditions.
In 2006, an additional 761,050 performance shares were granted, subject to the
achievement of established performance goals. Some of these performance goals
pertain only to 2006, while certain performance goals extend through 2010. Some
of these awards also contain service conditions that must be satisfied. Based on
interim achievement rates at June 30, 2006, the Company estimates that 564,000
of these performance shares will be earned. During 2006, compensation expense is
being recognized for these performance shares based on the estimated achievement
rates for the performance goals and on the related vesting schedules.
15
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the status of the Company's nonvested performance shares as of June
30, 2006, and changes during the quarter and six months then ended, is presented
below:
Weighted-Average
Grant Date Fair
Shares Value
------- ----------------
Nonvested at January 1, 2006 55,880 $6.38
Granted 761,050 5.01
Vested -- --
Forfeited -- --
-------
Nonvested at March 31, 2006 816,930 5.11
Granted -- --
Vested -- --
Forfeited (9,380) 5.28
-------
Nonvested at June 30, 2006 807,550 $5.10
=======
The total fair value of the 13,970 performance shares vested at June 30, 2006
was $89,000. At June 30, 2005, no performance shares were vested.
Compensation expense recognized under SFAS 123R for all performance shares
totaled $124,000 and $598,000 for the quarter and six months ended June 30,
2006, respectively. For the same periods in 2005, compensation expense
recognized under APB 25 for all performance shares totaled $36,000 and $99,000,
respectively. Compensation cost for these awards is net of estimated or actual
award forfeitures. As of June 30, 2006, there was $2,519,000 of total unearned
compensation cost related to nonvested performance shares that is expected to be
recognized over a weighted-average period of 2.4 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 since these awards
only have service conditions once granted.
16
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the status of the Company's nonvested restricted shares as of June
30, 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 -- --
------
Nonvested at March 31, 2006 55,000 6.03
Granted -- --
Vested -- --
Forfeited -- --
------
Nonvested at June 30, 2006 55,000 $6.03
======
Compensation expense recognized for all restricted shares totaled $16,000 and
$33,000, respectively, for the quarter and six months ended June 30, 2006. There
were no restricted shares granted or outstanding as of June 30, 2005. As of June
30, 2006, there was $297,000 of total unearned compensation cost related to
nonvested restricted shares, which is expected to be recognized over a
weighted-average period of 4.5 years.
Employee Stock Purchase Plans
At June 30, 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; neither was compensatory under APB 25.
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 its 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.
17
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Since the U.S. Plan involves a look-back option, the estimate of the fair value
for the share 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. This value is adjusted to reflect
the effect of the dividends that the employees do not receive during the life of
the share option.
At June 30, 2006, an estimated 100,000 shares can be purchased under the U.S.
Plan at the end of the current withholding period for a discounted purchase
price of $5.62 per share. During the quarter and six months ended June 30, 2006,
compensation expense of $51,000 and $104,000, respectively, was recognized. At
June 30, 2006, there was no remaining unearned compensation cost to be
recognized through the end of the current withholding period which ended June
30, 2006.
Under the U.K. Plan, the Company is authorized to issue up to 1,000,000 shares
of its Class A common stock. Under the U.K. Plan, eligible employees can elect
to have up to L250 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 June 30, 2006, an estimated 422,000 shares in total could be purchased under
the U.K. Plan at the end of the withholding periods. 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 the Company's Class A
common stock under the U.K. Plan ranges from $4.56 to $5.97. For the quarter and
six months ended June 30, 2006, compensation cost of $47,000 and $70,000,
respectively, was recognized for the U.K. Plan. At June 30, 2006, there was an
estimated $277,000 of total unrecognized compensation cost related to the U.K.
Plan, which is expected to be recognized through March 2009.
During the quarter and six months ended June 30, 2006, a total of 308,708 and
308,940 shares, respectively, of Class A common stock were issued under the U.K.
Plan.
18
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DEPOSIT ON SALE OF THE COMPANY'S CORPORATE HEADQUARTERS AND DEFERRED GAIN
On June 30, 2006, the Company sold the land and building utilized as its
corporate headquarters in Atlanta, Georgia. These assets have a net carrying
amount of $2,842,000. The base sales price of $8,000,000 was paid in cash at
closing. Under the sale agreement, the $8,000,000 base sales price is subject to
upward revision depending upon the buyer's ability to subsequently redevelop the
property. Also on June 30, 2006, the Company entered into a 12-month leaseback
agreement for these same facilities. Prior to termination of the leaseback
agreement, the Company plans to relocate its corporate headquarters to other
nearby leased facilities (see Note 13).
Under SFAS 98, "Accounting for Leases," the Company deferred recognition of the
gain related to this sale. Net of transaction costs, a pre-tax gain of
$4,864,000 will be recognized by the Company upon the expiration or termination
of the leaseback agreement, expected to be on or before June 30, 2007. The gain
of $4,864,000 is based on the base sales price and does not include any amount
for the potential upward revision of the sales price. Should such revision
subsequently occur, the Company could ultimately realize a larger gain. The
Company cannot predict the likelihood of any subsequent price revisions.
Prior to the sale, this disposal group of assets had a fair value that exceeded
its depreciated cost. No adjustment to the carrying cost was required when this
disposal group was classified as "held for sale" under the provisions of SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company does not own these assets at June 30, 2006. However, these assets are
reported in Prepaid Expenses and Other Current Assets on the Company's Condensed
Consolidated Balance Sheet at carrying cost in accordance with the provisions of
SFAS 144. Pending recognition of the gain described above, the $8,000,000
received by the Company on June 30, 2006 is reported on the Company's Condensed
Consolidated Balance Sheet as a deposit liability.
8. 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 quarters and six months ended June 30, 2006 and 2005 included the following
components:
19
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands) 2006 2005 2006 2005
-------- -------- -------- --------
Service cost $ 660 $ 515 $ 1,261 $ 1,029
Interest cost 8,169 7,842 16,110 15,685
Expected return on assets (8,774) (8,128) (17,252) (16,246)
Recognized net actuarial loss 2,525 1,876 5,009 3,751
------- ------- -------- --------
Net periodic benefit cost $ 2,580 $ 2,105 $ 5,128 $ 4,219
======= ======= ======== ========
9. 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.
Financial information for the quarters and six months ended June 30, 2006 and
2005 covering the Company's reportable segments is presented below:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands) 2006 2005 2006 2005
-------- -------- -------- --------
REVENUES:
U.S., before reimbursements $118,743 $114,354 $249,849 $226,861
International, before reimbursements 73,860 71,648 144,360 143,475
-------- -------- -------- --------
Total Segment Revenues before
Reimbursements 192,603 186,002 394,209 370,336
Reimbursements 17,164 20,779 37,230 36,088
-------- -------- -------- --------
TOTAL REVENUES $209,767 $206,781 $431,439 $406,424
======== ======== ======== ========
SEGMENT OPERATING EARNINGS:
U.S $ 4,305 $ 1,810 $ 12,936 $ 3,646
International 3,213 3,696 4,899 7,041
-------- -------- -------- --------
TOTAL SEGMENT OPERATING EARNINGS 7,518 5,506 17,835 10,687
Deduct:
Stock option expense (351) -- (617) --
Net corporate interest expense (594) (1,355) (1,592) (2,882)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES $ 6,573 $ 4,151 $ 15,626 $ 7,805
======== ======== ======== ========
20
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. 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 June 30,
2006 under existing earnout agreements would approximate $2.2 million through
2009, as follows:
2006 2007 2008 2009
---- ---- ---------- --------
-- -- $2,094,000 $150,000
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 for the deductibles under various insurance coverages. In the
opinion of Company management, adequate provisions have been made for such
self-insured risks.
11. 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 June 30, 2006.
On June 16, 2006, the Company executed amendments to its senior debt and
revolving credit agreements. As a result of these amendments, the provisions of
the original agreements were modified to alter the terms and conditions under
which the Company could sell its corporate headquarters facilities in Atlanta,
Georgia (see Note 7).
12. SOUTH AFRICA BLACK ECONOMIC EMPOWERMENT AGREEMENT
The government of South Africa has adopted policies to increase black ownership
of South African businesses, including foreign-owned businesses located in South
Africa. This initiative is called Black Economic Empowerment. The Company's
South Africa subsidiary, Crawford & Company South Africa ("Crawford SA"),
entered into a Black Economic Empowerment agreement ("BEE agreement") with a
black-owned entity in South Africa (the "BEE entity"). As part of this BEE
agreement, Crawford SA issued 54,792 voting shares of its subsidiary stock to
the BEE entity for par value of 54,792 South African Rand (approximately US
$9,000). The 54,792 shares represent a 25.1% ownership interest in Crawford SA.
21
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to this transaction, Crawford SA was a wholly-owned subsidiary of the
Company. This capital transaction at the subsidiary level changed the Company's
ownership interest in Crawford SA by creating a 25.1% minority interest in the
subsidiary. To reflect the Company's change in its ownership interest of
Crawford SA and to reflect the creation of the minority interest, approximately
$601,000 was charged to the Company's Retained Earnings and credited to Minority
Interest on the Company's consolidated balance sheet. This amount represented
25.1% of the carrying value of the Company's investment in its South Africa
subsidiary.
13. SUBSEQUENT EVENT
Effective August 1, 2006, the Company entered into an operating lease agreement
for the lease of approximately 160,000 square feet of office space in Atlanta,
Georgia to be used as the Company's future corporate headquarters. This lease
has a term of eleven years with total minimum monthly lease payments of
approximately $41.5 million over the life of the lease. Additionally, the
Company will be responsible for certain property operating expenses. The Company
expects to occupy this office space sometime in early 2007 after the completion
of leasehold improvements. Approximately $4.9 million of leasehold improvements
will be provided by the lessor. Between August 1, 2006 and the occupancy date in
early 2007, rental costs incurred during the leasehold improvement construction
period will be charged to operating expenses as required by FASB Staff Position
13-1, "Accounting for Rental Costs Incurred during a Construction Period."
22
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 June 30, 2006, and the related condensed consolidated statements of income
for the three-month and six-month periods ended June 30, 2006 and 2005, and the
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 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
August 8, 2006
23
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., our ability to comply with debt covenants, the
outcome of our legal proceedings, possible legislation or changes in market
conditions that may curtail or limit growth in product
24
liability and securities class actions, man-made disasters and natural
disasters, 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.
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,
25
insurance companies become very selective in the risks they underwrite, and
insurance premiums and policy deductibles increase, sometimes quite
dramatically. This results in a reduction in industry-wide claims volumes, which
reduces claims referrals to us unless we can offset the decline in claim
referrals with growth in our share of the overall claims services market. Our
ability to grow our market share in such a highly fragmented, competitive market
is primarily dependent on the delivery of superior quality service and
effective, properly focused sales efforts.
RESULTS OF OPERATIONS
Consolidated net income was $4,213,000 and $2,681,000 for the quarters ended
June 30, 2006 and 2005, respectively, and $10,061,000 and $5,042,000 for the six
months ended June 30, 2006 and 2005, respectively.
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 $594,000 and $1.4 million for the quarters ended June 30, 2006
and 2005, respectively, and $1.6 million and $2.9 million for the six months
ended June 30, 2006 and 2005, respectively. During the quarter ended June 30,
2006, we received and recognized additional interest income of $288,000 related
to a tax refund claim originally settled with the IRS in June 2004.
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 $351,000 and $617,000 was
recognized for the 2006 second quarter and six month period, respectively, under
SFAS 123R. Stock option expense for any periods in 2005 was not recognized in
our Condensed Consolidated Statement of Income under the provisions of APB 25.
INCOME TAXES
Taxes on income totaled $2.4 million and $1.5 million for the quarters ended
June 30, 2006 and 2005, respectively, and $5.6 million and $2.8 million for the
six months ended June 30, 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
quarters and six month periods ended June 30, 2006 and 2005 was 35.4%,
excluding an adjustment of $33,000 in the second quarter of 2006 related to a
tax credit refund claim originally settled in 2004 with the Internal Revenue
Service.
26
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.
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. 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.
27
Operating results for our U.S. and international operations, reconciled to net
income, were as follows:
Quarter ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(in thousands) 2006 2005 2006 2005
-------- -------- -------- --------
REVENUES:
U.S., before reimbursements $118,743 $114,354 $249,849 $226,861
International, before reimbursements 73,860 71,648 144,360 143,475
-------- -------- -------- --------
Total, before reimbursements 192,603 186,002 394,209 370,336
Reimbursements 17,164 20,779 37,230 36,088
-------- -------- -------- --------
TOTAL $209,767 $206,781 $431,439 $406,424
COMPENSATION & FRINGE BENEFITS:
U.S. $ 76,447 $ 74,200 $157,215 $146,316
% of Revenues before reimbursements 64.4% 64.9% 62.9% 64.5%
International 51,732 49,922 102,397 100,467
% of Revenues before reimbursements 70.0% 69.6% 70.9% 70.0%
-------- -------- -------- --------
TOTAL $128,179 $124,122 $259,612 $246,783
% of Revenues before reimbursements 66.6% 66.7% 65.9% 66.6%
EXPENSES OTHER THAN COMPENSATION &
FRINGE BENEFITS:
U.S. $ 37,991 $ 38,344 $ 79,698 $ 76,899
% of Revenues before reimbursements 32.0% 33.5% 31.9% 33.9%
International 18,915 18,030 37,064 35,967
% of Revenues before reimbursements 25.6% 25.2% 25.7% 25.1%
-------- -------- -------- --------
TOTAL $ 56,906 $ 56,374 $116,762 $112,866
% of Revenues before reimbursements 29.5% 30.3% 29.6% 30.5%
Reimbursements 17,164 20,779 37,230 36,088
-------- -------- -------- --------
TOTAL $74,070 $77,153 $153,992 $148,954
% of Revenues 35.3% 37.3% 35.7% 36.6%
OPERATING EARNINGS:
U.S. $ 4,305 $ 1,810 $ 12,936 $ 3,646
% of Revenues before reimbursements 3.6% 1.6% 5.2% 1.6%
International 3,213 3,696 4,899 7,041
% of Revenues before reimbursements 4.4% 5.2% 3.4% 4.9%
DEDUCT:
Net corporate interest expense (594) (1,355) (1,592) (2,882)
Stock option expense (351) -- (617) --
Income taxes (2,360) (1,470) (5,565) (2,763)
-------- -------- -------- --------
Net Income $ 4,213 $ 2,681 $ 10,061 $ 5,042
======== ======== ======== ========
U.S. OPERATIONS
REVENUES BEFORE REIMBURSEMENTS
U.S. revenues before reimbursements by market type, for the quarters and six
months ended June 30, 2006 and 2005 were as follows:
28
Quarter ended Six months ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
(in thousands) 2006 2005 Variance 2006 2005 Variance
-------- -------- -------- -------- -------- --------
Insurance companies $ 51,563 $ 48,215 6.9% $113,079 $102,194 10.7%
Self-insured entities 36,750 38,594 (4.8%) 73,591 77,934 (5.6%)
Legal settlement administration 30,430 27,545 10.5% 63,179 46,733 35.2%
-------- -------- -------- --------
Total U.S. Revenues before Reimbursements $118,743 $114,354 3.8% $249,849 $226,861 10.1%
======== ======== ======== ========
Revenues before reimbursements from insurance companies increased 6.9% from the
2005 second quarter to $51.6 million in the 2006 second quarter, due to an
increase in storm-related revenues from the numerous severe storms which
occurred in the midwestern and northeastern U.S. These revenues increased 10.7%
to $113.1 million for the six months ended June 30, 2006, compared to $102.2
million for the 2005 period due to an increase in storm-related revenues in our
catastrophe, property central, and technical services units, including the
completion of hurricane related claims assigned to us in 2005. Revenues from
self-insured clients decreased 4.8% and 5.6% for the second quarter and six
months ended June 30, 2006, respectively, to $36.8 million and $73.6 million,
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 10.5% and 35.2% from the 2005
second quarter and six-month period, respectively, to $30.4 million and $63.2
million in the 2006 second quarter and year-to-date period, respectively. Legal
settlement administration revenues are project-based and can fluctuate
significantly. However, we have a record backlog of projects awarded totaling
approximately $51.2 million at June 30, 2006.
REIMBURSEMENTS INCLUDED IN TOTAL REVENUES
Reimbursements for out-of-pocket expenses included in total revenues for our
U.S. operations were $10.7 million and $23.7 million for the quarter and six
months ended June 30, 2006, respectively, declining from $13.5 million for the
2005 quarter, but increasing from $22.2 million for the six months ended June
30, 2005. The decline in the 2006 second quarter was related to our legal
settlement administration unit, where the nature of the work performed in the
quarter required less out-of-pocket expenditures. However, this unit's
reimbursements have increased on a year-to-date basis during 2006, reflecting an
overall increase in 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 3.9% in the second
quarter of 2006 compared to the same 2005 period. This decrease was partially
offset by a 5.2% revenue increase from changes in the mix of services provided
and in the rates charged for those services, resulting in a net 1.3% increase in
U.S. revenues before reimbursements for the second 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 second
quarter. Growth in legal settlement administration services increased U.S.
29
revenues by 2.5% in the quarter ended June 30, 2006, compared to the same
quarter in 2005.
For the six-month period ended June 30, 2006, U.S. unit volume decreased by 6.0%
compared to the 2005 period. This decrease was offset by an 8.8% revenue
increase from changes in the mix of services provided and in the rates charged
for those services, resulting in a net 2.8% increase in U.S. revenues for the
first six months of 2006, excluding revenues from legal settlement
administration services. Growth in legal settlement administration services
increased U.S. revenues by 7.3% in the 2006 six-month period, compared to the
same period in 2005.
Excluding the impact of legal settlement administration services, U.S. unit
volume by major service line, as measured by cases received, for the quarter and
six months ended June 30, 2006 and 2005 was as follows:
Quarter ended Six months ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
(whole numbers) 2006 2005 Variance 2006 2005 Variance
-------- -------- -------- -------- -------- --------
Casualty 44,088 46,207 (4.6%) 91,392 93,788 (2.6%)
Property 50,712 43,495 16.6% 97,238 92,052 5.6%
Vehicle 24,841 30,875 (19.5%) 51,596 63,804 (19.1%)
Workers' Compensation 31,568 36,984 (14.6%) 63,074 73,000 (13.6%)
Other 5,459 5,498 (0.7%) 10,671 11,387 (6.3%)
------- ------- ------- -------
TOTAL U.S. CASES RECEIVED 156,668 163,059 (3.9%) 313,971 334,031 (6.0%)
======= ======= ======= =======
The increase in property claims during the quarter and six months ended June 30,
2006 was primarily due to an influx of claims from the severe storms which
occurred in the midwestern and northeastern U.S. during the 2006 second quarter.
The decline in vehicle claims during the quarter and six months ended June 30,
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 and six months ended June 30, 2006 were due
primarily to a reduction in claims from our existing clients and reflect
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 64.4% in the second quarter of 2006,
compared to 64.9% in the same 2005 quarter. For the six-month period ended June
30, 2006, U.S. compensation expense as a percent of revenues before
reimbursements decreased to 62.9%, compared to 64.5% in the 2005 period. These
decreases were primarily due to the utilization of operating capacity within our
field operation branches as we completed claims associated with Hurricanes
Katrina, Wilma and Rita and processed claims in the 2006 second quarter
associated with the severe storms which occurred in the midwestern and
northeastern U.S. There was an average of 4,388 full-time equivalent employees
(including 188 catastrophe adjusters) in the first six months of 2006, compared
to an average of 4,234 (including 165 catastrophe adjusters) in the same 2005
period.
U.S. salaries and wages totaled $64.6 million and $131.1 million for the quarter
and six months ended June 30, 2006, respectively, increasing 9.3% and 12.0%,
from $59.1 million and $117.1 million in the comparable 2005 periods. These
increases were a result of the higher compensation associated with the increased
revenues generated by our catastrophe adjusters and
30
legal settlement administration unit. Payroll taxes and fringe benefits for U.S.
operations totaled $11.8 million and $26.1 million in the second quarter and
first six months of 2006, respectively, decreasing 21.9% and 10.6% from 2005
costs of $15.1 million and $29.2 million for the comparable periods, primarily
due to lower costs in our self-insured workers compensation and medical benefits
programs.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
U.S. expenses other than reimbursements, compensation and related payroll taxes
and fringe benefits were 32.0% of revenues before reimbursements for the quarter
ended June 30, 2006, down from 33.5% for the same quarter in 2005. U.S. expenses
other than reimbursements, compensation and related payroll taxes and fringe
benefits were 31.9% of revenues before reimbursements for the six-month period
ended June 30, 2006, down from 33.9% for the same period in 2005. These
decreases were primarily due to lower office expenses and professional fees
which were lower as a percentage of revenues, partially offset by higher
professional indemnity self-insurance costs.
REIMBURSED EXPENSES
Reimbursements for out-of-pocket expenses included in total revenues for our
U.S. operations were $10.7 million and $23.7 million for the quarter and six
months ended June 30, 2006, respectively, declining from $13.5 million for the
2005 quarter, but increasing from $22.2 million for the six months ended June
30, 2005. The decline in the 2006 second quarter was related to our legal
settlement administration unit, where the nature of the work performed in the
quarter required less out-of-pocket expenditures. However, this unit's
reimbursements have increased on a year-to-date basis during 2006, reflecting an
overall increase in noticing work performed on certain securities class action
settlements.
DEPOSIT ON SALE OF THE COMPANY'S CORPORATE HEADQUARTERS AND DEFERRED GAIN
On June 30, 2006, we sold the land and building utilized as our corporate
headquarters in Atlanta, Georgia. These assets have a net carrying amount of
$2,842,000. The base sales price of $8,000,000 was paid in cash at closing.
Under the sale agreement, the $8,000,000 base sales price is subject to upward
revision depending upon the buyer's ability to subsequently redevelop the
property. Also on June 30, 2006, we entered into a 12-month leaseback agreement
for these same facilities. Prior to termination of the leaseback agreement, we
plan to relocate our corporate headquarters to other nearby leased facilities.
Under SFAS 98, "Accounting for Leases," we deferred recognition of the gain
related to this sale. Net of transaction costs, we will recognize a pre-tax gain
of $4,864,000 upon the expiration or termination of the leaseback agreement,
expected to be on or before June 30, 2007. The gain of $4,864,000 is based on
the base sale price and does not include any amount for the potential upward
revision of the sales price. Should such revision subsequently occur, we could
ultimately realize a larger gain. We cannot predict the likelihood of any
subsequent price revisions.
Prior to the sale, this disposal group of assets had a fair value that exceeded
its depreciated cost. No adjustment to the carrying cost was required when this
disposal group was classified as "held for sale" under the provisions of SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We do not
own these assets at June 30, 2006. However, these assets are
31
reported in Prepaid Expenses and Other Current Assets on our Condensed
Consolidated Balance Sheet at carrying cost in accordance with the provisions of
SFAS 144. Pending recognition of the gain described above, the $8,000,000 that
we received on June 30, 2006 is reported on our Condensed Consolidated Balance
Sheet as a deposit liability.
INTERNATIONAL OPERATIONS
REVENUES BEFORE REIMBURSEMENTS
Substantially all international revenues are derived from the insurance company
market.
Revenues before reimbursements from our international operations increased 3.1%,
from $71.6 million in the second quarter of 2005 to $73.9 million in the 2006
second quarter. Revenues before reimbursements from our international operations
for the first six months of 2006 totaled $144.4 million, a 0.6% increase from
$143.5 million reported in the first six months of 2005. International unit
volume, measured principally by cases received, increased 18.1% and 6.6% in the
quarter and six months ended June 30, 2006, respectively, compared to the same
periods in 2005. Revenues per claim decreased 12.6% and 2.6% during the quarter
and six months ended June 30, 2006, respectively, due to changes in the mix of
services provided and in the rates charged for those services. Revenues before
reimbursements reflected a 2.4% and 3.4% decrease during the quarter and six
months ended June 30, 2006, respectively, due to the negative effect of a
stronger 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 decreased to $6.5 million and $13.5 million for the
quarter and six months ended June 30, 2006, respectively, from $7.3 million and
$13.9 million in the same 2005 periods, due primarily to the negative effect of
a stronger U.S. dollar during the 2006 periods.
Case Volume Analysis
International unit volume by region for the quarters and six months ended June
30, 2006 and 2005 was as follows:
Quarter ended Six months ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
(whole numbers) 2006 2005 Variance 2006 2005 Variance
-------- -------- -------- -------- -------- --------
United Kingdom 38,830 31,829 22.0% 72,393 73,184 (1.1%)
Americas 34,088 27,557 23.7% 66,811 56,938 17.3%
CEMEA 25,249 24,030 5.1% 51,784 52,005 (0.4%)
Asia/Pacific 16,719 13,823 21.0% 32,289 27,266 18.4%
------- ------ ------- -------
TOTAL INTERNATIONAL CASES RECEIVED 114,886 97,239 18.1% 223,277 209,393 6.6%
======= ====== ======= =======
The increase in the United Kingdom ("U.K.") unit volume was primarily due to
approximately 5,600 takeover claims received during the 2006 second quarter
associated with a new program. The increase in the Americas was primarily due to
an increase in high-frequency, low-severity claims associated with a new client
program in Brazil. The Asia/Pacific increase was due to an increase in
high-frequency, low-severity claims in Australia and Singapore.
32
COMPENSATION AND FRINGE BENEFITS
As a percentage of revenues before reimbursements, compensation expense,
including related payroll taxes and fringe benefits, was 70.0% for the quarter
ended June 30, 2006 compared to 69.6% for the same quarter in 2005. For the
six-month period ended June 30, 2006, compensation expense, including related
payroll taxes and fringe benefits increased as a percentage of revenues before
reimbursements to 70.9% from 70.0% in 2005. These increases primarily reflected
an increase in operating capacity in our Canadian operations and increased
staffing in our U.K. and Canadian units to handle claims expected to be received
under new claims handling agreements. There was an average of 3,389 full-time
equivalent employees in the first six months of 2006 compared to an average of
3,227 in the same 2005 period.
Salaries and wages of international personnel increased to $43.3 million for the
quarter ended June 30, 2006, from $42.1 million in the same 2005 quarter. For
the six-month periods, salaries and wages increased to $84.7 million in 2006
from $84.3 million in 2005. These increases were due to the increase in
full-time equivalent employees. Payroll taxes and fringe benefits for
international operations totaled $8.4 million and $17.7 million for the quarter
and six months ended June 30, 2006, respectively, compared to $7.8 million and
$16.2 million for the same period in 2005, primarily due to higher group
benefits and defined contribution retirement costs. The increases in the 2006
periods were partially offset by the impact of a stronger U.S. dollar.
EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS
Expenses other than reimbursements, compensation and related payroll taxes and
fringe benefits were 25.6% and 25.7% of international revenues before
reimbursements for the quarter and six months ended June 30, 2006, respectively,
as compared to 25.2% and 25.1% for the same periods in 2005.
REIMBURSED EXPENSES
Reimbursements for out-of-pocket expenses included in total revenues for our
international operations decreased to $6.5 million and $13.5 million for the
quarter and six months ended June 30, 2006, respectively, from $7.3 million and
$13.9 million in the same 2005 periods, due primarily to the impact of a
stronger U.S. dollar during the 2006 periods.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At June 30, 2006, our working capital balance (current assets less current
liabilities) was $137.7 million, an increase from the December 31, 2005 balance
of $125.8 million. Cash and cash equivalents totaled $65.0 million at June 30,
2006 and $49.4 million at December 31, 2005.
CASH PROVIDED BY OPERATING ACTIVITIES
Cash provided by operating activities increased by $13.7 million, from cash
provided by operating activities of $7.9 million in the six months ended June
30, 2005 to $21.6 million in the six months ended June 30, 2006. Cash was
generated in 2006 from higher net income, 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. During the 2006 second quarter, we received $3.8 million, including
associated interest, from the
33
Internal Revenue Service (IRS) related to a tax credit refund claim that was
previously settled with the IRS in June 2004.
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities increased by $292,000, from $2.3 million in
the six months ended June 30, 2005 to $2.5 million in the six months ended June
30, 2006. This increase was related to greater capitalization of computer
software costs in 2006 partially offset by lower fixed asset purchases. Cash of
$8.0 million was received during the second quarter of 2006 related to the sale
of our corporate headquarters. During the second quarter of 2005, we received a
final payment of approximately $7.6 million related to the 2004 sale of
undeveloped land.
CASH USED IN FINANCING ACTIVITIES
Cash used in financing activities decreased by $2.2 million, from $6.1 million
used in the six months ended June 30, 2005 to $3.9 million used in the six
months ended June 30, 2006. This decrease in cash used was due to a $1.0 million
increase during the 2006 period in net short-term borrowings in our
international operations over the level of net borrowings for the same period in
2005. In addition, proceeds from stock shares issued under employee incentive
plans, primarily related to the U.K. employee stock purchase plan, increased
approximately $1.0 million during the 2006 period. Cash dividends to
shareholders in both the 2006 and 2005 six-month periods ended June 30
approximated $5.9 million. As a percentage of net income, cash dividends totaled
58.6% for the six months ended June 30, 2006, compared to 116.3% for the same
period in 2005.
Our Board of Directors makes dividend decisions 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 $10,981,000 of our
retained earnings at June 30, 2006 is available for the payment of cash
dividends to shareholders during the remainder of 2006.
During the first six months of 2006, we did not repurchase any shares of our
Class A or Class B Common Stock. As of June 30, 2006, 705,863 shares remain to
be repurchased under the discretionary 1999 share repurchase program authorized
by our Board of Directors. We believe it is unlikely that we will repurchase
shares under this program in the foreseeable future due to the decline in the
funded status of our defined benefit pension plans.
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 $14.6 million
committed under the letter of credit facility, the balance of our unused line of
credit totaled $27.9 million at June 30, 2006. Our short-term borrowings
typically peak during the first quarter and generally decline during the balance
of the year. Short-term borrowings outstanding, including bank overdraft
facilities, as of June 30, 2006 totaled $30.4 million, increasing from $28.9
million at the end of 2005. Long-term borrowings outstanding, including current
installments of $11.4
34
million, totaled $51.6 million as of June 30, 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 and foreseeable
future.
We have not engaged in any hedging activities to compensate for the effect of
exchange rate fluctuations on the operating results of our foreign subsidiaries.
Foreign-currency-denominated debt serves to hedge the currency exposure of our
net investment in foreign operations.
Shareholders' investment at June 30, 2006 was $187.2 million, compared with
$179.0 million at the end of 2005. This overall increase was the result of net
income, common stock issued under employee incentive plans, and net positive
foreign currency translations, partially offset by dividends paid to
shareholders and a charge to retained earnings related to the creation of a
minority interest in our South Africa subsidiary.
OFF-BALANCE SHEET ARRANGEMENTS
At June 30, 2006, we have not entered into any off-balance sheet arrangements
that could materially impact our consolidated results of operations, financial
conditions, or cash flows.
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 accounting 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.
ADOPTION OF NEW ACCOUNTING STANDARDS
Additional information related to new accounting standards adopted during 2006
is provided in Notes 2 and 6 to our condensed consolidated financial statements
contained in this Form 10-Q.
35
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, and for
any subsequent interim periods in the first year of adoption.
During the quarter and six months ended June 30, 2006, we recognized total
pre-tax compensation expense for stock-based awards in the amount of $491,000
and $1,248,000, respectively, under SFAS 123R compared to $35,000 and $98,000,
respectively, for the same periods in 2005 under Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees," ("APB 25"). Included in
expense for the quarter and six months ended June 30, 2006 is $351,000 and
$617,000, respectively, 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 performance
shares and 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 differed 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, $140,000 and $631,000,
respectively, for the quarter and six months ended June 30, 2006, compared to
$35,000 and $98,000, respectively, for the same periods in 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 discuss 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 10, "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 June 30, 2006
36
under existing earnout agreements would approximate $2.2 million through 2009,
as follows: 2006 - none; 2007 - none; 2008 - $2,094,000; and 2009 - $150,000.
At June 30, 2006, we have committed $14.6 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.
CONTRACTUAL OBLIGATIONS
As disclosed in Note 13 to our condensed consolidated financial statements
contained in this Form 10-Q, we entered into a new operating lease on August 1,
2006 for approximately 160,000 square feet of office space in Atlanta, Georgia
to be used as our future corporate headquarters. We will begin utilizing this
leased space sometime in the first quarter of 2007, after construction of
leasehold improvements. The minimum monthly lease payments vary over the term of
the lease. The lessor will also provide a leasehold improvement allowance of
approximately $4.9 million.
The impact of these minimum lease payments on our liquidity and cash flow in
future periods is as follows:
Payments Due by Years
----------------------------------------------
2007 2010 2013
through through through
(in thousands) 2006 2009 2012 2017 Total
------ ------- ------- ------- -------
$1,028 $10,328 $11,204 $18,964 $41,524
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 June 30, 2006, there was $27.5 million
outstanding on the revolving credit line, with an average variable interest rate
of 6.06%. In addition, letters of credit of $14.6 million were also committed
under this revolving credit line. Our short-term borrowings at June 30, 2006
also include $2.7 million outstanding under bank overdraft facilities. The $50.0
million senior notes have scheduled principal repayments of approximately $5.6
million beginning October 2006 and continuing semi-annually through 2009 with
the final payment due October 2010. The stock of Crawford & Company
International, Inc. is pledged as security under these agreements and our U.S.
subsidiaries have guaranteed our obligations under these agreements.
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 was extended to September 29, 2010. On June 16, 2006, we
executed Amendment No. 1 to the Amended
37
Revolving Credit Agreement, which amended certain terms relating to the sale and
leaseback of real estate that was used as our headquarters in Atlanta, Georgia.
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. On June 16, 2006, we executed Waiver
and Amendment No. 2 to the Amended Note Purchase Agreement, which amended
certain terms relating to the sale and leaseback of real estate that was used as
our headquarters in Atlanta, Georgia.
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 September 30, 2006, we were allowed to sell, or sell and
lease back, the real estate that comprises our corporate headquarters
in Atlanta, Georgia.
We were in compliance with these debt covenants as of June 30, 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
38
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.
PENDING ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD
Financial Accounting Standards Board (FASB) Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"), is effective for fiscal years
beginning after December 15, 2006. FIN 48 will be applicable to all routine and
nonroutine positions for taxes accounted for under SFAS 109, "Accounting for
Income Taxes," by creating a single model to address uncertainties in tax
positions. FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. In addition, FIN 48 removes
income taxes from the scope of SFAS 5, "Accounting for Contingencies." Due to
the recent issuance of FIN 48, we are still evaluating the potential impact that
FIN 48 will have on our consolidated financial position, operating results, and
cash flows.
PENDING LEGISLATION
We are aware of pending U.S. legislation that impacts 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 ("U.S. Plan") is regulated by both the
PBGC and ERISA. This legislation has been approved by Congress, but it has not
been signed into law by the President. If signed into law by the President, this
legislation may alter future pension funding requirements and actuarial formulas
used by sponsors of defined benefit pension plans that are regulated by the PBGC
and ERISA.
Under existing PBGC and ERISA regulations, our U.S. Plan is significantly
underfunded based on the long-term interest rates used to discount our pension
liabilities as of January 1, 2006. We are currently not required to make any
contributions into our U.S. Plan during 2006. However, if the pending U.S.
legislation is not signed into law by September 15, 2006, we anticipate making a
discretionary $14.3 million cash contribution to our U.S. Plan during the 2006
third quarter in order to ensure it remains at an 80% funding level as measured
under existing PBGC and ERISA regulations. If this contribution is made, it will
not have any impact on the amount of periodic pension cost recognized in our
consolidated statement of income for any period in 2006.
If the pending legislation is signed into law on or before September 15, 2006,
our U.S. Plan will be more than 80% funded based on the long-term interest rates
used to discount pension liabilities as contained in the pending legislation and
no discretionary cash contribution is expected to be made during 2006.
We are also evaluating the impact that this pending legislation may have on our
U.S. Plan subsequent to 2006.
39
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
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.
40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes since the filing of our Form 10-K for the
year ended December 31, 2005.
ITEM 1. A. RISK FACTORS
There have been no significant changes for those risk factors contained in our
Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on May 2, 2006 at our company
headquarters in Atlanta, Georgia. All director nominees and management proposals
were approved by our shareholders, as detailed below. There were no shareholder
proposals.
(a) Votes regarding the election of the persons named below as Directors
were as follows:
For Withheld
---------- ---------
Jesse C. Crawford 23,588,054 364,206
Thomas W. Crawford 23,596,761 355,499
James D. Edwards 23,704,927 247,333
Robert T. Johnson 23,702,019 250,241
J. Hicks Lanier 22,967,813 984,447
Larry L. Prince 23,590,948 361,312
Clarence H. Ridley 21,910,620 2,041,640
P. George Benson 23,705,478 246,782
E. Jenner Wood, III 23,673,893 278,367
(b) Votes regarding ratification of the appointment of Ernst & Young LLP
as independent auditors of the Company to serve for the fiscal year
ending December 31, 2006 were as follows:
For 23,901,367
Against 40,920
Abstentions 9,973
(c) Votes regarding an increase in the number of shares of Class A Common
stock available for issuance under the Crawford & Company U.K.
Sharesave Scheme by an additional 500,000 shares were as follows:
For 21,571,691
Against 113,717
Abstention: 11,026
Broker Non-votes 2,255,826
ITEM 6. EXHIBITS
See Index to Exhibits beginning on page 43.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAWFORD & COMPANY
(Registrant)
Date: August 8, 2006 /s/ Thomas W. Crawford
----------------------------------------
Thomas W. Crawford
President and Chief Executive Officer
(Principal Executive Officer) and
Director
Date: August 8, 2006 /s/ W. Bruce Swain, Jr.
----------------------------------------
W. Bruce Swain, Jr.
Senior Vice President, Controller and
Interim
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
42
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 Amendment to Amended and Restated Supplemental Executive Retirement
Plan, dated April 14, 2006
10.2 Amended and Restated Purchase and Sales Agreement (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission June 16, 2006)
10.3 Amendment No. 1 to First Amended and Restated Credit Agreement
(incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Commission June 22,
2006)
10.4 Waiver and Amendment No. 2 to Note Purchase Agreement (incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission June 22, 2006)
10.5 Lease Agreement (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission August 1, 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
43
INDEX TO EXHIBITS, continued
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
44