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| CRD-A > SEC Filings for CRD-A > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
• changes in global economic conditions,
• changes in interest rates,
• changes in foreign currency exchange rates,
• changes in regulations and practices of various governmental authorities,
• changes in our competitive environment,
• changes in the financial condition 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 and our future funding obligations thereunder,
• 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.,
• our ability to identify new revenue sources not tied to the insurance underwriting cycle,
• our ability to develop or acquire information technology resources to support and grow our business,
• our ability to attract and retain qualified personnel,
• our ability to retain clients and renew existing major contracts with clients on satisfactory financial terms,
• our ability to collect accounts receivable from our clients and others,
• continued availability of funding and compliance with the covenants under our financing agreements,
• general risks associated with doing business outside the U.S.,
• our ability to comply with any applicable debtor or other covenant in our financing or other agreements,
• 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,
• our failure to complete the implementation of RiskTech on schedule, and
• further impairments of goodwill or our other indefinite-lived intangible assets.
As a result, you should not place undue reliance on any forward-looking
statements.
Actual results and trends in the future may differ materially from those
suggested or implied by the forward-looking statements. 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.
Business Overview
Based in Atlanta, Georgia, Crawford & Company is the world's largest independent
provider of claims management solutions to insurance companies and self-insured
entities, with a global network of more than 700 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 and bankruptcy claims administration,
warranty inspections, and risk management information services. We have two
classes of common stock traded on the New York Stock Exchange, Class A Common
Stock and Class B Common Stock, which trade under the symbols CRDA and CRDB,
respectively.
Insurance companies, which represent the major source of our global revenues,
customarily manage their own claims administration function but often rely on
third parties for certain services which we provide, primarily field
investigation and the evaluation of property and casualty insurance claims. We
also conduct inspections of building component products related to warranty and
product performance claims.
Self-insured entities typically rely on us for a broader range of services. 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 trust funds established
to pay their claims.
We also 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.
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 offering a varied
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, among other
things, the insurance underwriting cycle, weather-related events, general
economic activity, 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. In addition, our ability to retain clients
and maintain and increase case referrals is also dependent in part on our
ability to continue to provide high-quality, competitively priced services.
We generally earn our revenues on an individual fee-per-claim basis for claims
management services we provide to property and casualty insurance companies and
self-insured entities. Accordingly, the volume of claim referrals to us is a key
driver of our revenues, although sometimes a portion or substantially all of the
revenue will be earned in periods after a claim is initially referred to us.
Industry-wide claims volume in general will vary depending upon the insurance
underwriting cycle.
In the insurance industry, the underwriting cycle is often said to be in either
a "soft" or "hard" market. A soft market generally results when insurance
companies focus more on increasing their premium income and focus less on
controlling underwriting risks. A soft market often occurs in conjunction with
strong financial markets. Insurance companies can derive a significant portion
of their earnings from their investment portfolios, and when financial markets
are strong, their focus may turn to collecting more premium income to invest
under the assumption that increased investment income and gains will offset
higher claim costs that usually result from relaxed underwriting standards. Due
to competition in the industry during a soft market, insurance companies usually
concentrate on growing their premium base by increasing the number of policies
in-force instead of raising individual policy premiums. When the insurance
underwriting market is soft, insurance companies are generally more aggressive
in the risks they underwrite, and insurance premiums and policy deductibles
typically decline. This usually results in an increase in industry-wide claim
referrals which generally will increase claim referrals to us provided that we
are able to maintain our existing market share.
A transition from a soft to a hard market is usually caused by one or two key
factors, or sometimes a combination of both: weak financial markets or
unacceptable losses from policy holders. When investments held by insurance
companies begin to perform poorly, insurance companies typically turn their
focus to attempting to better control underwriting risks and claim costs.
However, even if financial markets perform well, the relaxed underwriting
standards in a soft market can lead to unacceptable increases in the frequency
and cost of claims, especially in geographic areas that are prone to frequent
weather-related catastrophes. Either of these factors will usually lead the
insurance industry to transition to a hard market. During a hard insurance
underwriting market, insurance companies generally become more 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 claim volumes, which generally reduces claim referrals to us
unless we are able to offset the decline in claim referrals with growth in our
market share.
We are also impacted by decisions insurance companies and other clients may make
to change the level of claims outsourced to independent claim service firms as
opposed to those handled by their own in-house claims adjusters. Our ability to
grow our market share in a highly fragmented and competitive market is primarily
dependent on the delivery of superior quality service and effective sales
efforts.
The legal settlement administration market is also highly competitive but
comprised of a smaller number of specialized entities. The demand for legal
settlement administration services is generally 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 and Noncash Charges for Goodwill and
Intangible Asset
Consolidated net loss attributable to Crawford & Company for the three months
and nine months ended September 30, 2009 was $(39.5 million), or loss per share
of $(0.76), and $(124.6 million), or loss per share of $(2.41), respectively.
Excluding a noncash goodwill and an intangible asset impairment charge totaling
$46.9 million ($46.7 million after tax), or $(0.90) per share, in the third
quarter of 2009 and $140.9 million, or $(2.72) per share, for the nine months
ended September 30, 2009, net income attributable to Crawford & Company was $7.2
million and $6.9 million for the three months ended September 30, 2009 and 2008,
respectively, and $16.2 million and $23.9 million for the nine months ended
September 30, 2009 and 2008, respectively. Consolidated net loss for the nine
months ended September 30, 2009 also included a pre-tax charge of $1.8 million,
or $1.2 million after income tax, for professional fees incurred in connection
with the previously announced realignment of certain of our legal entities in
the U.S. and internationally.
In addition to the goodwill and intangible asset impairment charges, the
decrease in our consolidated results of operations during the three months and
nine months ended September 30, 2009 compared to the same periods in 2008 was
driven primarily by lower revenues in our Broadspire segment, higher costs for
our defined benefit pension plans, the negative impact from a stronger U.S.
dollar on the results of our International Operations segment, and the
restructuring costs incurred in the first quarter of 2009. In addition, results
for the three months ended September 30, 2009 were also negatively impacted by
lower revenues in our U.S. Property & Casualty segment compared to the same
period in 2008.
As previously disclosed, due to declines in current and forecasted operating
results for our Broadspire reportable segment and reporting unit, the impact
that declining U.S. employment levels have had on Broadspire's revenue, and the
weakness in our stock prices, we recorded a preliminary noncash goodwill
impairment charge of $94.0 million in connection with the preparation of our
unaudited condensed consolidated financial statements for the three months and
six months ended June 30, 2009. In connection with the preparation of our
unaudited condensed consolidated financial statements for the three months and
nine months ended September 30, 2009, we completed this interim goodwill
impairment analysis and determined that all of Broadspire's remaining goodwill
was impaired, resulting in an additional noncash goodwill impairment charge of
$46.3 million. These goodwill impairment charges are not deductible for income
tax purposes. Also, it was determined during the quarter ended September 30,
2009 that the value of a trade name indefinite-lived intangible asset used in a
small portion of the Broadspire reporting unit was totally impaired.
Accordingly, we recorded a pre-tax impairment charge of $600,000, or
approximately $383,000 after tax, to recognize the impairment of the trade name
intangible asset. These impairment charges are not reflected in Broadspire's
segment operating loss.
The goodwill and intangible asset impairment charges described above did not
result in the violation of any covenants in our Credit Agreement.
Use of Non-GAAP Financial Performance Measure
Operating earnings is our segment measure of profit required to be disclosed by
Accounting Standards Codification ("ASC") Topic 280, "Segment Reporting," as
discussed in Note 11 to the accompanying unaudited condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q. Operating
earnings 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. We
believe this measure is useful to others in that it allows them to evaluate
segment operating performance using the same criteria our management uses.
Operating earnings represent earnings attributable to Crawford & Company
excluding 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 tax expense, net corporate interest expense, amortization of
customer-relationship intangible assets, and stock option expense are recurring
components of our net (loss) income, but they are not considered part of our
segment operating earnings because they are managed on a corporate-wide basis.
Income taxes are based on statutory rates in effect in each of the jurisdictions
where we provide services, and vary throughout the world. Net corporate interest
expense results from company-wide 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 generally related to historically
granted stock options and costs related to our employee stock purchase plans.
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 arise from events (such as restructuring costs
or a goodwill impairment charge) 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 for the three-month and nine-month
periods ended September 30, 2009 and 2008 primarily represented expenses related
to our CEO and Board of Directors, certain provisions for bad debt allowances or
subsequent recoveries such as those related to bankrupt clients, defined benefit
pension costs for our frozen U.S. pension plan, and certain self-insurance costs
and recoveries that are not allocated to our individual operating segments.
With the exception of income taxes, net corporate interest expense, amortization
of customer-relationship intangible assets, stock option expense, unallocated
corporate and shared costs, and certain other gains and expenses, 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 the results of our four 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, restructuring costs, and goodwill and
intangible asset impairment charges.
Income Taxes
Our consolidated effective income tax rate for financial reporting purposes
changes periodically due to changes in enacted tax rates, fluctuations in the
mix of taxable income earned from our various domestic and international
operations, our ability to utilize net operating loss carryforwards in certain
of our subsidiaries, and amounts related to uncertain income tax positions. At
September 30, 2009, we estimate that our effective annual income tax rate for
2009 will be approximately 23%, excluding the nondeductible noncash goodwill
impairment charge of $140.3 million.
Income tax expense totaled $4.6 million and $12.0 million for the nine months
ended September 30, 2009 and 2008, respectively. As a percentage of pre-tax
income, excluding the noncash goodwill impairment charge, income tax expense
including discrete items was 22.2% and 33.4% for the nine months ended
September 30, 2009 and 2008, respectively. The percentage decrease in 2009 was
due primarily to changes in the mix of taxable income earned from our domestic
and international operations and enacted tax legislation impacting the current
year. For the nine months ended September 30, 2009 and 2008, discrete items of
$492,000 and $655,000, respectively, decreased our effective income tax rate by
2.3% and 1.8%, respectively.
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 and cash equivalents. These amounts vary based on interest
rates, borrowings outstanding, and the amounts of invested cash and cash
equivalents. Interest expense is also impacted by our interest rate swap
agreement that we entered into in May 2007. Corporate interest expense totaled
$3.3 million and $4.9 million for the three months ended September 30, 2009 and
2008, respectively, and $11.5 million and $14.8 million for the nine months
ended September 30, 2009 and 2008, respectively. Interest income totaled
$142,000 and $551,000 for the three months ended September 30, 2009 and 2008,
respectively, and $1.2 million and $1.4 million for the nine months ended
September 30, 2009 and 2008, 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 as
part of our 2006 acquisitions of Broadspire Management Services, Inc. and
Specialty Liability Services, Ltd. Amortization expense associated with these
intangible assets totaled approximately $1.5 million for each of the three-month
periods ended September 30, 2009 and 2008, and $4.5 million for each of the
nine-month periods ended September 30, 2009 and 2008. This amortization is
included in SG&A expenses in our unaudited condensed consolidated statements of
operations.
Stock Option Expense
Stock option expense, a component of stock-based compensation, 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. Other stock-based compensation expense related to our
executive stock bonus plan (performance shares and restricted shares) is charged
to our operating segments and included in the determination of segment operating
earnings or loss. Stock option expense of $266,000 and $243,000 was recognized
during the three months ended September 30, 2009 and 2008, respectively, and
$696,000 and $717,000 was recognized for the nine months ended September 30,
2009 and 2008, respectively.
Unallocated Corporate and Shared Costs
Certain unallocated costs and credits are excluded from the determination of
segment operating earnings. For the three months ended September 30, 2009 and
2008, unallocated corporate and shared costs primarily represented costs or
credits related to our frozen U.S. defined benefit pension plan, expenses for
our CEO and our Board of Directors, certain adjustments to our self-insured
liabilities, and certain adjustments and recoveries to our allowances for
doubtful accounts receivable. Unallocated corporate and shared costs were
$878,000 and $3.7 million for the three months ended September 30, 2009 and
2008, respectively. For the nine months ended September 30, 2009 and 2008,
unallocated corporate and shared costs were $8.1 million and $5.1 million,
respectively. The 2009 overall decrease in the quarter-over-quarter expenses was
due primarily to favorable adjustments to the accruals for certain of our
self-insured liabilities, offset partially by higher 2009 cost for our frozen
U.S. defined benefit pension plan. The 2009 overall increase for the
year-to-date period was due primarily to higher costs associated with our frozen
U.S. defined benefit pension plan, offset partially by favorable adjustments to
the accruals for certain self-insured liabilities. Pension cost for our frozen
U.S. defined benefit plan was $3.1 million and $9.3 million higher for the
quarter and nine months ended September 30, 2009, respectively, than the
comparable periods in 2008.
Restructuring Costs
In the nine months ended September 30, 2009, we recorded pretax expenses
totaling $1.8 million for professional fees incurred in connection with an
internal realignment of certain of our legal entities in the U.S. and
internationally. This realignment did not impact our segment financial
reporting. The realignment activities commenced in the fourth quarter of 2008.
Goodwill and Intangible Asset Impairment Charges
As discussed above, during the third quarter of 2009 and the nine months ended
September 30, 2009, we recorded a noncash goodwill and an intangible asset
impairment charge totaling $46.9 million, or $(0.90) per share, and
$140.9 million, or $(2.72) per share, respectively, related to our Broadspire
reportable segment and reporting unit. Only $600,000 of this charge is
deductible by us for income tax purposes. These impairment charges are not
reflected in Broadspire's segment operating loss.
SEGMENT OPERATING RESULTS
As previously described, we evaluate our four operating segments primarily by
use of a non-GAAP financial measurement referred to by us as segment operating
earnings. Segment operating earnings represent earnings attributable to Crawford
& Company excluding income tax expense, net corporate interest expense,
amortization of customer-relationship intangible assets, stock option expense,
certain other expenses, and certain unallocated corporate and shared costs.
Our four operating segments, U.S. Property & Casualty, International Operations,
Broadspire, and Legal Settlement Administration, represent components of our
company 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 operating performance. U.S. Property & Casualty
serves the U.S. property and casualty insurance company market, including the
product warranties and inspections marketplace. International Operations serves
the property and casualty insurance company markets outside of the U.S.
Broadspire serves the U.S. self- insurance marketplace. Legal Settlement
Administration serves the securities, bankruptcy, and other legal settlements
markets primarily in the U.S.
In the normal course of our business, we sometimes incur certain out-of-pocket
expenses that are thereafter reimbursed by our clients. Under GAAP, these
out-of-pocket expenses and associated reimbursements are reported as revenues
and expenses in our Consolidated Statement of Operations. 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
pass-through reimbursed expenses. The amounts of reimbursed expenses and related
revenues offset each other in our Consolidated Statement of Operations with no
impact to our net (loss) income. Unless noted in the following discussion and
analysis, revenue amounts exclude reimbursements for out-of-pocket expenses, and
expense amounts exclude reimbursed out-of-pocket expenses, income taxes, net
corporate interest expense, amortization expense for customer-relationship
intangible assets, stock option expense, certain other expenses, and unallocated
corporate and shared costs.
Our discussion and analysis of the operating expenses included in our segment
operating earnings is comprised of two components. "Direct Compensation and
Fringe Benefits" includes all compensation, payroll taxes, and benefits provided
to our employees, which as a service company, represents our most significant
and variable operating expense. "Expenses Other Than Direct Compensation and
. . .
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