Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Financial Statements:
Year-to-Date Unaudited Consolidated Statements of Income for the Three-Month
Periods ended March 31, 1998 and March 31, 1997:
(In Thousands of Dollars
Except Share and Per Share Data)
1998 1997
Revenues $166,133 $165,951
Costs and Expenses:
Cost of services provided, less reimbursed expenses
of $9,351 in 1998 and $8,575 in 1997 123,782 119,594
Selling, general and administrative expenses 22,803 27,075
Year 2000 expenses 1,028 0
Restructuring charge 0 13,000
Total costs and expenses 147,613 159,669
Income Before Income Taxes and Minority Interest 18,520 6,282
Provision for Income Taxes 7,113 3,166
Income Before Minority Interest 11,407 3,116
Minority Interest in Loss of Joint Venture 13 3,199
Net Income $11,420 $6,315
Net Income Per Share
Basic $0.23 $0.13
Diluted $0.23 $0.12
Average Number of Class A and Class B Common
Shares used in Net Income per Share Calculations
Basic 49,319,110 50,030,061
Diluted 50,081,447 51,416,151
Declared Dividends Per Share - Class A Common Stock $0.125 $0.110
Declared Dividends Per Share - Class B Common Stock $0.125 $0.110
(See accompanying notes to condensed financial statements)
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 3
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997:
(In Thousands of Dollars)
(Unaudited)
March 31 December 31
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $45,309 $55,380
Accounts receivable, less allowance for doubtful
accounts of $16,730 in 1998 and $16,802 in 1997 117,056 117,338
Unbilled revenues, at estimated billable amounts 86,771 87,688
Prepaid income taxes 1,261 981
Prepaid expenses and other current assets 13,467 12,558
Total current assets 263,864 273,945
Property and Equipment:
Property and equipment, at cost: 148,829 149,506
Less accumulated depreciation and amortization (108,841) (110,314)
Net property and equipment 39,988 39,192
Other Assets:
Intangible assets arising from acquisitions,
less accumulated amortization of $11,045
in 1998 and $10,533 in 1997 51,297 51,968
Prepaid pension obligation 49,010 45,972
Other 9,219 5,981
Total other assets 109,526 103,921
TOTAL ASSETS $413,378 $417,058
(See accompanying notes to condensed financial statements)
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 4
Consolidated Balance Sheets - (Continued)
(In Thousands of Dollars)
(Unaudited)
March 31 December 31
1998 1997
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings $19,836 $19,812
Accounts payable 18,059 19,956
Accrued compensation and related costs 20,185 26,616
Other accrued liabilities 44,478 41,419
Deferred revenues 15,911 16,241
Current installments of long-term debt 453 594
Total current liabilities 118,922 124,638
Noncurrent Liabilities:
Long-term debt, less current installments 680 731
Deferred income taxes 15,323 14,921
Deferred revenues 13,556 13,404
Postretirement medical benefit obligation 8,263 8,105
Self-insured risks 9,151 9,067
Minority interest 26,719 26,732
Other 5,111 4,455
Total noncurrent liabilities 78,803 77,415
Shareholders' Investment:
Class A Common Stock, $1.00 par value; 50,000,000
shares authorized; 23,931,433 and 23,915,727
shares issued in 1998 and 1997, respectively 23,931 23,916
Class B Common Stock, $1.00 par value; 50,000,000
shares authorized; 25,439,054 and 25,477,233
shares issued in 1998 and 1997, respectively 25,439 25,477
Retained earnings 177,113 174,973
Accumulated other comprehensive income (10,830) (9,361)
Total shareholders' investment 215,653 215,005
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $413,378 $417,058
(See accompanying notes to condensed financial statements)
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 5
Unaudited Consolidated Statements of Cash Flows for the Three-Month Periods
Ended March 31, 1998 and March 31, 1997:
(In Thousands of Dollars)
1998 1997
Cash Flows From Operating Activities:
Net income $11,420 $6,315
Reconciliation of net income to net cash
provided by operating activities:
Minority interest in loss of joint venture (13) (3,199)
Depreciation and amortization 3,832 3,800
Deferred income taxes 336 (6,007)
(Gain)/loss on sales of property and equipment (75) 75
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable, net (1,951) 1,759
Unbilled revenues (1,091) 4,910
Prepaid or accrued income taxes 5,686 4,416
Accounts payable and accrued liabilities (6,696) 11,108
Deferred revenues (370) (264)
Prepaid expenses and other assets (6,676) (4,819)
Net cash provided by operating activities 4,402 18,094
Cash Flows From Investing Activities:
Acquisitions of property and equipment (4,630) (4,602)
Proceeds from sales of property and equipment 31 142
Net cash used in investing activities (4,599) (4,460)
Cash Flows From Financing Activities:
Dividends paid (6,176) (5,504)
Repurchase of common stock (7,427) (4,399)
Issuance of common stock 4,301 1,103
Increase in short-term borrowings 905 1,410
Decrease in long-term debt (115) (576)
Net cash used in financing activities (8,512) (7,966)
Effect of exchange rate changes on cash and
cash equivalents (1,362) 3,487
(Decrease)/increase in cash and cash equivalents (10,071) 9,155
Cash and cash equivalents at beginning of period 55,380 55,485
Cash and cash equivalents at end of period $45,309 $64,640
Cash payments for income taxes $2,587 $1,494
(See accompanying notes to condensed financial statements)
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The condensed financial statements included herein have been prepared by
the Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These condensed financial statements
should be read in conjunction with the financial statements and related notes
contained in the Registrant's annual report on Form 10-K for the fiscal year
ended December 31, 1997.
In the opinion of management, the condensed financial statements included
herein contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Registrant as of
March 31, 1998, the results of its operations for the three-month periods ended
March 31, 1998 and 1997, and its cash flows for the three-month periods then
ended.
2. The results of operations for the three-month period ended March 31, 1998,
are not necessarily indicative of the results to be expected during the balance
of the year ending December 31, 1998.
3. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128 effective December 31, 1997. Basic earnings per share is computed
based on the weighted average number of total common shares outstanding of
Class A and Class B Common Stock during the respective years. Diluted earnings
per share is computed based on the weighted average number of total common
shares outstanding of Class A and Class B Common Stock, adjusted for dilutive
common stock equivalents. All prior period earnings per share amounts have
been restated to comply with SFAS No. 128.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 7
The following reconciliation illustrates the numerators and denominators
of the basic and diluted net income per share computations shown on the
consolidated statements of income:
1998 1997
(In thousands, except per share data)
Basic net income per share computation
Numerator
Income available to common shareholders $11,420 $ 6,315
Denominator
Weighted-average common shares outstanding 49,320 50,030
Basic net income per share $ 0.23 $ 0.13
Diluted net income per share computation
Numerator
Income available to common shareholders $11,420 $ 6,315
Denominator
Weighted-average common shares outstanding 49,320 50,030
Option shares outstanding 762 604
Shares issuable under convertible debt --- 782
50,082 51,416
Diluted net income per share $ 0.23 $ 0.12
Options to purchase 1,012,500 shares of Class A Common Stock at $19.125 and
$19.50 per share were outstanding at March 31, 1998 but were not included in
the computation of diluted net income per share because the options' exercise
price was greater than the average market price of the common shares; to
include them would have been antidilutive.
4. The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of "comprehensive
income" and its components. Comprehensive income for the Company consists of
net income and foreign currency translation adjustments. Total comprehensive
income (in thousands) was $9,951 and $2,974 for the three-month periods ended
March 31, 1998 and 1997, respectively.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 8
5. In July 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 supersedes SFAS Nos. 14, 18, 24 and 30 and establishes new
standards for segment reporting, using the "management approach," in which
reportable segments are based on the same criteria on which management
disaggregates a business for making operating decisions and assessing
performance. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. Financial statement disclosures for prior periods are
required to be restated. The company is in the process of evaluating the
disclosure requirements and will adopt the standard for its 1998 fiscal year.
The adoption of SFAS No. 131 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 supersedes the disclosure requirements in SFAS
Nos. 87, 88 and 106 and is effective for fiscal years beginning after December
15, 1997. Financial statement disclosures for prior periods are required to
be restated. The Company is in the process of evaluating the disclosure
requirements and will adopt the standard for its 1998 fiscal year. The
adoption of SFAS No. 132 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
6. The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents for purposes of the
statements of cash flows.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Financial Condition
At March 31, 1998, current assets exceeded current liabilities by approximately
$144.9 million, a decrease of $4.4 million from the working capital balance at
December 31, 1997. Cash and cash equivalents at March 31, 1998 totaled $45.3
million, decreasing $10.1 million from the balance at the end of 1997. The
Company held no short-term investments at March 31, 1998 or December 31, 1997.
Cash was generated primarily from operating activities, while the principal
uses of cash were for repurchases of common stock, dividends paid to
shareholders, and acquisitions of property and equipment. The ratio of current
assets to current liabilities was 2.2 to 1 at March 31, 1998 and December 31,
1997.
During 1997, the Company announced a share repurchase program to acquire up to
an aggregate of 3,000,000 shares of its Class A or Class B Common Stock through
open market purchases. Through March 31, 1998, the Company has reacquired
878,500 shares of its Class A Common Stock and 85,200 shares of its Class B
Common Stock at an average cost of $19.68 and $20.03 per share, respectively.
The Company maintains credit lines with banks in order to meet seasonal working
capital requirements of its foreign subsidiaries or other financing needs that
may arise. Short-term borrowings outstanding as of March 31, 1998 and
December 31, 1997 totaled $19.8 million. The Company believes that its current
financial resources, together with funds generated from operations and existing
and potential long-term borrowing capabilities, will be sufficient to maintain
its current operations.
The Company does not engage in any hedging activities to compensate for the
effect of exchange rate fluctuations on the operating results of its foreign
subsidiaries. Foreign currency denominated debt is maintained primarily to
hedge the currency exposure of its net investment in foreign operations.
Shareholders' investment at March 31, 1998 was $215.7 million, compared with
$215.0 million at the end of 1997. Long-term debt totaled $0.7 million at
March 31, 1998 and December 31, 1997.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 10
Results of Operations
Operating results for the Company's domestic and international operations for
the three-month periods ended March 31, 1998 and 1997 are as follows:
Three-month Periods Ended March 31, 1998 and 1997
Domestic International Total
1998 1997 1998 1997 1998 1997
(In thousands of dollars, except percentages)
Revenues $127,257 $139,907 $ 38,876 $ 26,044 $166,133 $165,951
Compensation
& Benefits 80,194 89,433 25,267 16,424 105,461 105,857
% of Revenues 63.0% 63.9% 65.0% 63.1% 63.5% 63.8%
Expenses Other
than Compensation
& Benefits 27,555 31,653 13,569 9,159 41,124 40,812
% of Revenues 21.7% 22.6% 34.9% 35.2% 24.7% 24.6%
Pretax Income Before
Year 2000 Expenses,
Restructuring Charge
and Minority
Interest $ 19,508 $ 18,821 $ 40 $ 461 $ 19,548 $ 19,282
% of Revenues 15.3% 13.5% 0.1% 1.8% 11.8% 11.6%
Revenues for the first three months of 1998 were $166.1 million, up 0.1% from
the $166.0 million for the same period in 1997. Consolidated pretax income
before Year 2000 expenses, restructuring charge and minority interest increased
1.4%, to $19.5 million in the first quarter of 1998 compared to the same period
in 1997. While revenues increased 0.1% in the three-month period ended March
31, 1998, corresponding expenses actually decreased due to efficiencies
achieved in operating and support activities throughout the Company.
DOMESTIC OPERATIONS
Revenues
Domestic revenues from insurance companies and self-insured entities totaled
$127.3 million for the three months ended March 31, 1998, a 9.0% decrease from
the comparable period in 1997, due largely to the winding down of a large class
action service contract.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 11
Domestic unit volume, measured principally by chargeable hours and excluding
acquisitions, decreased approximately 14.6% in the first quarter of 1998,
compared to the same period in 1997. This decrease was partially offset by
changes in the mix of services provided and in the rates charged for those
services, the combined effects of which increased revenues by approximately
5.6% in the first quarter of 1998, compared to the comparable period in 1997.
Revenues from domestic operations include $6.2 million in revenue from services
provided by the Company's catastrophe adjusters during the first three months
of 1998, principally to clients affected by natural or man-made disasters,
including hurricanes, floods, hail storms and oil spills. During the same
period in 1997, such revenue approximated $6.7 million.
Compensation and Fringe Benefits
The Company's most significant expense is the compensation of its employees,
including related payroll taxes and fringe benefits. Domestic compensation
expense decreased as a percent of revenues from 63.9% in the three months
ended March 31, 1997 to 63.0% in the same period in 1998. This decrease is due
largely to an approximate 9% decline in full-time equivalent employees and a
reduction in retirement expense, resulting from favorable investment returns.
Domestic salaries and wages of personnel other than contract managers decreased
by 8.2%, from $63.6 million in the first quarter of 1997, to $58.4 million in
the comparable period in 1998, 45.5% and 45.9% of domestic revenues in 1997 and
1998, respectively. Contract managers' compensation is based on the operating
income of the offices which they manage. Compensation of these managers
totaled $8.6 million in the three-month period ended March 31, 1998, decreasing
17.3% from related 1997 costs of $10.4 million, due to the decline in revenues
and an increase in branches headed by non-contract managers.
Payroll taxes and fringe benefits for domestic operations totaled $13.2 million
in the first three months of 1998, decreasing 14.3% from 1997 costs of $15.4
million, due to the reduction in retirement expense.
Expenses Other than Compensation and Fringe Benefits
Domestic expenses other than compensation and related payroll taxes and fringe
benefits approximated 21.7% of revenues for the three months ended March 31,
1998, down from 22.6% of revenues for the same period in 1997. This decline is
largely due to reductions in administrative costs resulting from the Company's
continuing focus on cost control.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 12
INTERNATIONAL OPERATIONS
Revenues
Revenues from the Company's international operations totaled $38.9 for the
first quarter of 1998, a 49.3% increase from $26.0 million for the same period
in 1997, net of approximately a 5% decline due to the negative effect of a
relatively stronger U.S. dollar. This increase is due to the acquisition of
THG, with only one month's results included in the first three months of 1997,
due to an acquisition effective date of January 1, 1997 and a two-month delay
in reporting international results.
Compensation and Fringe Benefits
As a percent of revenues, compensation expense, including related payroll taxes
and fringe benefits, increased from 63.1% to 65.0% in the three-month periods
ended March 31, 1998 and 1997, respectively. Salaries and wages of
international personnel increased from 53.7% of revenues in 1997 to 55.8% for
the comparable period in 1998. Payroll taxes and fringe benefits decreased as
a percent of revenues, from 9.4% in the three-month period ended March 31,
1997, to 9.2% in the same period in 1998.
Expenses Other than Compensation and Fringe Benefits
Expenses other than compensation and related payroll taxes and fringe benefits
approximated 34.9% of international revenues for the first three months of
1998, compared to 35.2% of revenues for the same period in 1997. These
expenses comprise a higher percentage of revenues than the Company's domestic
operations due primarily to amortization of intangible assets and higher
automobile, occupancy and interest costs.
Restructuring Charge
In connection with the acquisition of Thomas Howell Group, the Company recorded
a pretax charge of $13 million for personnel, facilities and other costs
associated with integration of the Company's international businesses. An
integration management plan was developed by teams from both companies with an
advisory board, steering committee and integration teams for each geographic
territory. The teams developed a timeline and a communications program,
identified specific leases to be terminated and redundant positions to be
eliminated. After reflecting income tax benefits of $4.3 million and minority
interest share of $3.5 million, this charge reduced Crawford's net income for
the three months ended March 31, 1997 by $5.2 million, or $0.10 per share.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 13
Minority Interest
Minority interest benefit of $13,000 and $3.2 million were recorded in the
first quarter of 1998 and 1997, respectively, reflecting Swiss Re's 40%
minority interest in Crawford-THG Limited.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company expects to incur significant costs during the next two to three
years to address the impact of the so-called Year 2000 problem on its
information systems. The Year 2000 problem, which is common to most
organizations, concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date sensitive
information as the year 2000 approaches. The Company believes it will be able
to modify or replace its affected systems in time to minimize any detrimental
effects on operations. The Company estimates this cost to be approximately
$15 million over the next two to three years, with approximately $9 million
expected to be incurred in 1998. Through March 31, 1998, the Company has
incurred $1 million. Although this cost may be material to the Company's
results of operations in one or more fiscal quarters or years, the Company
does not believe it will have a material adverse impact on the long-term
results of operations, liquidity or consolidated financial position of the
Company.
Certain information presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations may include forward-looking
statements, the accuracy of which is subject to a number of risks and
assumptions. The Company's Form 10-K for the year ended December 31, 1997
discusses such risks and assumptions and other key factors that could cause
actual results to differ materially from those expressed in such forward-
looking statements. An additional risk factor is the Company's ability to
timely and efficiently address the Year 2000 problem.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 14
Review by Independent Public Accountants.
Arthur Andersen LLP, independent public accountants, has performed a review of
the interim financial information contained herein in accordance with
established professional standards and procedures for such a review and has
issued its report with respect thereto (see page 15).
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Crawford & Company:
We have made a review of the accompanying condensed consolidated balance sheet
of CRAWFORD & COMPANY (a Georgia corporation) AND SUBSIDIARIES as of March 31,
1998 and the related condensed consolidated statements of income for the three-
month periods ended March 31, 1998 and 1997 and the related condensed
consolidated statements of cash flows for the three-month periods ended March
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of obtaining an understanding of
the system for the preparation of interim financial information, applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally accepted auditing
standards, 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 financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Crawford & Company and
subsidiaries as of December 31, 1997 (not presented separately herein), and
in our report dated January 30, 1998, we expressed an unqualified opinion on
that balance sheet. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Arthur Andersen LLP
Atlanta, Georgia
May 4, 1998
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
15.1 Letter from Arthur Andersen LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the period
covered by this report.
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 17
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: 05/08/98 /s/D. A. Smith
D. A. Smith
Chairman of the Board, President and
Chief Executive Officer
Date: 05/08/98 /s/D. R. Chapman
D. R. Chapman
Executive Vice President - Finance
(Principal Financial Officer)
Date: 05/08/98 /s/J. F. Giblin
J. F. Giblin
Senior-Vice President and Controller
(Principal Accounting Officer)
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 18
INDEX TO EXHIBITS
Exhibit No. Description Sequential Page No.
15.1 Letter from Arthur Andersen LLP 19
27.1 Financial Data Schedule (for SEC use only)
Form 10-Q Crawford & Company
Quarter Ended March 31, 1998 Page 19
Exhibit 15.1
To the Stockholders and
Board of Directors of
Crawford & Company:
We are aware that Crawford & Company has incorporated by reference in its
previously filed Registration Statement File No. 2-78989, Registration
Statement File No. 33-22595, Registration Statement File No. 33-47536,
Registration Statement File No. 33-36116, Registration Statement File No.
333-2051, Registration Statement File No. 333-24425, and Registration
Statement File No. 333-24427, its Form 10-Q for the quarter ended March 31,
1998, which includes our report dated May 4, 1998 covering the unaudited
interim financial information contained therein. Pursuant to Regulation C
of the Securities Act of 1933 (the "Act"), that report is not considered a
part of the Registration Statement prepared or certified by our firm or a
report prepared or certified by our firm within the meaning of Sections 7
and 11 of the Act.
Arthur Andersen LLP
Atlanta, Georgia
May 4, 1998
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