CRAWFORD & COMPANY
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended June 30, 2007
OR
|
|
|
o |
|
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
(State or other jurisdiction of
incorporation or organization)
|
|
58-0506554
(I.R.S. Employer
Identification No.) |
|
|
|
1001 Summit Blvd.
Atlanta, Georgia
(Address of principal executive offices)
|
|
30319
(Zip Code) |
(404) 300-1000
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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 o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares outstanding of each of the issuers classes of common stock, as of July 31,
2007 was as follows:
Class A
Common Stock, $1.00 par value: 25,897,748
Class B Common Stock, $1.00 par value: 24,697,172
CRAWFORD & COMPANY
Quarterly Report on Form 10-Q
June 30, 2007
Table of Contents
2
Part 1 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, |
|
|
2007 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements |
|
$ |
484,145 |
|
|
$ |
394,209 |
|
Reimbursements |
|
|
34,678 |
|
|
|
37,230 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
518,823 |
|
|
|
431,439 |
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services provided, before reimbursements |
|
|
361,656 |
|
|
|
304,959 |
|
Reimbursements |
|
|
34,678 |
|
|
|
37,230 |
|
|
Total cost of services |
|
|
396,334 |
|
|
|
342,189 |
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses |
|
|
107,816 |
|
|
|
72,032 |
|
|
|
|
|
|
|
|
|
|
Corporate interest expense, net of interest income
of $910 and $1,103, respectively |
|
|
8,600 |
|
|
|
1,592 |
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
|
512,750 |
|
|
|
415,813 |
|
|
|
|
|
|
|
|
|
|
Gain on disposal of subrogation business |
|
|
3,980 |
|
|
|
|
|
Gain on sale of former corporate headquarters |
|
|
4,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
|
14,897 |
|
|
|
15,626 |
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes |
|
|
5,538 |
|
|
|
5,565 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
9,359 |
|
|
$ |
10,061 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.20 |
|
Diluted |
|
$ |
0.19 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
Average Number of Shares Used to Compute: |
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
50,397 |
|
|
|
49,137 |
|
Diluted Earnings Per Share |
|
|
50,526 |
|
|
|
49,318 |
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Per Share: |
|
|
|
|
|
|
|
|
Class A Common Stock |
|
$ |
0.00 |
|
|
$ |
0.12 |
|
Class B Common Stock |
|
$ |
0.00 |
|
|
$ |
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)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements |
|
$ |
240,537 |
|
|
$ |
192,603 |
|
Reimbursements |
|
|
15,694 |
|
|
|
17,164 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
256,231 |
|
|
|
209,767 |
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services provided, before reimbursements |
|
|
178,949 |
|
|
|
148,483 |
|
Reimbursements |
|
|
15,694 |
|
|
|
17,164 |
|
|
Total cost of services |
|
|
194,643 |
|
|
|
165,647 |
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses |
|
|
52,705 |
|
|
|
36,953 |
|
|
|
|
|
|
|
|
|
|
Corporate interest expense, net of interest income
of $490 and $772, respectively |
|
|
4,232 |
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses |
|
|
251,580 |
|
|
|
203,194 |
|
|
|
|
|
|
|
|
|
|
Gain on sale of former corporate headquarters |
|
|
4,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
|
9,495 |
|
|
|
6,573 |
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes |
|
|
3,443 |
|
|
|
2,360 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6,052 |
|
|
$ |
4,213 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
Diluted |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
Average Number of Shares Used to Compute: |
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
50,404 |
|
|
|
49,286 |
|
Diluted Earnings Per Share |
|
|
50,580 |
|
|
|
49,396 |
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Per Share: |
|
|
|
|
|
|
|
|
Class A Common Stock |
|
$ |
0.00 |
|
|
$ |
0.06 |
|
Class B Common Stock |
|
$ |
0.00 |
|
|
$ |
0.06 |
|
|
(See accompanying notes to condensed consolidated financial statements)
4
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
45,723 |
|
|
$ |
61,674 |
|
|
|
|
|
Short-term investment |
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Accounts receivable, less allowance for doubtful
accounts of $17,537 in 2007 and $15,319 in 2006 |
|
|
180,416 |
|
|
|
178,447 |
|
|
|
|
|
Unbilled revenues, at estimated billable amounts |
|
|
132,232 |
|
|
|
117,098 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
16,900 |
|
|
|
19,924 |
|
|
|
|
|
|
Total current assets |
|
|
375,271 |
|
|
|
382,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost |
|
|
152,624 |
|
|
|
140,729 |
|
|
|
|
|
Less accumulated depreciation |
|
|
(106,270 |
) |
|
|
(99,845 |
) |
|
|
|
|
|
Net property and equipment |
|
|
46,354 |
|
|
|
40,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
265,674 |
|
|
|
256,700 |
|
|
|
|
|
Intangible assets arising from business acquisitions, net |
|
|
121,760 |
|
|
|
127,869 |
|
|
|
|
|
Capitalized software costs, net |
|
|
37,562 |
|
|
|
36,903 |
|
|
|
|
|
Deferred income tax assets |
|
|
8,260 |
|
|
|
13,498 |
|
|
|
|
|
Other |
|
|
31,146 |
|
|
|
34,991 |
|
|
|
|
|
|
Total other assets |
|
|
464,402 |
|
|
|
469,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
886,027 |
|
|
$ |
892,988 |
|
|
|
|
|
|
|
|
|
* |
|
derived from the audited Consolidated Balance Sheet. |
(See accompanying notes to condensed consolidated financial statements)
5
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS CONTINUED
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
LIABILITIES AND SHAREHOLDERS INVESTMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
29,201 |
|
|
$ |
27,795 |
|
Accounts payable |
|
|
36,237 |
|
|
|
42,262 |
|
Accrued compensation and related costs |
|
|
57,480 |
|
|
|
64,636 |
|
Deposit from sale of real estate |
|
|
|
|
|
|
8,000 |
|
Deferred revenues |
|
|
66,011 |
|
|
|
68,359 |
|
Self-insured risks |
|
|
19,165 |
|
|
|
21,722 |
|
Accrued income taxes currently payable |
|
|
1,066 |
|
|
|
|
|
Deferred income taxes |
|
|
858 |
|
|
|
363 |
|
Other accrued liabilities |
|
|
57,632 |
|
|
|
46,526 |
|
Notes payable and capital leases |
|
|
7,524 |
|
|
|
2,621 |
|
|
Total current liabilities |
|
|
275,174 |
|
|
|
282,284 |
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Liabilities: |
|
|
|
|
|
|
|
|
Notes payable and capital leases, net of current portions |
|
|
187,945 |
|
|
|
199,044 |
|
Deferred revenues |
|
|
66,785 |
|
|
|
77,110 |
|
Self-insured risks |
|
|
15,513 |
|
|
|
12,338 |
|
Accrued pension liabilities |
|
|
87,910 |
|
|
|
90,058 |
|
Post-retirement medical benefit obligation |
|
|
2,517 |
|
|
|
2,440 |
|
Other |
|
|
12,183 |
|
|
|
14,019 |
|
|
Total noncurrent liabilities |
|
|
372,853 |
|
|
|
395,009 |
|
|
|
|
|
|
|
|
|
|
|
Minority interest in equity of consolidated affiliates |
|
|
4,982 |
|
|
|
4,544 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders Investment: |
|
|
|
|
|
|
|
|
Class A common stock, $1.00 par value; 50,000
shares authorized; 25,790 and 25,741 shares issued and
outstanding in 2007 and 2006, respectively |
|
|
25,790 |
|
|
|
25,741 |
|
Class B common stock, $1.00 par value; 50,000
shares authorized; 24,697 shares issued and
outstanding in 2007 and 2006 |
|
|
24,697 |
|
|
|
24,697 |
|
Additional paid-in capital |
|
|
17,086 |
|
|
|
15,468 |
|
Retained earnings |
|
|
217,037 |
|
|
|
207,891 |
|
Accumulated other comprehensive loss |
|
|
(51,592 |
) |
|
|
(62,646 |
) |
|
Total shareholders investment |
|
|
233,018 |
|
|
|
211,151 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS INVESTMENT |
|
$ |
886,027 |
|
|
$ |
892,988 |
|
|
|
|
|
* |
|
derived from the audited Consolidated Balance Sheet. |
(See accompanying notes to condensed consolidated financial statements)
6
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
|
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,359 |
|
|
$ |
10,061 |
|
Reconciliation of net income to net cash (used in)
provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
14,540 |
|
|
|
9,484 |
|
Loss on sales of property and equipment, net |
|
|
501 |
|
|
|
32 |
|
Stock-based compensation |
|
|
1,569 |
|
|
|
1,248 |
|
Gain on sale of subrogation unit |
|
|
(3,980 |
) |
|
|
|
|
Gain on 2006 sale of former corporate headquarters |
|
|
(4,844 |
) |
|
|
|
|
Changes in operating assets and liabilities,
net of effects of acquisitions and disposition: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
5,133 |
|
|
|
(11,335 |
) |
Unbilled revenues, net |
|
|
(10,704 |
) |
|
|
10,999 |
|
Accrued or prepaid income taxes |
|
|
8,102 |
|
|
|
6,433 |
|
Accounts payable and accrued liabilities |
|
|
(12,228 |
) |
|
|
(12,808 |
) |
Deferred revenues |
|
|
(12,901 |
) |
|
|
6,124 |
|
Accrued retirement costs |
|
|
(596 |
) |
|
|
240 |
|
Prepaid expenses and other assets |
|
|
(311 |
) |
|
|
(1,325 |
) |
|
Net cash (used in) provided by operating activities |
|
|
(6,360 |
) |
|
|
19,153 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Acquisitions of property and equipment |
|
|
(6,973 |
) |
|
|
(5,651 |
) |
Proceeds from sales of property and equipment |
|
|
438 |
|
|
|
99 |
|
Capitalization of computer software costs |
|
|
(5,043 |
) |
|
|
(4,606 |
) |
Proceeds from sale of investment security |
|
|
5,000 |
|
|
|
|
|
Proceeds from sale of subrogation unit |
|
|
5,000 |
|
|
|
|
|
Deposit received on sale of real estate |
|
|
|
|
|
|
8,000 |
|
Other investing activities |
|
|
(1,284 |
) |
|
|
(388 |
) |
|
Net cash used in investing activities |
|
|
(2,862 |
) |
|
|
(2,546 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
|
|
|
|
(5,900 |
) |
Other financing activities, net |
|
|
19 |
|
|
|
1,281 |
|
Short-term borrowings |
|
|
9,143 |
|
|
|
6,797 |
|
Payments on short-term borrowings |
|
|
(10,216 |
) |
|
|
(5,381 |
) |
Payments on long-term debt and capital lease obligations |
|
|
(6,328 |
) |
|
|
(721 |
) |
|
Net cash used in financing activities |
|
|
(7,382 |
) |
|
|
(3,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
653 |
|
|
|
449 |
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(15,951 |
) |
|
|
13,132 |
|
Cash and cash equivalents at beginning of period |
|
|
61,674 |
|
|
|
46,848 |
|
|
Cash and cash equivalents at end of period |
|
$ |
45,723 |
|
|
$ |
59,980 |
|
|
(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 United States (U.S.) Securities and Exchange
Commissions (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 three- and six-month periods ended June 30, 2007 are not
necessarily indicative of the results that may be expected for the year ended December 31, 2007 or
other future periods.
The Condensed Consolidated Balance Sheet presented herein as of December 31, 2006 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 Companys Annual Report on Form 10-K for the year ended December 31, 2006.
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.
2. Adoption of New Accounting Standards
FIN 48
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the
accounting and disclosure for uncertain tax positions, as defined. FIN 48 is intended to reduce the
diversity in practice associated with certain aspects of the recognition and measurement related to
accounting for income taxes. The adoption of FIN 48 resulted in a $214,000 charge to the Companys
retained earnings (a component of shareholders investment) on January 1, 2007. See Note 9, Income
Taxes.
3. Pending Adoption of Recently Issued Accounting Standards
SFAS 157
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. SFAS 157 applies under other accounting pronouncements that require
or permit fair value measurements. SFAS 157 is effective for
8
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
financial statements issued for years beginning after November 15, 2007, and interim periods within
those years. The Company does not expect the adoption of SFAS 157 to have a material impact on its
consolidated financial position, results of operations, or cash flows.
SFAS 159
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (SFAS 159).
SFAS 159 permits entities to voluntarily measure many financial instruments and certain other items
at fair value. SFAS 159s overall objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued for years beginning
after November 15, 2007. The Company has not determined what effect, if any, the adoption of SFAS
159 may have on the consolidated financial condition, results of operations, or cash flows of the
Company upon adoption.
4. Derivatives
In May 2007, the Company entered into a three-year interest rate swap agreement which effectively
converts the LIBOR-based portion of the interest rate on an initial notional amount of $175 million
of the Companys floating-rate debt to a fixed rate of 5.25%. In accordance with SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, and related guidance, the Company
has designated the interest rate swap as a cash flow hedge of exposure to changes in cash flows due
to changes in interest rates on an equivalent amount of debt. The notional amount is reduced over
the three-year term of the swap to match the expected repayment of the Companys outstanding debt.
The Company is exposed to counterparty credit risk for nonperformance and, in the event of
nonperformance, to market risk for changes in interest rates. The Company manages exposure to
counterparty credit risk through minimum credit standards, diversification of counterparties, and
procedures to monitor concentrations of credit risk. The Company reports the effective portion of
the change in fair value of the derivative instrument as a component of accumulated other
comprehensive loss and reclassifies that portion into earnings in the same period during which the
hedged transaction affects earnings. The Company recognizes the ineffective portion of the hedge,
if any, in current earnings during the period of change. Amounts that are reclassified into
earnings from accumulated other comprehensive loss and the ineffective portion of the hedge, if any, are
reported on the same income statement line item as the original hedged item. The Company includes
the fair value of the hedge in either current or non-current other liabilities and/or other assets
on the balance sheet based upon the term of the hedged item. The Company bases the fair value of
its derivative instrument on market pricing. Fair value represents the net amount required for the
Company to terminate the position, taking into consideration market rates and counterparty credit
risk. At June 30, 2007, the fair value of the interest rate swap and the amount expected to be
reclassified from accumulated other comprehensive loss into earnings were not material.
5. Earnings Per Share
Basic earnings per share (EPS) is computed based on the weighted-average number of total
9
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 is computed under the treasury stock method based
on the weighted-average number of total common shares outstanding (excluding nonvested shares of
restricted stock issued), 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,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
(in thousands, except earnings per share ) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net income available to common shareholders |
|
$ |
6,052 |
|
|
$ |
4,213 |
|
|
$ |
9,359 |
|
|
$ |
10,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
50,471 |
|
|
|
49,334 |
|
|
|
50,458 |
|
|
|
49,163 |
|
Less: Weighted-average unvested common shares
outstanding |
|
|
67 |
|
|
|
48 |
|
|
|
61 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used to compute
basic earnings per share |
|
|
50,404 |
|
|
|
49,286 |
|
|
|
50,397 |
|
|
|
49,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effects of stock-based compensation plans |
|
|
176 |
|
|
|
110 |
|
|
|
129 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used to compute
diluted earnings per share |
|
|
50,580 |
|
|
|
49,396 |
|
|
|
50,526 |
|
|
|
49,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain stock options are antidilutive. Options to purchase 2,422,955 shares of the
Companys Class A common stock at exercise prices ranging from $6.36 to $19.13 per share were
outstanding at June 30, 2007 but were not included in the computation of diluted EPS
because the options exercise prices were greater than the average market price of the Companys
Class A common stock during the second quarter of 2007. Additional options to purchase 25,000
shares of the Companys Class A common stock at an exercise price of $5.60 were outstanding at June
30, 2007 but were not included in the computation of diluted EPS because the options exercise
price, when added to the average unearned compensation costs, was greater than the average market
price of the Companys Class A common stock during the second quarter of 2007.
10
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Comprehensive Income
For the quarter and six months ended June 30, 2007, comprehensive income for the Company consisted
of net income, amortization of unrecognized retirement plan costs, change in fair value of the
effective portion of the Companys interest rate swap, and net foreign currency translation
adjustments. For the quarter and six months ended June 30, 2006, 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, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net income |
|
$ |
6,052 |
|
|
$ |
4,213 |
|
|
$ |
9,359 |
|
|
$ |
10,061 |
|
Amortization of unrecognized retirement plans cost |
|
|
1,157 |
|
|
|
|
|
|
|
2,450 |
|
|
|
|
|
Change in fair value of interest rate swap |
|
|
94 |
|
|
|
|
|
|
|
94 |
|
|
|
|
|
Foreign currency translation adjustments, net |
|
|
5,648 |
|
|
|
2,628 |
|
|
|
8,510 |
|
|
|
2,050 |
|
|
|
|
|
|
Total Comprehensive Income |
|
$ |
12,951 |
|
|
$ |
6,841 |
|
|
$ |
20,413 |
|
|
$ |
12,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Recognition of Deferred Gain on Sale of the Companys Former Corporate Headquarters
On June 30, 2006, the Company sold the land and building utilized as its former corporate
headquarters in Atlanta, Georgia. These assets had a net carrying amount of $2,842,000. The base
sale price of $8,000,000 was paid in cash at closing. Under the sale agreement, the $8,000,000
base sale price is potentially subject to upward revision depending upon the buyers ability to
subsequently redevelop the property. Also on June 30, 2006, the Company entered into a 12- month
leaseback agreement for this same facility. During the second quarter of 2007, the Company
relocated its corporate headquarters to another nearby leased facility.
Under SFAS 98, Accounting for Leases, the Company initially deferred recognition of the gain
related to this sale until the leaseback agreement expired on June 30, 2007. Net of transaction
costs, a pre-tax gain of $4,844,000 was recognized by the Company in the quarter ended June 30,
2007 upon expiration of the leaseback agreement and completion of the move to the new corporate
headquarters location. The gain of $4,844,000 was based on the base sale price and does not
include any amount for the potential upward revision of the sale 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, thus no adjustment to the carrying cost was
required when this disposal group was classified as held for sale on June 30, 2006 under the
provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
11
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Defined Benefit Pension Plans
Net periodic benefit costs related to the Companys defined benefit pension plans for the quarters
and six months ended June 30, 2007 and 2006 included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Service cost |
|
$ |
670 |
|
|
$ |
660 |
|
|
$ |
1,316 |
|
|
$ |
1,261 |
|
Interest cost |
|
|
8,742 |
|
|
|
8,169 |
|
|
|
17,379 |
|
|
|
16,110 |
|
Expected return on assets |
|
|
(9,597 |
) |
|
|
(9,114 |
) |
|
|
(19,056 |
) |
|
|
(17,914 |
) |
Recognized net actuarial
loss |
|
|
2,058 |
|
|
|
2,525 |
|
|
|
4,082 |
|
|
|
5,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,873 |
|
|
$ |
2,240 |
|
|
$ |
3,721 |
|
|
$ |
4,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Income Taxes
The Companys consolidated effective income tax may change periodically due to changes in enacted
tax rates, fluctuations in the mix of income earned from the Companys various international
operations, the Companys ability to utilize net operating loss carryforwards in certain of the
Companys international subsidiaries, and changes in amounts recorded related to uncertain income
tax provisions. At June 30, 2007, the Companys estimates that its effective annual income tax
rate for 2007 will be 38.3% before considering any discrete items that may affect our tax rate in
future periods. For the year ended December 31, 2006, the Companys effective income tax rate was
37.6%.
On January 1, 2007, the Company adopted FIN 48, which clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS 109), and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected to be taken on a
tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return
must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by
the relevant taxing authority. An uncertain income tax position can not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
The adoption of FIN 48 resulted in a $214,000 charge to the Companys retained earnings that was
reported as a cumulative effect adjustment for a change in accounting principle at January 1, 2007.
The total amount of unrecognized tax benefits as of the date of adoption was $5,541,000, which did
not change significantly during the quarter and six months ended June 30, 2007.
12
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Included in the total unrecognized tax benefits at January 1, 2007 and June 30, 2007 were
$5,541,000 and $5,476,000, respectively, of tax benefits that, if recognized, would affect the
effective tax rate.
The Company accrues interest and, if applicable, penalties related to unrecognized tax benefits in
income tax expense. The Company accrued $1,325,000 and $1,481,000 for the payment of interest at
January 1, 2007 and June 30, 2007, respectively. The Company did not have any amounts accrued for
penalties at January 1, 2007 or June 30, 2007.
The Company is subject to taxation in the U.S., various states within the U.S., and foreign
jurisdictions. With few exceptions, the Company is no longer subject to examination by those
authorities for the tax years before 2001. The Internal Revenue Service (IRS) commenced an
examination of the Companys 2004 U.S. income tax return in the second quarter of 2007. It is
reasonably possible that the amount of unrecognized tax benefits may change in the next twelve
months as a result of the expiration of statutes of limitation or due to the resolution of various
audits and appeals. If such events occur, the Company may recognize tax benefits of $400,000 to
$1,000,000.
10. Segment Information
The Companys four reportable operating segments are: U.S. Property & Casualty which serves the
U.S. property and casualty insurance company market, International Operations which serves the
property and casualty insurance company markets outside of the U.S., Broadspire which serves the
U.S. self-insurance marketplace, and Legal Settlement Administration which serves the class action
settlement, product warranties and inspections, and bankruptcy markets. The Companys reportable
segments represent components of the business for which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Intersegment sales are not material for any period
presented. The Company measures segment profit (loss) based on operating earnings, a non-GAAP
financial measure defined as earnings before net corporate interest expense, income taxes,
amortization of customer-relationship intangible assets, stock option expense, unallocated
corporate and shared costs, and certain other expenses and gains. Historical information has been
revised to conform to the current presentation of our realigned reportable segments. Effective
January 1, 2007, management changed its method of allocating corporate overhead costs to each of
its operating segments. Prior periods were restated on the same basis as the new allocation
method.
Financial information for the quarters and six months ended June 30, 2007 and 2006 covering the
Companys reportable segments is presented below:
13
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Revenues before reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
43,924 |
|
|
$ |
51,685 |
|
|
$ |
90,772 |
|
|
$ |
113,546 |
|
International Operations |
|
|
88,655 |
|
|
|
73,861 |
|
|
|
172,595 |
|
|
|
144,361 |
|
Broadspire |
|
|
82,985 |
|
|
|
36,149 |
|
|
|
167,566 |
|
|
|
72,113 |
|
Legal Settlement Administration |
|
|
24,973 |
|
|
|
30,908 |
|
|
|
53,212 |
|
|
|
64,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Revenues before
Reimbursements |
|
|
240,537 |
|
|
|
192,603 |
|
|
|
484,145 |
|
|
|
394,209 |
|
Reimbursements |
|
|
15,694 |
|
|
|
17,164 |
|
|
|
34,678 |
|
|
|
37,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
256,231 |
|
|
$ |
209,767 |
|
|
$ |
518,823 |
|
|
$ |
431,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
510 |
|
|
$ |
3,005 |
|
|
$ |
2,849 |
|
|
$ |
9,216 |
|
International Operations |
|
|
4,566 |
|
|
|
2,818 |
|
|
|
8,530 |
|
|
|
4,111 |
|
Broadspire |
|
|
2,959 |
|
|
|
(5,226 |
) |
|
|
2,500 |
|
|
|
(10,919 |
) |
Legal Settlement Administration |
|
|
3,353 |
|
|
|
6,323 |
|
|
|
6,408 |
|
|
|
13,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Earnings |
|
|
11,388 |
|
|
|
6,920 |
|
|
|
20,287 |
|
|
|
15,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add/(deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate and shared
cost, net |
|
|
(652 |
) |
|
|
598 |
|
|
|
(2,030 |
) |
|
|
2,167 |
|
Other gains |
|
|
4,844 |
|
|
|
|
|
|
|
8,824 |
|
|
|
|
|
Amortization of
customer-relationship intangible
assets |
|
|
(1,507 |
) |
|
|
|
|
|
|
(2,943 |
) |
|
|
|
|
Stock option expense |
|
|
(346 |
) |
|
|
(351 |
) |
|
|
(641 |
) |
|
|
(617 |
) |
Net corporate interest expense |
|
|
(4,232 |
) |
|
|
(594 |
) |
|
|
(8,600 |
) |
|
|
(1,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
$ |
9,495 |
|
|
$ |
6,573 |
|
|
$ |
14,897 |
|
|
$ |
15,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Commitments and Contingencies
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.
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 since they are dependent on future events. Based on projected levels
of revenues and operating earnings, additional payments after June 30, 2007 under existing earnout
agreements are expected to approximate $7.1 million through 2010, as follows:
14
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
$461,000
|
|
$781,000
|
|
$5,050,000
|
|
$792,000 |
12. Disposition and Acquisitions of Businesses
Effective February 28, 2007, the Company sold the operating assets of its U.S. subrogation services
business for $5,000,000 in cash at closing plus a potential future earnout of approximately
$1,400,000. This business was part of the Companys U.S. Property & Casualty operating segment.
The Company recognized a pre-tax gain of $3,980,000, or $0.05 per share after income taxes, based
on the $5,000,000 initial sales price and derecognized $571,000 of associated goodwill. Concurrent
with the sale, the Company also entered into a services agreement (the Agreement) with the buyer.
Under the terms of this Agreement, the buyer will provide subrogation and recovery services to
certain clients of the Company and the Company will receive an administrative fee from these
revenues earned by the buyer. The financial results of the subrogation services business are
included in the Companys consolidated financial statements through the effective date of sale, and
due to the significance of the Agreement with the buyer in relationship to the disposed business,
the Company has not reported the disposed business as discontinued operations in its consolidated
financial statements. Revenues before reimbursements for the sold subrogation services business
for the quarter ended June 30, 2006 were $599,000, and for the six months ended June 30, 2007 and
2006 were $375,000 and $1.2 million, respectively.
During the six-month period ended June 30, 2007, the Company increased goodwill by $3,359,000
related to the Companys October 31, 2006 acquisition of Broadspire Management Services, Inc.
(BMSI). This adjustment was for additional direct acquisition costs and to adjust the fair
values of certain assets purchased and liabilities assumed in the acquisition. The estimated fair
values of assets acquired and liabilities assumed for BMSI at the date of acquisition remain
subject to a working capital adjustment.
During the six months ended June 30, 2007, the Company revised the estimated values assigned to the
e-Triage.com, Inc. (e-Triage) intangible assets resulting from the Companys October 30, 2006
acquisition of e-Triage. These revised estimates are based on values determined by an independent
appraisal firm. As a result, the amount assigned to the e-Triage trademark intangible asset was
adjusted from $1,299,000 to $600,000 and technology-based intangible assets were adjusted from
$6,497,000 to $3,800,000. Goodwill associated with the e-Triage acquisition increased from
$4,015,000 at December 31, 2006 to $6,136,000 at June 30, 2007.
13. Amended Credit Agreement
The Companys secured Credit Agreement executed on October 31, 2006 (as amended) provides for a
maximum available borrowing capacity of $310,000,000, comprised of (i) a term loan facility in the
initial principal amount of $210,000,000 and (ii) a revolving credit facility in the principal
amount of $100,000,000 which includes a swingline subfacility, a letter of credit
15
CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
subfacility, and a foreign currency sublimit. On July 5, 2007, the Company entered into an
amendment to the Credit Agreement that lowered the variable interest rate for the term loan
facility to LIBOR plus 2.25%. In certain circumstances noted in the amended Credit Agreement, this
2.25% spread over LIBOR could be lowered in the future to a spread of 2.00%. Prior to the
amendment of July 5, 2007, the variable interest rate on the term loan was LIBOR plus 2.50%.
16
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,
2007, and the related condensed consolidated statements of income for the three-month and six-month
periods ended June 30, 2007 and 2006, and the condensed consolidated statements of cash flows for
the six-month periods ended June 30, 2007 and 2006. These financial statements are the
responsibility of the Companys 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, 2006, and the related consolidated statements of income, shareholders investment, and
cash flows for the year then ended (not presented herein) and in our report dated March 15, 2007,
we expressed an unqualified opinion on those consolidated financial statements and included an
explanatory paragraph regarding the Companys adoption of SFAS 123(R) and SFAS 158. In our
opinion, the information set forth in the accompanying condensed consolidated balance sheet as of
December 31, 2006, 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 7, 2007
17
Item 2. Managements 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).
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, including estimates in cost reductions related to the integration of
Broadspire Management Services, Inc. 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 currency exchange rates,
regulations and practices of various governmental authorities, the competitive environment, the
financial conditions of our clients, the performance of sublessors under certain subleases related
to our leased properties, 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, possible legislation or
changes in market conditions that may curtail or limit growth in product liability and securities
class actions, man-made disasters and natural disasters, and our integration of Broadspire
Management Services, Inc. (BMSI). Therefore you should not place undue reliance on any
forward-looking statements.
18
Actual results and trends in the future may differ materially from those suggested or implied by
the forward-looking statements. Forward-looking statements speak only as of the date they are made
and we undertake no obligation to publicly update any of these forward-looking statements in light
of new information or future events. 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 worlds largest independent provider of claims
management solutions to insurance companies and self-insured entities, with a global network of
more than 700 locations 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 settlement 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 certain 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.
We perform legal settlement administration services related to securities, product liability, and
other class action settlements and bankruptcies, 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. We also conduct
inspections related to building component products in various contexts ranging from class actions
to warranty and product performance claims.
The claims management services market, both in the 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 are limited in our
ability to predict case volumes that may be referred to us in the future.
We generally earn our revenues on an individual fee-per-claim basis for claims management services provided to property and casualty insurance
companies and self-insured entities. Accordingly, the volume
of claims referred to us is a key driver of our revenues. When the insurance underwriting market is
soft, insurance companies are generally more aggressive in the risks they underwrite, and insurance
premiums and policy deductibles decline. This usually results in an increase in industry-wide
claim referrals which will increase claim referrals to us provided we maintain at least our
existing share of the overall claim services market. During a hard insurance
19
underwriting market, insurance companies become very selective in the risks they underwrite and
insurance premiums and policy deductibles typically increase, sometimes quite dramatically. This
usually 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.
The legal settlement administration market is also highly competitive but comprised of a smaller
number of specialized companies servicing the securities class action, bankruptcy, and product
warranty and inspection markets. The demand for legal settlement administration services is not
directly tied to or affected by the insurance underwriting cycle. The demand for these services is
largely dependent on the volume of securities and product liability class action settlements, the
volume of Chapter 11 bankruptcy filings and the resulting settlements, and general economic
conditions. Our revenues for legal settlement administration services are generally project based
and we earn these revenues as we perform individual tasks and deliver the outputs as outlined in
each project.
Results of Consolidated Operations
Consolidated net income was $6.1 million and $4.2 million for the quarters ended June 30, 2007 and
2006, respectively, and $9.4 million and $10.1 million for the six months ended June 30, 2007 and
2006, respectively. Consolidated net income for the quarter and six months ended June 30, 2007
included a pretax gain of $4.8 million, or $3.0 million after tax, related to the June 30, 2006
sale of our former corporate headquarters. This gain was initially deferred pending the expiration
of a leaseback arrangement related to that facility which expired June 30, 2007. Consolidated net
income for the six months ended June 30, 2007 also included a pre-tax gain of $4.0 million, or $2.5
million after tax, from the sale of our U.S. subrogation services unit in February 2007.
With the exception of income taxes, net corporate interest expense, amortization of
customer-relationships intangible assets, stock option expense, unallocated corporate and shared
costs, and other gains, our results of operations are discussed and analyzed by our four operating
segments: U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement
Administration. The discussion and analysis of our operating segments follows the sections on
income taxes, net corporate interest expense, amortization of customer-relationship intangible
assets, stock option expense, unallocated corporate and shared costs, and other gains.
Income Taxes
The provision for income taxes totaled $3.4 million and $2.4 million for the quarters ended June
30, 2007 and 2006, respectively, and $5.5 million and $5.6 million for the six months ended June
30, 2007 and 2006, respectively. Our consolidated effective income tax rate may change
periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our
various international operations, our ability to utilize net operating loss carryforwards in
certain of our international subsidiaries, and changes in amounts recorded related to uncertain
income tax positions. At June 30, 2007, we estimate that our effective annual income tax rate for
2007 will be 38.3% before considering any discrete items that may affect our tax rate in future
periods. For the year ended December 31, 2006, our effective income tax rate was 37.6%.
20
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 and
short-term investments. These amounts vary based on interest rates, borrowings outstanding, and
the amounts of invested cash and short-term investments. Interest expense will also be impacted by
our interest rate swap agreement that we entered into in May 2007. Corporate interest expense
totaled $4.7 million and $1.4 million for the quarters ended June 30, 2007 and 2006, respectively,
and $9.5 million and $2.7 million for the six months ended June 30, 2007 and 2006, respectively.
The increase in interest expense was due to higher levels of outstanding borrowings and higher
interest rates. Corporate interest income totaled $490,000 and $772,000 for the quarters ended June
30, 2007 and 2006, respectively, and $910,000 and $1.1 million for the six months ended June 30,
2007 and 2006, respectively.
Amortization of Customer-Relationship Intangible Assets
Amortization of customer-relationship intangible assets represents the non-cash amortization
expense for customer-relationship intangible assets acquired during our 2006 acquisitions of BMSI
and Specialty Liability Services, Ltd. (SLS). Amortization expense associated with these
intangible assets totaled approximately $1.5 million and $2.9 million for the quarter and six
months ended June 30, 2007, respectively. Such amortization is included in Selling, General, and
Administrative expenses in our condensed consolidated statements of income. There were no
such expenses in the 2006 periods.
Stock Option Expense
Stock option expense is comprised of non-cash expenses related to stock options granted under our
various stock option and employee stock purchase plans. Stock option expense is not allocated to
our operating segments. Most of our stock option grants that are subject to expense recognition
under SFAS No. 123-R, Share-based Payment (SFAS 123R), were granted prior to 2005. Stock-based
compensation expense related to our executive stock bonus plan (performance shares and restricted
shares) is allocated to our operating segments and included in the determination of segment
operating earnings or loss. Stock option expense of $346,000 and $351,000 was recognized during
the quarters ended June 30, 2007 and 2006, respectively, and $641,000 and $617,000 for the six
months ended June 30, 2007 and 2006, respectively, under the provisions of SFAS 123R.
Unallocated Corporate and Shared Costs
Certain unallocated costs and credits are excluded from the determination of segment operating
earnings. These unallocated corporate and shared costs primarily represent costs or credits
related to our frozen U.S. defined benefit pension plan, expenses for the office of the CEO and
Board of Directors, relocation costs associated with the move of our Atlanta, Georgia headquarters
facility, certain adjustments to our self-insured liabilities,
certain internal-use software, and certain adjustments to our
allowances for doubtful accounts receivable. Unallocated corporate and shared costs were a net
expense of $652,000 and $2.0 million for the quarter and six months ended June 30, 2007,
respectively, and a net credit of $598,000 and $2.2 million for the same 2006 periods,
respectively. The variances in the quarter and year-to-date periods
were due primarily to corporate information technology employees
working on fewer internal-use software development projects,
additional rent and relocation costs associated with the move of our
corporate headquarters facility, and adjustments to our self-insured
liabilities.
21
Other Gains
Effective February 28, 2007, we completed a strategic alliance with Trover Solutions, Inc.
(Trover). As part of this transaction, we sold the operating assets of our subrogation services
unit to Trover for $5.0 million in cash and a potential future earnout of $1.4 million. This unit
was part of our U.S. Property & Casualty operating segment. We recognized a pre-tax gain of $4.0
million from this transaction based on the initial sales price of $5.0 million and derecognized
$571,000 of associated goodwill. As part of this sale transaction, approximately 30 of our
subrogation services employees were offered employment with Trover. Concurrent with the sale, we
also entered into a services agreement (the Agreement) with Trover. Under the terms of this
Agreement, Trover will provide subrogation and recovery services to certain of our clients and we
will receive an administrative fee generated from these revenues earned by Trover. Due to the
significance of this Agreement in relationship to the disposed business unit, we have not reported
the disposed business unit as a discontinued operation.
On June 30, 2006 we sold the land and building utilized as our former corporate headquarters in
Atlanta, Georgia. These assets had a net carrying amount of $2.8 million. The base sales price of
$8.0 million was paid in cash at closing. Under the sales agreement, the $8.0 million base sales
price is subject to potential upward revision depending upon the buyers ability to subsequently
redevelop the property. Also on June 30, 2006, we entered into a 12-month leaseback agreement for
these same facilities. During the second quarter of 2007, we relocated our corporate headquarters
to another nearby leased facility. In accordance with the provisions of SFAS 98, Accounting for
Leases, we initially deferred recognition of the gain related to this sale until the leaseback
agreement expired on June 30, 2007. Net of transaction costs, a pre-tax gain of $4.8 million was
recognized in the quarter ended June 30, 2007 upon expiration of the leaseback agreement. The
pre-tax gain of $4.8 million was based on the base sales price and did 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.
SEGMENT OPERATING RESULTS
Our operating segments, U.S. Property & Casualty, International Operations, Broadspire, and Legal
Settlement Administration, represent components of our business for which separate financial
information is available that is evaluated regularly by our chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Segment operating earnings (or loss), a non-GAAP financial measure, is the primary financial
performance measure used by our senior management and chief operating decision maker to evaluate
the financial performance of our operating segments and make resource allocation decisions.
Segment operating earnings is our segment measure of profit (loss) required to be disclosed by SFAS
No. 131, Disclosure about Segments of Enterprises and Related Information. We believe this
measure is useful to investors in that it allows them to evaluate our segment operating performance
using the same criteria our management uses. Segment operating earnings exclude income tax
expense, net corporate interest expense, amortization of customer-relationship intangible assets,
stock option expense, certain other gains and expenses, and certain unallocated corporate and
shared costs.
Income taxes, net corporate interest expense, amortization of customer-relationship intangible
assets, and stock option expense 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
22
basis. Net corporate interest expense results from capital structure decisions made by management,
amortization expense relates to non-cash amortization expense of customer-relationship intangible
assets resulting from business combinations, stock option expense is the non-cash cost related to
historically granted stock options which are not allocated to our operating segments, and income
taxes are based on statutory rates in effect in each of the locations where we provide services and
vary throughout the world. None of these costs relates directly to the performance of our services
or operating activities, and therefore are excluded from segment operating earnings in order to
better assess the results of our segment operating activities on a consistent basis. Certain other
gains and expenses represent events (such as gain on disposals of real estate, gain on disposal of
businesses, restructuring costs, and loss on early retirement of debt) that are not considered part
of our segment operating earnings since they historically have not regularly impacted our
performance and are not expected to impact our future performance on a regular basis. Unallocated
corporate and shared costs represent expenses and credits related to certain executive management
and Board of Directors functions, certain provisions to bad debt allowances or subsequent
recoveries such as those related to bankrupt clients, defined benefit pension costs for our frozen
U.S. pension plan, certain internal-use software, and certain self insurance costs and recoveries that are not allocated to our
individual operating segments.
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, income taxes,
net corporate interest expense, amortization of customer-relationship intangible assets, stock
option expense, certain other gains, and unallocated corporate and shared costs/credits.
Our discussion and analysis of operating expenses is comprised of two components. Direct
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 Direct Compensation and Fringe Benefits include outsourced services, office
rent and occupancy costs, other office operating expenses, cost of risk, amortization and
depreciation expense other than amortization of customer-relationship intangible assets, and
allocated corporate overhead costs.
Allocated corporate and shared costs are allocated to our operating segments based primarily on usage. These allocated
costs are included in the determination of segment operating earnings. Effective January 1, 2007,
we changed our method of allocating corporate overhead and shared costs to each of our operating
segments. Prior periods were restated on the same basis as the new allocation method.
This discussion and analysis should be read in conjunction with our condensed consolidated
financial statements and the accompanying notes.
23
Operating results for our U.S. Property & Casualty, International Operations, Broadspire, and
Legal Settlement Administration segments reconciled to consolidated net income, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
June 30, |
|
|
June 30, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
Revenues before reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
43,924 |
|
|
$ |
51,685 |
|
|
|
$ |
90,772 |
|
|
$ |
113,546 |
|
International Operations |
|
|
88,655 |
|
|
|
73,861 |
|
|
|
|
172,595 |
|
|
|
144,361 |
|
Broadspire |
|
|
82,985 |
|
|
|
36,149 |
|
|
|
|
167,566 |
|
|
|
72,113 |
|
Legal Settlement Administration |
|
|
24,973 |
|
|
|
30,908 |
|
|
|
|
53,212 |
|
|
|
64,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, before reimbursements |
|
|
240,537 |
|
|
|
192,603 |
|
|
|
|
484,145 |
|
|
|
394,209 |
|
Reimbursements |
|
|
15,694 |
|
|
|
17,164 |
|
|
|
|
34,678 |
|
|
|
37,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
256,231 |
|
|
$ |
209,767 |
|
|
|
$ |
518,823 |
|
|
$ |
431,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Compensation & Fringe Benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
29,537 |
|
|
$ |
33,797 |
|
|
|
$ |
60,685 |
|
|
$ |
71,846 |
|
% of related revenues before reimbursements |
|
|
67.2 |
% |
|
|
65.4 |
% |
|
|
|
66.9 |
% |
|
|
63.3 |
% |
International Operations |
|
|
62,857 |
|
|
|
51,732 |
|
|
|
|
121,743 |
|
|
|
102,397 |
|
% of related revenues before reimbursements |
|
|
70.9 |
% |
|
|
70.1 |
% |
|
|
|
70.6 |
% |
|
|
71.0 |
% |
Broadspire |
|
|
49,086 |
|
|
|
24,423 |
|
|
|
|
103,360 |
|
|
|
49,246 |
|
% of related revenues before reimbursements |
|
|
59.1 |
% |
|
|
67.6 |
% |
|
|
|
61.7 |
% |
|
|
68.2 |
% |
Legal Settlement Administration |
|
|
13,141 |
|
|
|
12,335 |
|
|
|
|
26,679 |
|
|
|
24,845 |
|
% of related revenues before reimbursements |
|
|
52.6 |
% |
|
|
39.9 |
% |
|
|
|
50.2 |
% |
|
|
38.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
154,621 |
|
|
$ |
122,287 |
|
|
|
$ |
312,467 |
|
|
$ |
248,334 |
|
% of Revenues before reimbursements |
|
|
64.3 |
% |
|
|
63.5 |
% |
|
|
|
64.5 |
% |
|
|
63.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses Other than Direct Compensation &
Fringe Benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
13,877 |
|
|
$ |
14,883 |
|
|
|
$ |
27,238 |
|
|
$ |
32,484 |
|
% of related revenues before reimbursements |
|
|
31.6 |
% |
|
|
28.8 |
% |
|
|
|
30.0 |
% |
|
|
28.6 |
% |
International Operations |
|
|
21,232 |
|
|
|
19,311 |
|
|
|
|
42,322 |
|
|
|
37,853 |
|
% of related revenues before reimbursements |
|
|
23.9 |
% |
|
|
26.1 |
% |
|
|
|
24.5 |
% |
|
|
26.2 |
% |
Broadspire |
|
|
30,940 |
|
|
|
16,952 |
|
|
|
|
61,706 |
|
|
|
33,786 |
|
% of related revenues before reimbursements |
|
|
37.3 |
% |
|
|
46.9 |
% |
|
|
|
36.8 |
% |
|
|
46.9 |
% |
Legal Settlement Administration |
|
|
8,479 |
|
|
|
12,250 |
|
|
|
|
20,125 |
|
|
|
26,084 |
|
% of related revenues before reimbursements |
|
|
34.0 |
% |
|
|
39.6 |
% |
|
|
|
37.8 |
% |
|
|
40.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,528 |
|
|
$ |
63,396 |
|
|
|
$ |
151,391 |
|
|
$ |
130,207 |
|
% of Revenues before reimbursements |
|
|
31.0 |
% |
|
|
32.9 |
% |
|
|
|
31.3 |
% |
|
|
33.0 |
% |
Reimbursements |
|
|
15,694 |
|
|
|
17,164 |
|
|
|
|
34,678 |
|
|
|
37,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
90,222 |
|
|
$ |
80,560 |
|
|
|
$ |
186,069 |
|
|
$ |
167,437 |
|
% of Revenues |
|
|
35.2 |
% |
|
|
38.4 |
% |
|
|
|
35.9 |
% |
|
|
38.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segment Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
510 |
|
|
$ |
3,005 |
|
|
|
$ |
2,849 |
|
|
$ |
9,216 |
|
% of related revenues before reimbursements |
|
|
1.2 |
% |
|
|
5.8 |
% |
|
|
|
3.1 |
% |
|
|
8.1 |
% |
International Operations |
|
|
4,566 |
|
|
|
2,818 |
|
|
|
|
8,530 |
|
|
|
4,111 |
|
% of related revenues before reimbursements |
|
|
5.2 |
% |
|
|
3.8 |
% |
|
|
|
4.9 |
% |
|
|
2.8 |
% |
Broadspire |
|
|
2,959 |
|
|
|
(5,226 |
) |
|
|
|
2,500 |
|
|
|
(10,919 |
) |
% of related revenues before reimbursements |
|
|
3.6 |
% |
|
|
(14.5 |
%) |
|
|
|
1.5 |
% |
|
|
(15.1 |
%) |
Legal Settlement Administration |
|
|
3,353 |
|
|
|
6,323 |
|
|
|
|
6,408 |
|
|
|
13,260 |
|
% of related revenues before reimbursements |
|
|
13.4 |
% |
|
|
20.5 |
% |
|
|
|
12.0 |
% |
|
|
20.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add/(deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate and shared costs, net |
|
|
(652 |
) |
|
|
598 |
|
|
|
|
(2,030 |
) |
|
|
2,167 |
|
Net corporate interest expense |
|
|
(4,232 |
) |
|
|
(594 |
) |
|
|
|
(8,600 |
) |
|
|
(1,592 |
) |
Stock option expense |
|
|
(346 |
) |
|
|
(351 |
) |
|
|
|
(641 |
) |
|
|
(617 |
) |
Amortization of customer-relationship intangibles |
|
|
(1,507 |
) |
|
|
|
|
|
|
|
(2,943 |
) |
|
|
|
|
Other gains |
|
|
4,844 |
|
|
|
|
|
|
|
|
8,824 |
|
|
|
|
|
Income taxes |
|
|
(3,443 |
) |
|
|
(2,360 |
) |
|
|
|
(5,538 |
) |
|
|
(5,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6,052 |
|
|
$ |
4,213 |
|
|
|
$ |
9,359 |
|
|
$ |
10,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
U.S. PROPERTY & CASUALTY
Second quarter operating earnings for our U.S. Property & Casualty segment decreased from $3.0
million, or 5.8% of segment revenue before reimbursements, in 2006 to $510,000 in 2007,
representing an operating margin of 1.2%. The decline for the quarter and six months ended June
30, 2007 was primarily due to the decrease in revenues and incremental profits produced by our
catastrophe adjusters.
Revenues before Reimbursements
U.S. Property & Casualty revenues are primarily generated from the property and casualty insurance
company market.
U.S. Property & Casualty revenues before reimbursements decreased 15.0% to $43.9 million for the
quarter ended June 30, 2007, compared to $51.7 million in the comparable 2006 period. Revenues
decreased 20.1% to $90.8 million for the six months ended June 30, 2007, compared to $113.5 million
in the comparable 2006 period. These declines were due to lower industry-wide claim volumes,
reduced catastrophic claims activity, and the sales of our subrogation services business in the
first quarter of 2007 and our investigation services business in the third quarter of 2006.
Revenues generated by our catastrophe adjuster group were $1.3 million and $3.1 million for the
quarter and six months ended June 30, 2007, respectively, declining from $5.6 million and $16.9
million in the comparable 2006 periods when we were responding to catastrophic claims in the
northeastern and midwestern U.S. and completing claims resulting from 2005 hurricanes Katrina, Rita
and Wilma. There were no major hurricanes impacting the U.S. in the second half of 2006, and thus
2007 revenues were not significantly impacted by carryover claims from the mild 2006 hurricane
season. U.S. Property & Casualty revenues included $2.1 million and $4.6 million produced by our
investigation services business for the 2006 second quarter and year-to-date periods, respectively.
Our investigation services unit was sold in the 2006 third quarter. Prior year revenues also
included $599,000 and $1.2 million produced by our subrogation services business for the second
quarter and year-to-date periods, respectively. The assets and operations of the
subrogation unit were sold in the 2007 first quarter.
See the following analysis of U.S. Property & Casualty cases received.
Reimbursed Expenses included in Total Revenues
Reimbursements for out-of-pocket expenses included in total revenues for our U.S. Property &
Casualty segment were $2.6 million and $5.2 million for the quarter and six months ended June 30,
2007, respectively, decreasing from $2.7 million and $5.7 million in the comparable 2006 period.
These 2007 decreases were primarily attributable to higher third-party costs incurred during 2006 when
we were completing certain large commercial claims resulting from hurricanes Katrina, Rita and
Wilma.
Case Volume Analysis
U.S. Property & Casualty unit volumes, measured principally by cases received and excluding claims
associated with the disposed investigations service and subrogation businesses, increased overall
by 3.4% and 2.9% for the second quarter and six months ended June 30, 2007, respectively, compared
to the same 2006 periods. For the quarter and six months ended June 30, 2007, segment revenue
declined 5.3% and 4.8%, respectively, from the comparable periods in 2006 due to the sale of our
subrogation services and investigation services businesses. Revenues declined 13.1% and 18.2% from
changes in the mix of services provided and in the rates charged for those services, resulting in
an overall net 15.0% and 20.1% decrease in U.S. Property &
25
Casualty revenues before reimbursements for the quarter and six months ended June 30, 2007,
respectively. The decrease in revenue produced by our catastrophe adjusters and the increase in
referrals of high-frequency, low-severity property and vehicle claims referred from our U.S.
insurance company clients decreased our average revenue per claim in the 2007 second quarter and
year-to-date period.
U.S. Property & Casualty unit volumes by major service line, as measured by cases received
excluding dispositions, for the quarter and six months ended June 30, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
June 30, |
|
June 30, |
|
|
(whole numbers) |
|
2007 |
|
2006 |
|
Variance |
|
2007 |
|
2006 |
|
Variance |
|
Casualty |
|
|
23,085 |
|
|
|
24,869 |
|
|
|
(7.2 |
%) |
|
|
46,982 |
|
|
|
52,399 |
|
|
|
(10.3 |
%) |
Catastrophe Services |
|
|
1,873 |
|
|
|
7,652 |
|
|
|
(75.5 |
%) |
|
|
3,463 |
|
|
|
13,074 |
|
|
|
(73.5 |
%) |
Property |
|
|
45,317 |
|
|
|
42,891 |
|
|
|
5.7 |
% |
|
|
90,818 |
|
|
|
83,799 |
|
|
|
8.4 |
% |
Vehicle |
|
|
29,736 |
|
|
|
24,841 |
|
|
|
19.7 |
% |
|
|
59,925 |
|
|
|
51,596 |
|
|
|
16.1 |
% |
Workers Compensation |
|
|
5,635 |
|
|
|
4,452 |
|
|
|
26.6 |
% |
|
|
10,890 |
|
|
|
9,129 |
|
|
|
19.3 |
% |
Other |
|
|
2,625 |
|
|
|
8 |
|
|
nm |
|
|
4,008 |
|
|
|
13 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Property
&
Casualty
Cases Received |
|
|
108,271 |
|
|
|
104,713 |
|
|
|
3.4 |
% |
|
|
216,086 |
|
|
|
210,010 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2007 declines in casualty claims were due primarily to a reduction in claims from our
existing clients. The 2007 declines in catastrophe services claims were due to an overall lack of
catastrophic events for the quarter and six months ended June 30, 2007. The 2007 increases in
property claims were due to increases in high-frequency, low-severity claims. The 2007 increases
in vehicle claims were primarily due to additional claims referred to us under a major contract
entered into during 2006. Workers Compensation claims increased in 2007 due to increased
referrals for outside investigations from our Broadspire segment.
Direct Compensation and Fringe Benefits
The most significant expense in our U.S. Property & Casualty segment is the compensation of
employees, including related payroll taxes and fringe benefits. U.S. Property & Casualty direct
compensation and fringe benefits expense as a percent of segment revenues before reimbursements was
67.2% in the second quarter of 2007, compared to 65.4% in the comparable 2006 quarter. For the
six-month period ended June 30, 2007, U.S. Property & Casualty direct compensation and fringe
benefits expense as a percent of segment revenues before reimbursements was 66.9%, compared to
63.3% in the comparable 2006 period. There was an average of 1,666 full-time equivalent employees
(including 53 catastrophe adjusters) in the first six months of 2007, compared to an average of
2,079 employees (including 117 catastrophe adjusters) in the same period of 2006. The number of
employees for the 2006 period included 110 employees in our investigations unit and 27 employees in
our subrogation unit. The assets and operations of the investigations unit were disposed of on
September 29, 2006 and the assets and operations of the subrogation unit were disposed of on
February 28, 2007.
U.S. Property & Casualty salaries and wages totaled $24.2 million and $49.4 million for the second
quarter and six months ended June 30, 2007, respectively, decreasing 12.6% and 15.8%, from $27.7
million and $58.7 million in the comparable 2006 periods, primarily as a result of the reduced
number of catastrophe adjusters and employees in the disposed businesses. Payroll taxes and fringe
benefits for U.S. Property & Casualty totaled $5.3 million and $11.3 million in the
26
second quarter and first six months of 2007, respectively, decreasing 13.1 % and 14.4% from 2006
costs of $6.1 million and $13.2 million for the comparable periods, due primarily to the reduced
number of employees.
Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits
U.S. Property & Casualty expenses other than reimbursements, direct compensation and related
payroll taxes and fringe benefits were 31.6% of segment revenues before reimbursements for the
quarter ended June 30, 2007, up from 28.8% for the comparable quarter of 2006. For the six-month
period ended June 30, 2007, these expenses were 30.0% of segment revenues before reimbursements, up
from 28.6% in the comparable 2006 period. These percentage increases were primarily due to a
decrease in revenue in the 2007 periods, even though the actual dollar amounts of these expenses
decreased in 2007. The declines in the actual dollar amount of these expenses in 2007 reflected
the companys efforts to reduce costs in light of reduced revenues and were also due to lower
office operating expenses resulting from the reduced number of employees in 2007.
BROADSPIRE
Our Broadspire segment recorded operating earnings of $3.0 million, or 3.6% of segment revenues,
and $2.5 million, or 1.5% of segment revenues, in the quarter and six months ended June 30, 2007,
respectively, compared to an operating loss of $5.2 million, or 14.5% of segment revenues and $10.9
million, or 15.1% of segment revenues, in the comparable 2006 periods. Operating results for our
Broadspire segment for the quarter and six months ended June 30, 2006 exclude BMSI, which we
acquired on October 31, 2006. These improvements reflected incremental operating earnings generated
by the acquired BMSI and cost reduction initiatives started in November 2006 and continued into
2007. We have taken significant steps to reduce operating expenses in the combined Broadspire
operations, primarily through staff reductions and consolidation of existing leased office
facilities.
Revenues before Reimbursements
Broadspire segment revenues are primarily derived from workers compensation and liability claims
management, medical management for workers compensation, vocational rehabilitation, and risk
management information services provided to the U.S. self-insured market place.
Broadspire segment revenues before reimbursements increased 129.6% to $83.0 million and 132.4% to
$167.6 million for the quarter and six months ended June 30, 2007, respectively, compared to $36.1
million and $72.1 million for the comparable 2006 periods. The acquisition of BMSI contributed
$50.0 million and $99.6 million in revenues in the quarter and six months ended June 30, 2007,
respectively. See the following analysis of Broadspire segment cases received.
Reimbursed Expenses included in Total Revenues
Reimbursements for out-of-pocket expenses included in total revenues for the Broadspire segment
were $1.2 million and $2.6 million for the quarter and six months ended June 30, 2007,
respectively, increasing from $894,000 and $1.7 million in the comparable 2006 periods. This
increase was primarily attributable to the acquisition of BMSI.
Case Volume Analysis
Excluding the impact of the BMSI acquisition on 2007 cases received, unit volumes for the
Broadspire segment, measured principally by cases received, decreased 17.3% and 13.2% for the
27
second quarter and the first six months of 2007, respectively, compared to the same periods in
2006. Our acquisition of BMSI increased Broadspire segment revenues by 138.3% and 138.1% for the
quarter and six months ended June 30, 2007, respectively. Revenues increased by 8.6% and 7.5 %
from changes in the mix of services provided by our former Crawford Integrated Services business
(now part of the combined Broadspire segment) and in the rates charged for those services,
resulting in a total 129.6% and 132.4% increase in Broadspire segment revenues before
reimbursements for the second quarter and first six months of 2007, respectively, compared to the
same periods in 2006.
Excluding the impact of the BMSI acquisition, Broadspire unit volumes by major service line, as
measured by cases received, for the second quarter and six months ended June 30, 2007 and 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
June 30, |
|
June 30, |
|
|
(whole numbers) |
|
2007 |
|
2006 |
|
Variance |
|
2007 |
|
2006 |
|
Variance |
|
Workers Compensation |
|
|
19,476 |
|
|
|
24,598 |
|
|
|
(20.8 |
%) |
|
|
40,074 |
|
|
|
48,714 |
|
|
|
(17.7 |
%) |
Casualty |
|
|
16,688 |
|
|
|
18,650 |
|
|
|
(10.5 |
%) |
|
|
35,170 |
|
|
|
38,055 |
|
|
|
(7.6 |
%) |
Other |
|
|
4,267 |
|
|
|
5,618 |
|
|
|
(24.0 |
%) |
|
|
9,644 |
|
|
|
11,018 |
|
|
|
(12.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Broadspire Cases Received |
|
|
40,431 |
|
|
|
48,866 |
|
|
|
(17.3 |
%) |
|
|
84,888 |
|
|
|
97,787 |
|
|
|
(13.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The declines in workers compensation and casualty claims in 2007 were primarily due to
reductions in claims from our existing clients, only partially offset by net new business gains,
and reflected a continuing decline in reported workplace injuries in the U.S. The acquisition of
BMSI resulted in 30,611 and 61,533 claim referrals for the second quarter and six months ended June
30, 2007, which are not reflected in the above table.
Direct Compensation and Fringe Benefits
The most significant expense in our Broadspire segment is the compensation of employees, including
related payroll taxes and fringe benefits. Broadspires direct compensation and fringe benefits
expense, as a percent of segment revenues before reimbursements, declined to 59.1% and 61.7% for
the quarter and six months ended June 30, 2007, respectively, compared to 67.6% and 68.2% in the
same 2006 periods. This decrease primarily reflected the cost reduction initiatives we started in
late 2006 when we acquired BMSI. As of June, 30 2007, a net of
418 positions, or approximately 12%
of the Broadspire segment workforce, have been eliminated. We estimate that these cost reductions
will reduce annual compensation and other expenses by approximately $32.3 million in 2007, with no
negative impact on revenues. Average full-time equivalent employees totaled 2,741 in the first six
months of 2007, up from 1,444 in the same 2006 period. The acquisition of BMSI added 1,533 full
time equivalent employees in 2007.
Broadspire segment salaries and wages totaled $40.7 million and $85.2 million for the second
quarter and six months ended June 30, 2007, respectively, increasing 103.4% and 113.5%, from $20.0
million and $39.9 million in the comparable 2006 periods. This increase was primarily the result of
additional compensation expense of $23.4 million and $48.6 million for the second quarter and first
six months of 2007, respectively, associated with the acquired BMSI business. Payroll taxes and
fringe benefits for the Broadspire segment totaled $8.4 million and $18.2 million for the second
quarter and six months ended June 30, 2007, respectively, increasing 90.9% and 95.7%, respectively,
from 2006 expenses of $4.4 million and $9.3 million for the same comparable periods, due primarily
to the BMSI acquisition which added $4.8 million and
28
$10.1 million in payroll taxes and fringe benefits for the second quarter and six months ended June
30, 2007, respectively.
Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits
Broadspire segment expenses other than reimbursements, direct compensation and related payroll
taxes and fringe benefits decreased as a percent of segment revenues before reimbursements to 37.3%
and 36.8% for the second quarter and six months ended June 30, 2007, respectively, from 46.9% for
both the second quarter and six months ended June 30, 2006. This decline was primarily due to the
cost reduction initiatives we started when we acquired BMSI on October 31, 2006. As part of the
cost reduction initiatives implemented in this segment, we have closed and consolidated
approximately 15 leased offices throughout the U.S. These office closures and consolidations will
continue through 2009.
LEGAL SETTLEMENT ADMINISTRATION
Our Legal Settlement Administration segment reported operating earnings of $3.4 million and $6.4
million for the second quarter and six months ended June 30, 2007, respectively, declining from
$6.3 million and $13.3 million in the comparable 2006 periods. The related segment operating margin
declined from 20.5% and 20.7% for the second quarter and the first six months of 2006,
respectively, to 13.4% and 12.0% in the comparable 2007 periods.
Revenues before Reimbursements
Legal Settlement Administration revenues are primarily derived from securities, product liability
and other class action settlements, warranties and inspections, and bankruptcy administration.
Legal Settlement Administration revenues before reimbursements declined 19.2% to $25.0 million and
17.1% to $53.2 million for the second quarter and six months ended June 30, 2007, respectively,
compared to $30.9 million and $64.2 million in the comparable 2006 periods. Legal Settlement
Administration revenues are project-based and can fluctuate significantly. During the second
quarter and six months ended June 30, 2007, we were awarded 63 and 98 new settlement administration
assignments, respectively, compared to 60 and 112 during the same periods in 2006. At June 30,
2007 we had a backlog of projects awarded totaling approximately $41.1 million, compared to $51.2
million at June 30, 2006. Of the $41.1 million backlog at June 30, 2007, an estimated $38.1
million is expected to be included in revenues within the next twelve months.
Reimbursed Expenses included in Total Revenues
Reimbursements for out-of-pocket expenses included in total revenues for Legal Settlement
Administration were $3.8 million and $11.4 million for the second quarter and six months ended June
30, 2007, respectively, declining from $7.1 million and $16.3 million in the comparable 2006
periods. This decrease was primarily attributable to lower legal settlement administration
revenues in the 2007 periods and higher out-of-pocket costs in 2006 related to certain securities
class action settlements we were administering. The nature and volume of work performed in our
Legal Settlement Administration segment typically requires more reimbursable out-of-pocket
expenditures than our other operating segments.
Transaction Volume
Legal Settlement Administration services are generally project based and not denominated by
individual claims. Depending upon the nature of projects and their respective stages of
29
completion, the volume of transactions or tasks performed by us can vary, sometimes significantly.
Direct Compensation and Fringe Benefits
Legal Settlement Administrations direct compensation expense, including related payroll taxes and
fringe benefits, as a percent of segment revenues before reimbursements was 52.6% in the second
quarter of 2007, compared to 39.9% in the comparable 2006 quarter. For the six-month period ended
June 30, 2007, these expenses as a percent of segment revenues before reimbursements were 50.2%,
compared to 38.7% in the same 2006 period. These 2007 increases were primarily due to an increase
in operating capacity during 2007 due to lower class action settlement activity. In addition,
certain tasks previously outsourced in 2006 are now being performed by our own employees, resulting
in an increase in direct compensation costs in this segment during 2007. There was an average of
608 full-time equivalent employees in the first six months of 2007, compared to an average of 533
in the same 2006 period.
Legal Settlement Administration salaries and wages totaled $11.5 million and $22.7 million for the
quarter and six months ended June 30, 2007, respectively, increasing 5.5% and 5.1%, from $10.9
million and $21.6 million in the comparable 2006 periods. This net increase was primarily the
result of internally performing certain functions in 2007 that were previously outsourced in 2006,
partially offset by a reduction in full-time equivalent employees in 2007 from the levels at
December 31, 2006. Payroll taxes and fringe benefits for Legal Settlement Administration totaled
$1.6 million and $4.0 million for the quarter and six months ended June 30, 2007, respectively,
increasing 14.3% and 25.0% from costs of $1.4 million and $3.2 million in the comparable 2006
periods, due to the increase in salaries and wages.
Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits
One of our most significant expenses in Legal Settlement Administration is outsourced services due
to the variable, project-based nature of our work. Legal Settlement Administration expenses other
than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as
a percent of segment revenues before reimbursements to 34.0% and 37.8% in the second quarter and
six months ended June 30, 2007, respectively, from 39.6% and 40.6% in the comparable 2006 periods.
These declines were due to the lower class action activity during 2007 and our decision to utilize
more internal staff resources for certain tasks as opposed to outsourced service providers.
INTERNATIONAL OPERATIONS
Effective January 1, 2007, we changed our method of allocating corporate overhead and shared costs
to each of our operating segments. Prior periods were restated on the same basis as the new
allocation method. As a result, International Operations operating earnings for the quarter and
six months ended June 30, 2006 decreased to $2,818,000 and $4,111,000, respectively, from the
$3,213,000 and $4,899,000 originally reported for these 2006 periods. The prior year amounts in
the following discussion and analysis have been restated to reflect these changes.
Operating earnings in our International Operations segment improved to $4.6 million and $8.5
million in the second quarter and six months ended June 30, 2007, respectively, up significantly
from last years second quarter and six months operating earnings of $2.8 million and $4.1 million,
respectively. This improvement reflected an increase in the operating margin from 3.8% and 2.8% in
the second quarter and six months ended June 30, 2006, respectively, to 5.2% and 4.9% in the
comparable 2007 periods.
30
Revenues before Reimbursements
Substantially all International Operations revenues are derived from the property and casualty
insurance company market.
Revenues before reimbursements from our International Operations increased 20.0%, from $73.9
million in the second quarter of 2006 to $88.7 million in the 2007 second quarter. Revenues before
reimbursements from our International Operations for the first six months of 2007 totaled $172.6
million, a 19.6% increase from $144.4 million reported in the first six months of 2006. Compared to
the 2006 periods, during the current quarter and year-to-date periods, the U.S. dollar weakened
against most major foreign currencies, resulting in a net exchange rate benefit in the 2007
periods. Excluding the benefit of exchange rate fluctuations, international revenues would have
been $82.6 million and $162.0 million in the second quarter and six months ended June 30, 2007,
respectively, reflecting growth in revenues on a constant dollar basis of 11.8% and 12.2%. This
growth primarily reflected increased case referrals in each region of our International Operations
segment in the first six months of 2007. Average revenue per claim decreased 23.0% and 25.0%
during the second quarter and six months ended June 30, 2007, respectively, due primarily to the increase in high-frequency, low-severity claims in the Americas. The acquisition of Specialty
Liability Services, Ltd. in the U.K. during the 2006 fourth quarter increased revenues by $4.0
million, or 2.3%, in the six months ended June 30, 2007 and by $2.0 million, or 2.3%, for the 2007
second quarter over the comparable periods in 2006.
Reimbursed Expenses included in Total Revenues
Reimbursements for out-of-pocket expenses included in total revenues for our International
Operations segment increased to $8.1 million and $15.5 million for the second quarter and six
months ended June 30, 2007, respectively, from $6.5 million and $13.5 million in the comparable
2006 periods. These increases in 2007 were due primarily to higher revenues and claims volume in
the U.K. and Canada and also due to a weaker U.S. dollar during the current year.
Case Volume Analysis
Excluding the impact of acquisitions, International Operations unit volumes by region for the
second quarters and six months ended June 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
June 30, |
|
June 30, |
|
|
(whole numbers) |
|
2007 |
|
2006 |
|
Variance |
|
2007 |
|
2006 |
|
Variance |
|
United Kingdom |
|
|
48,985 |
|
|
|
42,439 |
|
|
|
15.4 |
% |
|
|
95,206 |
|
|
|
78,975 |
|
|
|
20.6. |
% |
Americas |
|
|
44,051 |
|
|
|
30,476 |
|
|
|
44.4 |
% |
|
|
94,860 |
|
|
|
60,229 |
|
|
|
57.5 |
% |
CEMEA |
|
|
34,699 |
|
|
|
25,249 |
|
|
|
37.4 |
% |
|
|
65,954 |
|
|
|
51,784 |
|
|
|
27.4 |
% |
Asia/Pacific |
|
|
21,287 |
|
|
|
16,719 |
|
|
|
27.3 |
% |
|
|
42,585 |
|
|
|
32,289 |
|
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International Cases Received |
|
|
149,022 |
|
|
|
114,883 |
|
|
|
29.7 |
% |
|
|
298,605 |
|
|
|
223,277 |
|
|
|
33.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2007 increases in the United Kingdom and CEMEA (Continental Europe, Middle East, and
Africa) were primarily due to claims management agreements entered into during 2006 and 2007 and
increases in claims generated by severe weather during the winter of 2006-2007. The 2007 increases
in the Americas were primarily due to increases in high-frequency, low-severity claims in Brazil
and increases in claims in Canada generated by severe weather in the 2007 first quarter. The 2007
increases in Asia-Pacific were due primarily to increases in high-frequency, low-
31
severity claims in Singapore, weather-related claims in Australia, Malaysia and Vietnam, and
vehicle claims in China.
Direct Compensation and Fringe Benefits
As a percentage of segment revenues before reimbursements, direct compensation expense, including
related payroll taxes and fringe benefits, was 70.9% for the second quarter ended June 30, 2007
compared to 70.1% for the same quarter in 2006. The increase in the 2007 second quarter compared to
the same quarter in 2006 was primarily due to additional staff hired to handle new assignments
received in the current quarter. For the six-month period ended June 30, 2007, these
expenses decreased as a percentage of segment revenues before reimbursements to 70.6% from 71.0% in
comparable 2006 period. This percentage decrease in the 2007 period was primarily due to increased
utilization of our staff as a result of the increase in the number of cases received. There was an
average of 3,608 full-time equivalent employees in the first six months of 2007 compared to an
average of 3,389 in the same 2006 period.
Salaries and wages of International Operations segment personnel increased to $53.1 million for the
second quarter ended June 30, 2007, from $43.3 million in the comparable 2006 quarter. For the
six-month periods, salaries and wages of International Operations segment personnel increased to
$102.5 million in 2007 from $84.7 million in 2006. These increases were primarily related to the
increase in employees necessary to service the increased revenues and a weaker U.S. dollar during
the current periods. Payroll taxes and fringe benefits for International Operations segment
totaled $9.7 million and $19.3 million for the second quarter and six months ended June 30, 2007,
respectively, compared to $8.4 million and $17.7 million for the same periods in 2006, primarily
due to the increase in employees and a weaker U.S. dollar during the current periods.
Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits
Expenses other than direct compensation and related payroll taxes and fringe benefits were 23.9%
and 24.5% of international revenues before reimbursements for the second quarter and six months
ended June 30, 2007, respectively, compared to 26.1% and 26.2% for the same periods in 2006.
These percentage decreases in 2007 were due primarily to increased revenues without corresponding
increases in expenses.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
At June 30, 2007, our working capital balance (current assets less current liabilities) was $100.1
million, an increase from the December 31, 2006 balance of $99.9 million. Cash and cash
equivalents totaled $45.7 million at June 30, 2007 and $61.7 million at December 31, 2006. During
the first quarter of 2007, we sold a $5 million short-term investment.
Cash (Used in) Provided by Operating Activities
Net cash used in operating activities was $6.4 million in the six months ended June 30, 2007
compared to net cash provided by operating activities of $19.2 million in the same period of 2006.
This decrease in cash from operations in 2007 was primarily due to growth in unbilled receivables,
non-operating gains, and cash disbursements for accrued liabilities, including those assumed in the
Broadspire Management Services, Inc. acquisition. The Companys operating cash needs typically
peak during the first quarter and decline during the balance of the year due to cash disbursements
for retirement plan contributions, annual incentive compensation payments, and other recurring annual payments typically made in the first
quarter of each year.
32
Cash Used in Investing Activities
Net cash used in investing activities was $2.9 million in the six months ended June 30, 2007 and
$2.5 million in the same period of 2006. During the current period, we sold a short-term
investment for $5.0 million and also received $5.0 million from the sale of our U.S. subrogation
services unit. The 2006 period included the receipt of an $8.0 million deposit from the sale of
our former corporate headquarters.
Cash Used in Financing Activities
Net cash used in financing activities increased by $3.5 million, from $3.9 million in the six
months ended June 30, 2006 to $7.4 million in the same period of 2007. This net increase in the
current period was due to higher principal payments on our long-term debt and net repayments on our
short-term borrowings, partially offset by the absence of dividend payments and lower proceeds from
exercises of stock options and employee stock purchase plans in 2007.
During the six months ended June 30, 2007, we did not repurchase any shares of our Class A or Class
B Common Stock under our discretionary 1999 share repurchase program authorized by the Board of
Directors. As of June 30, 2007, 705,863 additional shares can be repurchased under the program. We
believe it is unlikely that we will repurchase shares under this program in the foreseeable future
due to the underfunded status of our defined benefit pension plans and the covenants and
restrictions associated with our credit agreement.
Other Matters Concerning Liquidity, Capital Resources, and Financial Condition
We maintain a committed $100.0 million revolving credit line with a syndicate of banks in order to
meet seasonal working capital requirements and other financing needs that may arise. This
revolving credit line expires on October 30, 2011. As a component of this credit line, we maintain
a letter of credit facility to satisfy certain of our own contractual obligations. Including $22.9
million committed under the letter of credit facility, the balance of our unused line of credit
totaled $50.3 million at June 30, 2007. Short-term borrowings outstanding, including bank
overdraft facilities, as of June 30, 2007 totaled $29.2 million, increasing from $27.8 million at
the end of 2006. Long-term borrowings outstanding, including current installments and capital
leases, totaled $195.5 million as of June 30, 2007, compared to $201.7 million at December 31,
2006. We have historically used the proceeds from our long-term borrowings to finance business
acquisitions.
On July 5, 2007, we entered into an amendment to our Credit Agreement. Under this amendment, the variable interest rate on the term loan
facility was lowered to LIBOR plus 2.25%. Depending on our ability to meet certain criteria as
described in the amended Credit Agreement, this spread over LIBOR could be lowered to 2.00% in the
future. Prior to the amendment of July 5, 2007, the variable interest rate on the term loan
facility was LIBOR plus 2.50%
We are exposed to changes in interest rates, primarily as a result of our short-term and long-term
debt. In May 2007, we entered into a three-year interest rate swap agreement to manage the interest
rate characteristics of a portion of our outstanding debt. We evaluate market conditions and our
leverage ratio in order to determine our tolerance for potential increases in interest expense that
could result from floating interest rates. Based on the amounts and mix of our fixed and floating
rate debt at June 30, 2007, if market interest rates increase by 1.0%, after considering the effect
of our swap, our annual pre-tax interest expense would increase by approximately $500,000, or less
that $0.01 per share after considering related income taxes. We determined this amount by
considering the impact of the hypothetical interest rates on our
33
borrowing costs and interest rate swap agreement. This analysis does not consider the effects of
changes in the level of overall economic activity that could exist in such an environment.
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.
We believe our current financial resources, together with funds generated from operations and
existing and potential borrowing capability, will be sufficient to maintain our current operations
for the next 12 months.
Shareholders investment at June 30, 2007 was $233.0 million, compared to $211.2 million at
December 31, 2006. This increase was primarily the result of comprehensive income, which includes
net income, net positive foreign currency translations, reclassification of amortization under SFAS
158 for retirement plans, and the change in fair value of the interest rate swap, partially offset
by the cumulative effect of adopting FIN 48 on January 1, 2007.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements 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 interim 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 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, 2006 except for the adoption of FIN 48 and its impact on our effective income tax
rate. For additional discussion regarding the application of our critical accounting policies, see
our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and
Exchange Commission, under the heading Critical Accounting Policies and Estimates in the
Managements Discussion and Analysis of Financial Condition and Results of Operations section.
New Accounting Standards Adopted
Additional information related to new accounting standards adopted during 2007 is provided in Notes
2 and 9 to our condensed consolidated financial statements contained in this Form 10-Q.
Pending Adoption of New Accounting Standards
Additional information related to pending adoption of new accounting standards is provided in Note
3 to our condensed consolidated financial statements contained in this Form 10-Q.
34
FACTORS THAT MAY AFFECT FUTURE RESULTS
Future Dividend Payments
Our Board of Directors makes dividend decisions each quarter based in part 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, future levels of cash generated by our operating activities,
and restrictions related to the covenants contained in our Credit Agreement dated October 31, 2006
(as amended). The covenants in our Credit Agreement limit dividend payments to shareholders to
$12.5 million in any 12-month period once certain leverage and fixed charge coverage ratios are
met. Based on our anticipated future operating performance and the application of these leverage
and fixed charge coverage ratios, we anticipate being able to pay cash dividends for the fourth
quarter of 2007 sometime during the 2008 first quarter.
Legal Proceedings
As disclosed in Note 11, Commitments and Contingencies, to the condensed consolidated financial
statements contained in this Form 10-Q, 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 entities 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, 2007 under existing earnout
agreements would approximate $7.1 million through 2010, as follows: 2007 $461,000; 2008
$781,000; 2009 $5,050,000; and 2010 $792,000.
Credit Agreement and Debt Covenants
Our Credit Agreement contains customary representations, warranties and covenants, including
covenants limiting liens, indebtedness, guaranties, mergers and consolidations, substantial asset
sales, investments, loans, sales and leasebacks, dividends and distributions, and other fundamental
changes. In addition, the Credit Agreement requires us to meet certain financial tests. For more
information on our debt covenants, see Note 5, Term Loans and Revolving Credit Facility, to the
consolidated financial statements contained in our Annual Report on Form 10-K for the year ended
December 31, 2006.
The covenants in the Credit Agreement also place certain restrictions on our ability to pay
dividends to shareholders, including a $12,500,000 limit on dividend payments in any 12-month
period.
We are currently in compliance with these debt covenants. If we do not meet the covenant
requirements in the future, we then would be in default under these agreements. In such an event,
we would need to obtain a waiver of the default or repay the outstanding indebtedness under the
agreements. If we could not obtain a waiver on satisfactory terms, we could be required to
renegotiate this indebtedness. Any such renegotiations could result in less favorable terms,
including higher interest rates and accelerated payments. Based upon our projected operating
results for 2007, we expect to remain in compliance with the financial covenants contained in the
Credit Agreement throughout 2007. However, there can be no assurance that our actual financial
results will match our planned results or that we will not violate the covenants.
35
At June 30, 2007, $220.8 million was outstanding under our Credit Agreement. In addition,
commitments under letters of credit totaling $22.9 million were outstanding at June 30, 2007 under
the letters of credit subfacility of the Credit Agreement. These letter of credit commitments were
for our own obligations. Including the $22.9 million committed under the letter of credit
facility, the unused balance of the $100 million revolving credit facility totaled $50.3 million at
June 30, 2007.
Off-Balance Sheet Arrangements
At June 30, 2007, we have not entered into any off-balance sheet arrangements that could materially
impact our operations, financial conditions, or cash flows.
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, 2006 other than the impact of an interest rate swap agreement we entered into in
May 2007 to manage the interest rate characteristics of a portion of our outstanding debt. Based on
the amounts and mix of our fixed and floating rate debt at June 30, 2007, if market interest rates
increase an average of 1.0%, after considering the effect of our swap, our annual pretax interest
expense would increase by approximately $500,000, or less than $0.01 per share after considering
related income taxes. We determined this amount by considering the impact of the hypothetical
interest rates on our borrowing costs and interest rate swap agreement. This analysis does not
consider the effects of changes in the level of overall economic activity that could exist in such
an environment.
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 Commissions rules and
forms, and that such information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management necessarily applied its judgment in assessing the costs and
benefits of such controls and procedures, which, by their nature, can provide only reasonable
assurance regarding managements control objectives. The Companys management, including the Chief
Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can
prevent all possible errors or fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. There are inherent limitations in all control systems, including the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of simple errors or
mistakes. Additionally, controls can be circumvented by the individual acts of one or more
persons. The design of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and, while our disclosure controls and procedures are designed to be
effective under circumstances where they should reasonably be expected to operate effectively,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Because of the inherent limitations in any control system,
misstatements due to possible errors or fraud may occur and not be detected.
36
As of the end of the period covered by this report, we performed an evaluation, under the
supervision and with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operations of our disclosure
controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the
foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that our
disclosure controls and procedures are effective at providing reasonable assurance that all
material information relating to the Company (including consolidated subsidiaries) required to be
included in our Exchange Act reports is reported in a timely manner.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during
the period covered by this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
For information on legal matters, see Note 11, Commitments and Contingencies to the condensed
consolidated financial statements included in this Form 10-Q which is incorporated into this Item 1
by reference.
Item 4. Submission of Matters To a Vote of Security Holders
Our annual meeting of shareholders was held on May 3, 2007 at our company headquarters in Atlanta,
Georgia. All director nominees and management proposals were approved by our shareholders, as
detailed below. There was one shareholder proposal which was not approved by the majority of our
voting shareholders and was not endorsed by our Board of Directors.
|
(a) |
|
Votes regarding the election of the persons named below as Directors were as follows: |
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
Jesse C. Crawford |
|
|
19,721,217 |
|
|
|
332,179 |
|
Thomas W. Crawford |
|
|
19,721,354 |
|
|
|
332,042 |
|
James D. Edwards |
|
|
19,244,100 |
|
|
|
809,296 |
|
Robert T. Johnson |
|
|
19,834,821 |
|
|
|
218,575 |
|
J. Hicks Lanier |
|
|
18,431,315 |
|
|
|
1,622,081 |
|
Larry L. Prince |
|
|
19,248,853 |
|
|
|
804,543 |
|
Clarence H. Ridley |
|
|
17,360,617 |
|
|
|
2,692,779 |
|
P. George Benson |
|
|
19,244,587 |
|
|
|
808,809 |
|
E. Jenner Wood, III |
|
|
18,631,245 |
|
|
|
1,422,151 |
|
|
(b) |
|
Votes regarding ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company to serve for the year ending December 31, 2007 were as follows: |
37
|
|
|
|
|
For |
|
|
20,017,562 |
|
Against |
|
|
26,724 |
|
Abstain |
|
|
9,110 |
|
|
(c) |
|
Votes regarding the approval of the 2007 Non-Employee Directors Stock Option Plan: |
|
|
|
|
|
For |
|
|
17,425,845 |
|
Against |
|
|
2,036,481 |
|
Abstain |
|
|
486,610 |
|
Non-votes |
|
|
104,460 |
|
|
(d) |
|
Votes regarding the approval of the Management Team Incentive Compensation Plan: |
|
|
|
|
|
For |
|
|
18,977,363 |
|
Against |
|
|
778,930 |
|
Abstain |
|
|
192,643 |
|
Non-votes |
|
|
104,460 |
|
|
(e) |
|
Votes regarding the disapproval of the Maximize Value Resolution shareholder
proposal: |
|
|
|
|
|
For |
|
|
1,568,745 |
|
Against |
|
|
18,372,838 |
|
Abstain |
|
|
7,353 |
|
Non-votes |
|
|
104,460 |
|
Item 6. Exhibits
See Index to Exhibits beginning on page 40.
38
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 9, 2007 |
/s/ Thomas W. Crawford
|
|
|
Thomas W. Crawford |
|
|
President and Chief Executive Officer
(Principal Executive Officer) and Director |
|
|
|
|
|
Date: August 9, 2007 |
/s/ W. Bruce Swain, Jr.
|
|
|
W. Bruce Swain, Jr. |
|
|
Executive Vice President and
Chief Financial Officer (Principal Financial
Officer) |
|
39
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of the Registrant , as amended May 11, 2007
(incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed with the
Securities and Exchange Commission on May 14, 2007) |
|
|
|
3.2
|
|
Restated By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to
the Registrants quarterly report on Form 10-Q for the three months ended March 31, 2004) |
|
|
|
10.1
|
|
Second Amendment to Credit Agreement, dated July 5, 2007 (incorporated by reference to
Exhibit 10.1 to the Registrants Form 8-K filed with the Securities and Exchange Commission on
July 6, 2007) |
|
|
|
*10.2
|
|
2007 Non-Employee Director Stock Option Plan, approved March 14, 2007 and ratified by the
Registrants shareholders on May 3, 2007 (incorporated by reference to Appendix A to the Registrants
Definitive Proxy Statement filed with the Securities and Exchange Commission on March 28,
2007) |
|
|
|
*10.3
|
|
2007 Management Team Incentive Compensation Plan, approved March 14, 2007 and ratified by
the Registrants shareholders on May 3, 2007 (incorporated by reference to Appendix B to the
Registrants Definitive Proxy Statement filed with the Securities and Exchange Commission on
March 28, 2007) |
|
|
|
15
|
|
Letter from Ernst & Young LLP |
|
|
|
31.1
|
|
Certification of principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
32.1
|
|
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Identifies each management contract or compensatory plan required to be filed. |
40