As of December 31, 2009, the Registrant owned a building in Tucker, Georgia where part of its information technology facility is located. It also owned an office in Kitchener, Ontario and an additional
Based in Atlanta, Georgia, Crawford & Company (www.crawfordandcompany.com) is the world’s largest independent provider of claims management solutions to the risk management and insurance industry as well as self-insured entities, with a global network of more than 700 locations in 63 countries. The Crawford System of Claims Solutionssmoffers
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 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.
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 or in a period with a lack of catastrophe losses. Insurance companies often attempt to derive a significant portion of their earnings from their investment portfolios, and 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. However, if a soft market coincides with a period of low catastrophic claims activity, industry-wide claim volumes may not increase.
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. During 2009, the insurance industry underwriting cycle could be characterized as a “soft” market. Because the underwriting cycle can change suddenly due to unforeseen events in the financial markets and catastrophic claims activity, we cannot predict what impact the current “soft” market may have on us in the future.
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.
Net loss attributable to Crawford & Company was ($115.7) million in 2009, compared to net income of $32.3 million in 2008 and $16.1 million in 2007. The net loss in 2009 included non-cash goodwill and intangible asset impairment charges of $140.9 million, of which $140.3 million is not deductible for income tax purposes. Also included in our 2009 results was a loss on the partial sublease of a Broadspire facility in Plantation, Florida and other restructuring costs totaling $4.1 million, or approximately $2.6 million after income tax. The 2009 net loss was reduced by certain foreign tax benefits totaling $5.7 million as a result of an internal restructuring of certain of the Company’s international operations. Net corporate interest expense declined $3.5 million in 2009 compared to 2008 due to lower interest rates and reduced short-term borrowings. Operating earnings (a measure of segment operating performance used by our management that is defined and discussed in more detail below) and the related operating margin increased for Legal Settlement Administration in 2009 compared to 2008, but both measures declined for our other three operating segments.
Net income attributable to Crawford & Company in 2007 included a gain of $4.8 million, or approximately $3.1 million net of related income taxes, from the 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 during the second quarter of 2007. Our net income for 2007 also included a gain of $4.0 million, or approximately $2.5 million net of related income taxes, from the sale of our former U.S. subrogation services business in February 2007, and the recognition of a previously unrecognized tax benefit of $2.0 million.
Unallocated corporate and shared costs represent expenses and credits 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 or credits for our frozen U.S. pension plan, certain software, and certain self-insurance costs and recoveries that are not allocated to our individual operating segments.
In the normal course of business, our operating segments 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 results of operations. In some of the segment discussion and analysis that follows, we do not believe it is informative to include the GAAP-required gross up of our segment revenues and expenses for these pass-through reimbursed expenses. The amounts of reimbursed expenses and related revenues offset each other in our results of operations with no impact to our net income or loss. Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses.
Allocated corporate and shared costs are allocated to our four operating segments based primarily on usage. These allocated costs are included in the determination of segment operating earnings. If we change our allocation methods or change the types of costs that are allocated to our four operating segments, prior periods are adjusted to reflect the current allocation process.
Revenues before reimbursements from our International Operations segment totaled $392.6 million in 2009, an 11.8% decrease from the $445.1 million in 2008. This 2009 revenue decrease was due to the net negative impact of changes in currency exchange rates, case volumes, and changes in the mix of services provided and in the rates charged for those services. Compared to 2008, the U.S. dollar was stronger in 2009 against most major foreign currencies, resulting in a negative impact from exchange rate movements of $62.5 million on this segment’s revenues from 2008 to 2009. Excluding the negative impact of exchange rate fluctuations, International Operations revenues would have been $455.1 million in 2009, reflecting growth in revenues on a constant dollar basis of 2.3%.
Reimbursements for out-of-pocket expenses included in total revenues for our International Operations segment decreased to $31.0 million in 2009 from $42.1 million in 2008. This decrease in 2009 was due primarily to reduced out-of-pocket reimbursable expenses related to a major Canadian service agreement and also due to a stronger U.S. dollar in 2009.
Excluding the impact of the 2008 disposition of the Netherlands subsidiary, International Operations unit volumes by region for 2009 and 2008 were as follows:
During 2009, we were notified by a major client of our Broadspire segment that the client would not renew its existing contract with us upon the scheduled expiration of that contract in December 2009. For 2009, revenues related to this client totaled approximately $21.1 million, or 7.3% of total segment revenues.
Broadspire segment expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits increased as a percent of segment revenues before reimbursements to 44.6% in 2009 from 42.6% in 2008. This percentage increase was primarily due to lower revenue, as total 2009 expenses were reduced year-over-year due primarily to lower office operating expenses in 2009 and the implementation of the RiskTech software, which allowed us to terminate an outsource arrangement with an information technology service provider.
Our Legal Settlement Administration segment reported 2009 operating earnings of $13.1 million, increasing 21.4% from $10.8 million in 2008 with the related operating margin increasing from 14.4% in 2008 to 16.0% in 2009 for the reasons discussed below.
At December 31, 2009, we had a backlog of awarded projects totaling approximately $55.0 million, compared to $41.9 million at December 31, 2008. Of the $55.0 million backlog at December 31, 2009, an estimated $48.1 million is expected to be included in revenues within the next twelve months.
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 completion, the volume of transactions or tasks performed in this segment can vary, sometimes significantly, in any given period. For this reason, period-over-period comparisons are generally not meaningful.
Operating earnings for our U.S. Property & Casualty segment increased from $7.6 million in 2007 to $22.6 million in 2008, representing an operating margin of 10.4% in 2008 compared to 3.9% in 2007. These increases in 2008 were primarily due to increased catastrophe-related property claims as discussed below, and also due to technology-driven operating efficiencies resulting from our technology investments in this segment.
U.S. Property & Casualty revenues before reimbursements increased 12.3% to $216.8 million in 2008 compared to $193.0 million in 2007. This 2008 increase was due primarily to increased property and
U.S. Property & Casualty revenues before reimbursements increased a net of 12.3% from 2007 to 2008 due to the following factors. In 2008, revenues declined 0.2% due to the 2007 sale of our former subrogation services business. Revenues increased 10.7% from 2007 due to changes in the mix of services provided and in the rates charged for those services. Segment unit volume, measured principally by cases received, increased 1.8% from 2007 to 2008. The decrease in low-severity vehicle claims from our U.S. insurance company clients increased our average revenue per claim in 2008.
Excluding the disposition of our subrogation services business in 2007, U.S. Property & Casualty unit volumes by underlying case category, as measured by cases received, for 2008 and 2007 were as follows:
The 2008 increases in property and catastrophe services claims were due primarily to severe weather in 2008 from Hurricanes Dolly, Gustav, and Ike, and also due to storm activity in portions of Florida, Louisiana, Texas, Missouri, Ohio and Pennsylvania. Hurricanes Dolly, Gustav, and Ike generated over 24,000 claims in 2008. The 2008 decrease in casualty claims was primarily due to reductions in claims referred from our existing clients. The 2008 decline in vehicle claims was due primarily to the decision of a large client to insource the handling of claims that were previously outsourced to us and also due to decisions by certain insurance companies to reduce adjuster involvement in handling vehicle-related claims. The 2008 increase in warranty services claims was primarily due to increased claims from our existing and new clients. The 2008 decrease in workers’ compensation claims was due primarily to lower referrals for outside investigations from insurance carriers and from our Broadspire segment. The 2008 increase in Contractor Connection cases was
U.S. Property & Casualty salaries and wages increased 8.0%, to $111.6 million in 2008 from $103.3 million in 2007. The increase in 2008 compared to 2007 was due primarily to higher incentive compensation costs in 2008 related to the increase in operating earnings and revenues. Incentive compensation is variable and is primarily tied to growth in revenues and operating earnings and to reductions in a days-sales-outstanding measure for accounts receivable. Payroll taxes and fringe benefits for U.S. Property & Casualty totaled $22.4 million in 2008, decreasing 2.2% from 2007 expenses of $22.9 million. The decrease in 2008 compared to 2007 was due primarily to the reduction in the number of average FTEs in 2008 in this segment.
revenues on a constant dollar basis of 15.4%. International Operations revenues before reimbursements by major region were as follows:
Excluding the disposition of a Netherlands subsidiary in 2008, International Operations unit volume, measured principally by cases received, declined 3.3% in 2008 compared to 2007. This decline primarily reflected decreased case referrals during 2008 in the United Kingdom and CEMEA regions of our International Operations segment, as discussed below. Revenues before reimbursements increased 18.9% from changes in the mix of services provided and in the rates charged for those services. During 2008, we entered into certain new claim service agreements in our Canadian operations. In the U.K. a substantial portion of the revenue associated with flood-related claims initially reported in 2007 was earned in 2008 as we completed the assignments. In addition, an overall decrease in high-frequency, low severity claims increased our average revenue per claim in 2008. The disposition of a Netherlands business in 2008 decreased revenues by $576,000, or 0.2%, in 2008 compared to 2007.
Expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of segment revenues before reimbursements from 24.4% in 2007 to 23.2% in 2008. This percentage decrease in 2008 was due primarily to increased operational efficiencies which allowed us to service additional revenue without adding an equivalent amount of these costs which are generally more fixed in nature.
Broadspire unit volumes by underlying case category, as measured by cases received, for 2008 and 2007 were as follows:
The 2008 decline in workers’ compensation claims reflected a continuing decline in reported workplace injuries in the U.S. This decline has been a decade-long trend and has resulted in a loss in revenue from our existing customer base. The sharp increase in U.S. unemployment levels in the 2008 fourth quarter also negatively impacted workers’ compensation claim referrals. The 2008 decline in casualty claims was primarily due to reductions in claims from certain of our existing clients, partially offset by net new business gains.
Broadspire’s direct compensation and fringe benefits expense, as a percent of the related revenues before reimbursements, decreased to 56.3% in 2008 compared to 57.1% in 2007. The decrease in 2008 was primarily due to fewer FTEs in 2008 as a result of reduced case volumes. Average FTEs totaled 2,362 in 2008, down from 2,506 in 2007.
Broadspire segment expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits increased as a percent of segment revenues before reimbursements to 42.6% in 2008 from 41.9% in 2007. This percentage increase was primarily due to lower revenue, as the actual 2008 expenses were down year-over-year due primarily to lower provisions for doubtful accounts receivable and office operating expenses in 2008.
As of January 1, 2008, our Strategic Warranty Services unit was transferred to our U.S. Property & Casualty segment from our Legal Settlement Administration segment. Segment results for prior periods have been restated to reflect this transfer.
December 31, 2008 we had a backlog of awarded projects totaling approximately $41.9 million, compared to $45.0 million at December 31, 2007.
Reimbursements for out-of-pocket expenses included in total revenues for Legal Settlement Administration were $28.7 million in 2008, increasing from $20.5 million in 2007. The increase in 2008 was due primarily to large noticing projects in 2008 that required significant amounts of out-of-pocket reimbursable expenses. The nature and volume of work performed in our Legal Settlement Administration segment typically require the incurrence of more reimbursable out-of pocket expenditures than our other operating segments.
Legal Settlement Administration’s direct compensation expense, including related payroll taxes and fringe benefits, as a percent of segment revenues before reimbursements, increased to 47.2% in 2008 compared to 46.9% in 2007. The 2008 percentage increase was primarily due to declines in revenues. The 2008 decrease in the dollar amount of these expenses was due primarily to the reduced number of FTEs in 2008 and reduced incentive compensation expenses in 2008. There was an average of 336 FTEs in 2008, compared to an average of 412 in 2007.
Based on our 2010 operating plans, we anticipate our effective tax rate for financial reporting purposes in 2010 to be in the 23% to 25% range.
Management believes that it is more likely than not that we will realize our net deferred tax assets based on our forecast of future taxable income. Our most significant deferred tax asset is related to the unfunded liability of our defined benefit pension plans. The tax deduction for defined benefit pension plans generally occurs upon actual funding. Assuming that the estimated minimum funding requirements for the defined benefit pension plans are met, the deferred tax asset should be realized. In accordance with GAAP, we have considered the four possible sources of taxable income that may be available to realize a tax benefit for deductible temporary differences and carryforwards and have recorded a $9.6 million valuation allowance on certain net operating loss carryforwards in our international operations. Future changes in the valuation allowance will not affect our liquidity or our compliance with any existing debt covenants.
Stock option expense, a component of stock-based compensation expense, is comprised of non-cash expenses related to stock options granted under our various stock option and employee stock purchase plans. Most of our stock options were granted prior to 2005. Stock option expense of $914,000, $861,000, and $1.2 million was recognized during 2009, 2008, and 2007, respectively. Other stock-based compensation expense related to our Executive Stock Bonus Plan (pursuant to which we have authority to grant performance shares and restricted shares) is charged to our four operating segments and included in the determination of segment operating earnings.
Certain unallocated costs and credits are excluded from the determination of segment operating earnings. These unallocated corporate and shared costs primarily represent pension costs or credits related to our frozen U.S. defined benefit pension plan, expenses for our CEO and our Board of Directors, relocation costs associated with the 2007 move of our corporate headquarters, certain adjustments to our self-insured liabilities, certain software costs, and certain adjustments to our allowances for doubtful accounts receivable. From time to time, we evaluate which corporate costs and credits are appropriately allocated to our four operating segments. If changes are made to our allocation methodology, prior period allocations are revised to conform to our then-current allocation methodology.
Due to declines in then-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 noncash goodwill and other intangible asset impairment charges of $140.9 million in 2009. The $140.3 million goodwill impairment charge is not deductible for income tax purposes. The intangible asset portion of the charge relates to the value of a trade name indefinite-lived intangible asset used in a small portion of the Broadspire reporting unit and was $600,000 of the total charge.
Other gains and expenses in 2009 consisted of restructuring and other costs that totaled $4.1 million before income taxes. Included in the restructuring and other costs are a $1.8 million loss on the partial sublease of our Broadspire facility in Plantation, Florida, $1.8 million in professional fees related to the internal realignment of certain of our legal entities in the U.S. and internationally in 2008 and 2009, and $400,000 in severance expense in our International Operations segment. This realignment did not impact the composition of our segments for financial reporting purposes.
Other gains and expenses in 2008 consisted of $3.3 million of pre-tax restructuring charges partially offset by a $2.5 million non-taxable gain on the sale of the Netherlands subsidiary. The $3.3 million restructuring charges consisted of $1.8 million for severance and other costs in our International Operations segment, $300,000 for severance costs in our U.S. Property and Casualty segment, and $1.2 million for professional fees incurred in connection with the internal realignment previously discussed.
Rising unemployment levels in the United States, particularly in late 2008 and 2009, have resulted in an industry-wide reduction in the number of employment-related claim referrals, such as workers’ compensation claims. Our Broadspire segment has been negatively impacted by this, resulting in a 12.5% decrease in workers’ compensation claim referrals in 2009 compared to 2008. This trend may continue or stabilize depending on future employment levels or changes in workplace safety guidelines, many of which are beyond our control. In addition, we have seen a decade-long trend in the U.S. of a decline in the number of reported injuries in the workplace, which we attribute to the shift of the U.S. economy to service-related industries from manufacturing-related industries. This trend has lowered the occurrence of workers’ compensation claims.
Cash used in investing activities increased by $8.9 million in 2008, from $19.1 million in 2007 to $28.0 million in 2008. Cash used to acquire property and equipment and capitalized software, including internal software development costs, was $32.0 million in 2008 compared to $28.1 million in 2007. Net cash proceeds from the sale of a Netherlands business were $4.3 million in 2008.
Cash used in financing activities was $17.3 million in 2007. In 2007, we repaid a net of $17.0 million of short-term and long-term borrowings.
The Company may be required to make additional annual debt repayments if the Company generates excess cash flows or fails to meet certain leverage ratios as defined in the Credit Agreement. For the year ended December 31, 2009, the Company anticipates an excess cash flow payment of approximately $5.9 million will be made on March 31, 2010.
As a component of our Credit Agreement, we maintain a committed $100.0 million revolving credit line with a syndication of lenders in order to meet seasonal working capital requirements and other financing needs that may arise. This revolving credit line expires on October 30, 2013. As a component of this credit line, we maintain a letter of credit facility to satisfy certain contractual obligations. Including $19.6 million and $19.9 million of undrawn letters of credit issued under the letter of credit facility, the balance of our unused line of credit totaled $80.4 million and $68.3 million at December 31, 2009 and 2008, respectively. Our short-term debt obligations typically peak during the first quarter of each year due to the annual payment of incentive compensation, contributions to retirement plans, and certain other recurring payments, and generally decline during the balance of the year. At December 31, 2009 and 2008, the outstanding balances under our revolving line of credit facility were zero and $13.4 million, respectively. Long-term borrowings outstanding, including current installments, totaled $181.3 million as of December 31, 2009, compared to $183.5 million at December 31, 2008. We have historically used the proceeds from our long-term borrowings to finance, among other things, business acquisitions.
As disclosed in Note 5, “Interest Rate Swap Agreements,” to our accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K, we have three principal financial covenants in our Credit Agreement. Of the three financial covenants contained in our Credit Agreement, we believe the leverage ratio covenant is potentially the most restrictive. This covenant requires us to comply with a maximum leverage ratio, defined in our Credit Agreement as the ratio of consolidated total funded debt to earnings before interest expense, income taxes, depreciation, amortization, stock-based compensation expense, and certain other charges and expenses (“EBITDA”), of no more than (i) 3.25 to 1.00 from December 31, 2009 through March 31, 2011, (ii) 3.00 to 1.00 from June 30, 2011 through March 31, 2012, (iii) 2.75 to 1.00 from June 30, 2012 through September 30, 2012 and (iv) 2.50 to 1.00 after December 31, 2012. At December 31, 2009, our actual leverage ratio was 2.52 to 1.00, compared to the maximum of 3.25 to 1.00 allowed by our Credit Agreement. As noted above, the maximum allowable leverage ratio remains at 3.25 to 1.00 for all of 2010. Based on our financial plans, we expect to remain in compliance with all required covenants throughout 2010. Our compliance with the leverage ratio is particularly sensitive to changes in our
EBITDA, and if our financial plans for 2010 or other future periods do not meet our current projections, we could fail to remain in compliance with this or other financial covenants in our Credit Agreement.
In February and October 2009, we entered into separate amendments to our Credit Agreement. The February amendment was undertaken to allow us to enhance certain operational and financial aspects of our business, including, among other things, undertaking an internal corporate realignment of certain of our operating subsidiaries and assets. This realignment has been completed. In addition, the amendment provided us with the ability to repurchase and retire, from time to time through December 2010, up to $25.0 million of our outstanding term debt under the Credit Agreement.
The October amendment affected the following changes to the Company’s Credit Agreement, among others:
imposing a LIBOR floor of 2.0% on all loans under the Credit Agreement;
Approximately $15.0 million of operating lease obligations included in the table above are expected to be funded by sublessors under existing sublease agreements.
The Company may be required to make additional annual debt repayments if the Company generates excess cash flows and fails to meet certain leverage ratios as defined in the Credit Agreement. For the year ended December 31, 2009, the Company anticipates an excess cash flow payment of approximately $5.9 million to be made on March 31, 2010.
At December 31, 2009, we had approximately $2.9 million of unrecognized income tax benefits related to uncertain tax positions. We cannot reasonably estimate when all of these unrecognized income tax benefits may be settled. However, it is reasonably possible that a reduction in the range of $50,000 to $300,000 of unrecognized income tax benefits may occur within the next twelve months as a result of projected resolutions of income tax uncertainties.
Net periodic benefit cost (credit) for our defined benefit pension plans totaled $15.6 million, $(787,000), and $7.9 million in 2009, 2008 and 2007, respectively. Net periodic pension costs for 2010 are expected to be
The estimated annual minimum contributions in the above table are sensitive to changes in the expected rate of return on plan assets and the discount rate used to determine the present value of projected benefits payable under the plan. If our assumption for the expected return on plan assets of our U.S. defined benefit pension plan increased by 1.00%, representing an increase in the expected return, our estimated cumulative minimum funding requirements for 2011 - 2017 would decrease by approximately $11.4 million. If our assumption for the expected return on plan assets of our U.S. defined benefit pension plan decreased by 1.00%, representing a decrease in the expected return, our estimated cumulative minimum funding requirements for 2011 through 2017 would increase by approximately $12.8 million. If our assumption for the discount rate used to determine the present value of projected benefits payable under the plan decreased by 1.00%, representing a decrease in the interest rate used to value pension plan liabilities, our estimated cumulative minimum funding requirements for 2011 through 2017 would increase by approximately $39.7 million. If our assumption for the discount rate used to determine the present value of projected benefits payable under the plan increased by 1.00%, representing an increase in the interest rate used to value pension plan liabilities, our estimated cumulative minimum funding requirements for 2011 through 2017 would decrease by approximately $33.0 million.
As a component of our Credit Agreement, we maintain a letter of credit facility to satisfy certain contractual obligations. At December 31, 2009, the total issued, but undrawn, letters of credit totaled approximately $19.6 million. These letters of credit expire as follows:
At December 31, 2009, we were not party to any off-balance sheet arrangements, other than operating leases, which could materially impact our operations, financial condition, or cash flows. We have certain material obligations under operating lease agreements to which we are a party. In accordance with GAAP, these operating lease obligations and the related leased assets are not reported on our consolidated balance sheet.
We maintain funds in trusts to administer claims for certain clients. These funds are not available for our general operating activities and, as such, have not been recorded in the accompanying consolidated balance sheets. We have concluded that we do not have material off-balance sheet financial risk related to these funds at December 31, 2009.
In addition to the noncash goodwill impairment charge of $140.3 million related to Broadspire, goodwill increased $1.0 million in the U.S. Property & Casualty segment due to goodwill associated with a 2009 acquisition, and $10.6 million in our International Operations segment. The International Operations segment amount resulted from earnout payments recorded in goodwill during 2009 that totaled $1.5 million, with currency translation accounting for substantially all of the remaining change.
Deferred revenues decreased by $15.3 million, or $15.8 million net of currency translations. Deferred revenues in our Broadspire segment decreased $17.1 million due to the ongoing completion of open claims assumed in our 2006 acquisition of Broadspire Management Services, Inc., net of additional deferred revenues generated by new claims in 2009. Deferred revenues in our Legal Settlement Administration segment increased $2.3 million due mainly to new projects awarded in 2009.
Accrued compensation and related costs decreased approximately $6.9 million due to decreased expense accruals in 2009 under various performance-based incentive compensation plans.
As disclosed in Note 1, “Major Accounting and Reporting Policies,” to our accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K, the financial statements of subsidiaries in our International Operations segment, other than subsidiaries in Canada and the Caribbean, are
included in our consolidated financial statements on a two-month delayed basis (fiscal year end of October 31) as permitted by GAAP, in order to provide sufficient time for accumulation of their results.
Based upon our historical averages, we close approximately 99% of all cases referred to us under lifetime claim service arrangements within five years from the date of referral. Also, within that five-year period, the percentage of claims remaining open in any one particular year has remained relatively consistent from period to period. Each quarter we evaluate our historical claim closing rates by major line of insurance coverage and make adjustments as necessary. Any changes in estimates are recognized in the period in which they are determined.
would have recognized additional revenues of approximately $1.9 million, $1.9 million, and $1.8 million for the years ended December 31, 2009, 2008, and 2007, respectively.
We regularly evaluate whether events and circumstances have occurred which indicate that the carrying amounts of goodwill, indefinite-lived intangible assets, or other long-lived assets have been impaired. Our indefinite-lived intangible assets consist of trade names associated with acquired businesses. Our other long-lived assets consist primarily of property and equipment, deferred income tax assets, capitalized software, and amortizable intangible assets related to customer relationships and technology. When factors indicate that such assets should be evaluated for possible impairment, we perform an impairment test. We believe our goodwill, indefinite-lived intangible assets, and other long-lived assets were appropriately valued and not impaired at December 31, 2009. As discussed below, in 2009 we recognized pretax impairment charges totaling $140.9 million related primarily to a goodwill impairment charge in our Broadspire reporting unit and segment.
The major assumptions used in accounting for our U.S. defined benefit pension plan in 2009 and 2008 were discount rates of 6.70% and 6.46%, respectively, used to compute net periodic benefit costs, discount rates of 5.88% and 6.70%, respectively, used to compute benefit obligations, and an expected long-term return on plan assets of 8.50% for both years. The major assumptions used in accounting for our U.K. defined benefit pension plans in 2009 and 2008 were discount rates of 7.30% and 5.60%, respectively, used to compute net periodic benefit costs, discount rates of 5.70% and 7.30%, respectively, used to compute benefit obligations, and an expected long-term return on plan assets of 8.50% for both years. The discount rate assumptions reflect the rates at which the benefit obligations could be effectively settled. Our discount rates were determined based on the yield for a portfolio of investment grade corporate bonds with maturity dates matched to the estimated future payment of the plans’ benefit obligations. The expected long-term rates of return on plan assets were based on the plans’ asset mix, actual historical returns on equity securities and fixed income investments held by the plans, and an assessment of expected future returns. We review these assumptions at least annually.
The estimated liabilities for our defined benefit pension plans are sensitive to changes in the underlying assumptions for the expected rates of return on plan assets and the discount rates used to determine the present value of projected benefits payable under the plans. If our assumptions for the expected returns on plan assets
Other factors which influence our effective tax rate used for financial reporting purposes include changes in enacted statutory tax rates, changes in the composition of taxable income from the countries in which we operate, our ability to utilize net operating loss and tax credit carryforwards, and changes in unrecognized tax benefits.
It is possible that future changes in the tax laws of jurisdictions in which we operate could have a significant impact on U.S.-based multinational companies such as our company. At this time we cannot predict the likelihood or details of any such changes or their specific potential impact on our company.
We self insure certain insurable risks consisting primarily of professional liability, auto liability, employee medical, disability, and workers’ compensation. Insurance coverage is obtained for catastrophic property and casualty exposures, including professional liability on a claims-made basis, and those risks required to be insured by law or contract. Most of these self-insured risks are in the United States. Provisions for claims incurred under self-insured programs are made based on our estimates of the aggregate liabilities for claims incurred, losses that have occurred but have not been reported to us, and the adverse developments on reported losses. These estimated liabilities are calculated based on historical claim payment experience, the expected life of the claims, and other factors considered relevant to the claims. The liabilities for claims incurred under
See Note 1, “Major Accounting and Reporting Policies,” of our accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements including the dates, or expected dates of adoption and effects, or expected effects on our results of operations and financial condition.
Based in Atlanta, Georgia, Crawford & Company (www.crawfordandcompany.com) is the world’s largest independent provider of claims management solutions to the risk management and insurance industry as well as self-insured entities, with a global network of more than 700 locations in 63 countries. The Crawford System of Claims Solutionssm
offers comprehensive, integrated claims services, business process outsourcing and consulting services for major product lines including property and casualty claims management, workers’ compensation claims and medical management, and legal settlement administration. Shares of the Company’s two classes of common stock are traded on the New York Stock Exchange under the symbols CRDA and CRDB, respectively.
The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company, its majority-owned subsidiaries, and variable interest entities in which the Company is deemed to be the primary beneficiary. Significant intercompany transactions are eliminated in consolidation. The financial statements of the Company’s international subsidiaries, other than those in Canada and the Caribbean, are included in the Company’s consolidated financial statements on a two-month delayed basis (fiscal year-end of October 31) as permitted by GAAP in order to provide sufficient time for accumulation of their results.
The Company has controlling ownership interests in several entities that are not wholly-owned by the Company. The financial results and financial positions of these controlled entities are included in the Company’s consolidated financial statements, for both the controlling interests and the noncontrolling interests. The noncontrolling interests represent the equity interests (formerly referred to as minority interests) in these entities that are not attributable, either directly or indirectly, to the Company. Noncontrolling interests are reported as a separate component of the Company’s Shareholders’ Investment. On the Company’s Consolidated Statements of Operations, net income (or loss) is attributed to the controlling interests and the noncontrolling interests separately.
With the issuance of Financial Accounting Standards Board (“FASB”) Statement No. 168, “The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles,” the FASB approved its codification (the “Codification”) as the single source of authoritative GAAP for nongovernmental entities in the United States (“U.S.”) for interim and annual periods ending after September 15, 2009. As a result, on July 1, 2009, the Company adopted ASC Topic 105, “Generally Accepted Accounting Principles,” as updated by Accounting Standards Update (“ASU”) No. 2009-1, “Topic 105-Generally Accepted Accounting Principles,” to establish the Codification as the Company’s source of authoritative GAAP. The Codification also considers rules and interpretive releases of the SEC under authority
of U.S. federal securities laws as additional sources of authoritative GAAP for SEC registrants. The Codification superseded all then-existing non-SEC accounting and reporting standards. However, at its initial effective date of July 1, 2009, the purpose of the Codification was to reorganize existing GAAP into a consistent and logical structure. The Codification did not create new GAAP.
On August 18, 2009, the SEC issued interpretive guidance FR-80, “Commission Guidance Regarding the Financial Accounting Standards Board’s Accounting Standards Codification” (“FR-80”). With the issuance of FR-80, the SEC formally recognized the FASB’s Codification as the single source of authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the SEC.
The Company’s revenues are primarily comprised of claims processing or program administration fees and are generated from the Company’s four operating segments.
The U.S. Property & Casualty segment primarily serves the U.S. property and casualty insurance company market with additional services provided to the warranty and inspection services marketplaces. The International Operations segment primarily serves the property and casualty insurance company markets outside of the U.S. The Broadspire segment serves the U.S. self-insurance marketplace. The Legal Settlement Administration segment primarily serves the securities, bankruptcy, and other legal settlement markets.
For the years ended December 31, 2009, 2008, and 2007, the Company’s adjustments to revenues associated with client invoice adjustments totaled $3,151,000, $4,665,000, and $5,560,000, respectively.
The Company’s four operating segments are deemed to be reporting units because the components of each operating segment have similar economic characteristics. If changes to the Company’s reporting structure impact the composition of the Company’s reporting units, existing goodwill is reallocated to the revised reporting units based on their relative fair market values as determined by a discounted cash flow analysis. If all of the assets and liabilities of an acquired business are assigned to a specific reporting unit, then the
goodwill associated with that acquisition is assigned to that reporting unit at acquisition unless another reporting unit is also expected to benefit from the acquisition.
Additions to property and equipment under capital leases totaled $81,000, $208,000, and $328,000 for 2009, 2008, and 2007, respectively. Additions to property and equipment that were funded directly by lessors totaled $100,000 and $4,921,000 for 2009 and 2007, respectively. There were no such additions in 2008.
Depreciation on property and equipment, including property under capital leases and amortization of leasehold improvements, was $14,433,000, $14,992,000, and $14,081,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
risks required to be insured by law or contract. Most of these self-insured risks are in the U.S. Provisions for claims under the self-insured programs are made based on the Company’s estimates of the aggregate liabilities for claims incurred, losses that have occurred but have not been reported to the Company, and for adverse developments on reported losses. The estimated liabilities are calculated based on historical claims payment experience, the expected lives of the claims, and other factors considered relevant by management. Changes in these estimates may occur as additional information becomes available. The estimated liabilities for claims incurred under the Company’s self-insured workers’ compensation and employee disability programs are discounted at the prevailing risk-free interest rate for U.S. government securities of an appropriate duration. All other self-insured liabilities are undiscounted. At December 31, 2009 and 2008, accrued liabilities for self-insured risks totaled $33,299,000 and $36,470,000, respectively, including current liabilities of $18,475,000 and $17,939,000, respectively.
External trusts are maintained to hold assets of the Company’s defined benefit pension plans in the U.S. and U.K. The Company’s funding policy is to make cash contributions in amounts sufficient to meet regulatory funding requirements. Assets of the plans are measured at fair value at the end of each reporting
For financial reporting purposes, the provision for income taxes is the sum of income taxes both currently payable and payable on a deferred basis. Currently payable income taxes represent the liability related to the income tax returns for the current year, while the net deferred tax expense or benefit represents the change in the balance of deferred income tax assets or liabilities as reported on the Company’s Consolidated Balance Sheets that are not related to balances in Accumulated Other Comprehensive Loss. The changes in deferred income tax assets and liabilities are determined based upon changes in the differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for income tax purposes, measured by the enacted statutory tax rates in effect for the year in which the Company estimates these differences will reverse. The Company must estimate the timing of the reversal of temporary differences, as well as whether taxable income in future periods will be sufficient to fully recognize any gross deferred tax assets.
Effective January 1, 2007, the Company adopted new accounting guidance issued by the FASB to create a single model to address accounting for uncertainty in tax positions. The new guidance clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position must meet before being recognized in the financial statements. The new guidance also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of the new guidance resulted in a $214,000 charge to the Company’s retained earnings on January 1, 2007.
In certain jurisdictions, both in the U.S. and internationally, various governments and taxing authorities require the Company to assess and collect sales and other taxes, such as Value Added Taxes, on certain services that the Company renders and bills to its customers. The majority of the Company’s revenues are not currently subject to these types of taxes. The Company records these government-imposed taxes on a net basis with amounts collected related to these pass-through taxes recorded as balance sheet transactions.
Net (Loss) Income Attributable to Crawford & Company per Common Share
Basic EPS is computed based on the weighted-average number of total common shares outstanding during the respective period, including nonvested shares of issued restricted stock that are entitled to receive dividends should any dividends be declared. Diluted EPS is computed under the “treasury stock” method based on the weighted-average number of total common shares outstanding, including nonvested shares of restricted stock that are entitled to receive dividends should any dividends be declared, plus the dilutive effect of: outstanding
stock options, estimated shares issuable under employee stock purchase plans, and nonvested shares under the Company’s Executive Stock Bonus Plan that vest based on service conditions or on performance conditions that have been achieved.
The computations of basic and diluted net (loss) income attributable to Crawford & Company per common share, after giving effect to the adoption of ASC 260-10-45-60, “Earnings Per Share-Overall-Other Presentation Matters,” were as follows for the years ended December 31, 2009, 2008, and 2007:
Company’s Consolidated Balance Sheet and Consolidated Statements of Shareholders’ Investment, Noncontrolling Interests, and Comprehensive Income (Loss) were as follows:
The Company’s adoption of any other new accounting standards not previously discussed in this Note 1 is presented below.
On January 1, 2009, the Company adopted ASC 805, “Business Combinations.” ASC 805 changed many well-established business combination accounting practices and significantly affected how acquisition transactions are reflected in the financial statements. ASC 805 changed the accounting treatment for certain acquisition-related activities that occur after its adoption including (a) recording contingent consideration at the acquisition date at fair value, (b) expensing acquisition-related costs as incurred, and (c) expensing restructuring costs associated with the acquired business. ASC 805 also introduced certain new disclosure requirements. Since ASC 805 uses an expanded definition of a business, the Company was required to evaluate its reporting units at adoption. The adoption of ASC 805 did not have an impact on the Company’s consolidated financial statements. However, it could have a significant impact on the accounting for any future acquisitions.
On January 1, 2009, the Company adopted ASC 260-10-45-60, “Earnings Per Share-Overall-Other Presentation Matters.” Under this guidance, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities, and as such they are included in the computation of basic earnings per share (“EPS”) using the two-class method. Upon adoption, all prior-period EPS data were adjusted retrospectively to conform to the provisions of ASC 260-10-45-60. The Company’s grants of restricted shares of its Class A Common Stock made under its Executive Stock Bonus Plan provide for the payment of nonforfeitable dividends, should any be declared and paid by the Company, during any vesting period for the restricted stock grants. As such, these unvested restricted stock grants are now considered participating securities and thus the two-class method of computing EPS applies to the Company upon adoption of the new guidance. The impact of ASC 260-10-45-60 on the Company’s basic and diluted EPS calculations for any time period depends upon the number of unvested restricted stock grants outstanding for the period. The adoption of this new guidance reduced basic EPS by $0.01 for the year ended December 31, 2008. For the year ended December 2007, retroactive adoption of this new guidance did not change EPS amounts from those originally reported before the adoption.
ASC 715-10-50, “Compensation-Retirement Benefits,” requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. ASC 715-10-50 replaces many of the disclosures currently required under GAAP and requires disclosure of the fair value of each major asset category. Disclosure is also required for the level within the fair value hierarchy of each major category of plan assets, using the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures.” Employers are required to reconcile the beginning and ending balances of plan assets with fair values measured using significant unobservable inputs (Level 3), separately presenting changes during the period attributable to a) actual return on plan assets, b) purchases, sales, and settlements (net), and c) transfers in and out of Level 3, if any. ASC 715-10-50 is effective beginning with the Company’s December 31, 2009 annual disclosures related to its defined benefit pension plans. The Company’s other postretirement plans are not funded, thus the disclosure provisions of ASC 715-10-50 do not apply to those plans. Since ASC 715-10-50 relates only to disclosures, its adoption did not have an impact on the Company’s results of operations, financial condition, or cash flows. See Note 9, “Retirement Plans.”
In 2006, the Company’s U.K. subsidiary acquired all of the outstanding stock of Specialty Liability Services Ltd. (“SLS”). The purchase price paid at acquisition was $7,965,000, less $1,099,000 cash acquired. The results of SLS’s operations have been included in the Company’s consolidated financial statements since that date. SLS is a specialist liability adjusting and claims handling company with operations in the U.K. The net assets acquired included amortizable intangible assets of $1,409,000, indefinite-live intangible assets of $2,487,000, and goodwill of $2,929,000. The purchase price was increased by $1,545,000, $888,000 and $338,000 in 2009, 2008 and 2007, respectively, due to additional acquisition costs incurred in 2007 and earnout payments in all three years. At December 31, 2009, all contingent amounts related to the SLS acquisition have been determined and all have been paid with the exception of $791,000 expected to be paid in 2010. At December 31, 2009, this $791,000 is included in Goodwill and in current Accrued Liabilities on the Company’s Consolidated Balance Sheet.
Due to declines in current and forecasted operating results for the Company’s Broadspire segment and reporting unit, the impact that declining U.S. employment levels have had on Broadspire’s revenue, and the weakness in the Company’s stock prices, the Company recorded a noncash impairment charge of $140.3 million during 2009. This impairment charge is not deductible for income tax purposes and is not reflected in
On January 1, 2008, the Company’s Strategic Warranty Services unit was transferred from the Legal Settlement Administration segment to the U.S. Property & Casualty segment. As a result of this transfer, $3,813,000 of goodwill was reallocated from the Legal Settlement Administration reporting unit and segment to the U.S. Property & Casualty reporting unit and segment.
The following is a summary of intangible assets at December 31, 2009 and 2008:
Amortization of intangible assets was $6,433,000, $6,464,000, and $6,399,000 for the years ended December 31, 2009, 2008, and 2007, respectively. For the years ended December 31, 2009, 2008, and 2007, amortization expense for customer-relationship intangible assets in the amounts of $5,994,000,$6,025,000, and $6,025,000, respectively, were excluded from operating earnings (see Note 12, “Segment and Geographic Information”). Intangible assets subject to amortization are amortized on a straight-line basis over lives ranging from 5 to 15 years. For intangible assets at December 31, 2009 subject to amortization, annual estimated aggregate amortization expense is $6,433,000 for 2010 and 2011; $6,399,000 for 2012; and $6,374,000 for 2013 and 2014.
Long-term debt consisted of the following at December 31, 2009 and 2008:
The Company’s capital leases are primarily comprised of leased automobiles with terms ranging from 24 to 60 months.
At December 31, 2008, the weighted-average interest rate on borrowings outstanding under the revolving credit facility was 9.97% and all outstanding borrowings were outside the U.S. At December 31, 2009, no borrowings were outstanding under the revolving credit facility. The term loan has a variable interest rate based on LIBOR, and at December 31, 2009 the interest rate on the term loan was LIBOR (with a 2.0% floor) plus 3.25%, or 5.25%. See Note 5, “Interest Rate Swap Agreements,” for more on the Company’s effective rate of interest incurred on its outstanding borrowings.
Scheduled principal repayments of long-term debt, including current portions and capital leases, as of December 31, 2009 are as follows:
The term loan currently requires minimum principal repayments of $525,000 at the end of each calendar quarter with a final balloon payment due on October 30, 2013. Outstanding borrowings under the revolving credit facility are also due in full on October 30, 2013. Interest is payable quarterly on the term loan. For the revolving credit facility, interest is payable at least quarterly. During 2009, the Company made only the required quarterly repayments of $525,000 on the term loan. Under the Company’s Credit Agreement, the Company may be required to make additional annual debt repayments if the Company generates excess cash flows and fails to meet certain leverage ratios as defined in the Credit Agreement. For the year ended December 31, 2009, the Company anticipates an excess cash flow payment of approximately $5,875,000 to be paid on March 31, 2010. This excess cash flow payment is classified as a current liability in the above table and on the Company’s consolidated balance sheet at December 31, 2009.
In February 2009, the Company amended its Credit Agreement so that it could enhance certain operational and financial aspects of its business, including, among other things, undertaking an internal corporate realignment of certain of the Company’s operating subsidiaries and assets. A substantial portion of this realignment was completed in connection with the execution of this amendment. This corporate realignment did not impact the composition of the Company’s four operating segments. In addition, the amendment provides the Company with the ability to repurchase and retire, from time to time through December 2010, up to $25.0 million of the outstanding term debt under the agreement.
In October 2009, the Company entered into the Fifth Amendment to the Credit Agreement (the “Fifth Amendment”). The Fifth Amendment affected the following changes to the Company’s Credit Agreement, among others:
provided the Company the option to increase the revolving commitment amount or incur additional term loans under the Credit Agreement of up to a maximum of $50,000,000 in aggregate;
imposed a LIBOR floor of 2.0% on all LIBOR-based loans under the Credit Agreement;
increased the applicable margin (as defined) and applicable commitment fee percentage;
Under the Credit Agreement, the fixed charge coverage ratio, defined as the ratio of EBITDA to total fixed charges consisting of scheduled principal and interest payments and restricted payments as defined in the Credit Agreement, of the Company and its consolidated subsidiaries must not be less than 1.50 to 1.00.
Company and its consolidated subsidiaries after the third quarter of 2006 plus (iii) any net proceeds from any underwritten public offering of any capital stock of the Company.
The covenants in the Credit Agreement also place certain restrictions on the Company’s ability to pay dividends to shareholders, including a $4,500,000 limit in any four quarter period if the Leverage Ratio, as defined, is less than 2.75 to 1.00 but exceeds 2.25 to 1.00, and a $12,500,000 limit on dividend payments in any four quarter period if the leverage ratio is less than or equal to 2.25 to 1.00.
At December 31, 2009, the Company was in compliance with the financial covenants under the Credit Agreement. If the Company does not meet the covenant requirements in the future, it would be in default under the Credit Agreement. In such an event, the Company would need to obtain a waiver of the default or repay the outstanding indebtedness under the Credit Agreement. If the Company could not obtain a waiver on satisfactory terms, it could be required to renegotiate the Credit Agreement, or obtain other financing in order to repay all amounts due thereunder. Any such renegotiations, if successful, or any other financing, if completed, could result in less favorable terms, including higher interest rates, accelerated payments, and fees. No assurance can be provided that any necessary renegotiations or other financing arrangements could be completed in a timely manner, or at all.
The Company manages its exposure to the impact of interest rate changes by entering interest rate swap agreements. The Company designates pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate debt. Pay-fixed swaps effectively convert floating rate debt to fixed-rate debt. The Company reports the effective portion of the change in fair value of the derivative instrument as a component of its 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 is exposed to counterparty credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in interest rates. The Company attempts to manage exposure to counterparty credit risk primarily by selecting a counterparty only if it meets certain credit and other financial standards.
In May 2007, the Company entered into a three-year interest rate swap agreement that effectively converts the LIBOR-based portion of the interest rate under the Company’s Credit Agreement for a portion of its floating-rate debt to a fixed rate of 5.25%. The Company 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 of the swap is reduced over its three-year term and was $80,000,000 at December 31, 2009.
In November 2009, the Company entered into a two-year forward-starting interest rate swap agreement that is effective beginning on June 30, 2010. The swap effectively converts the LIBOR-based portion of the interest rate on an initial notional amount of $90,000,000 million of the Company’s floating-rate debt to a fixed rate of 3.05% plus the applicable credit spread. The Company 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 of the swap is reduced to $85,000,000 on March 31, 2011 to match the expected repayment of the Company’s outstanding debt. The Company believes there have been no material changes in the creditworthiness of the counterparties to this interest-rate swap agreement.
At December 31, 2009, the fair value of the interest rate swaps was a liability of $2,067,000 and the amount expected to be reclassified from accumulated other comprehensive loss into earnings during the next twelve months was approximately $2,074,000.
The effective portions of the pre-tax losses on the Company’s interest-rate swap derivative instruments are categorized in the table below:
The amounts of gains/losses recognized in income/expense on the Company’s interest rate hedge contract (ineffective portion excluded from any effectiveness testing) were not material for the years ended December 31, 2009, 2008 or 2007.
The fair values of the money market funds were based on recently quoted market prices and reported transactions in an active marketplace. Money market funds are reported on the Company’s Consolidated Balance Sheet as Cash and Cash Equivalents.
Effective August 1, 2006, the Company entered into an 11-year operating lease agreement for the lease of approximately 160,000 square feet of office space in Atlanta, Georgia for use as the Company’s corporate headquarters. Included in the future minimum lease payments noted above are total lease payments of $31,227,000 related to this lease. Additionally, the Company is responsible for certain property operating expenses. Leasehold improvements totaling $4,921,000 were funded directly by the lessor.
During October 2009, the Company entered into a separate sublease agreement with another sublessor to sublease a portion of the other building in Plantation, Florida. Expected subrental payments from the sublessor for the space subleased in October 2009 are included in the above table. For the portion of the building subleased in October 2009, the Company concurrently recognized a pre-tax loss of $1,810,000 on that phase of the sublease. This sublease agreement also provides the sublessor with options to sublease all or a portion of the remainder of the building at various dates in 2010. The subleases would be for the remaining term of the Company’s lease on this building (expiring December 2021).
Net cash payments for income taxes were $10,301,000, $7,975,000, and $2,339,000 in 2009, 2008, and 2007, respectively.
The provision for income taxes is reconciled to the federal statutory rate of 35% as follows:
The Company does not provide for additional U.S. and foreign income taxes on undistributed earnings of foreign subsidiaries because they are considered to be indefinitely reinvested. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through
As disclosed in Note 1, on January 1, 2007 the Company adopted guidance which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements, 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 this guidance, 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 cannot be recognized if it has less than a 50% likelihood of being sustained. Additionally, this guidance addresses derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of this new guidance resulted in a $214,000 charge to the Company’s retained earnings that was reported as a cumulative effect adjustment for a change in accounting principle at January 1, 2007.
Included in the total unrecognized tax benefits at December 31, 2009, 2008, and 2007 were $2,215,000, $2,455,000, and $2,566,000, respectively, of tax benefits that, if recognized, would affect the effective income tax rate.
The Company conducts business globally and, as a result, files U.S. federal and various state and foreign jurisdiction income tax returns. In the normal course of business, the Company is subject to examination by various taxing authorities throughout the world, including jurisdictions such as Canada, the United Kingdom, and the United States. With few exceptions, the Company is no longer subject to income tax examinations for years before 2002.
The Company sponsors defined benefit pension plans in the U.S. and U.K. Effective December 31, 2002, the Company elected to freeze its U.S. defined benefit pension plan. The Company’s U.K. defined benefit pension plans have also been closed for new employees, but existing participants may still accrue additional limited benefits based on salary amounts in effect at the time the plan was closed. Benefits payable under the Company’s U.S defined benefit pension plan are generally based on career compensation; however, no additional benefits accrue on the frozen U.S. plan after December 31, 2002. Benefits payable under the U.K. plans are generally based on an employee’s final salary at the time the plan was closed. Benefits paid from the U.K. plans are also subject to adjustments for the effects of inflation. In 2010, the Company expects to make contributions of approximately $33,500,000 to its U.S. defined benefit pension plan and approximately $8,000,000 to its U.K. defined benefit pension plans.
The reconciliation of the beginning and ending balances of the projected benefit obligations and the fair value of plans’ assets for the Company’s defined benefit pension plans as of the plans’ most recent measurement dates is as follows:
Due to the status of the plans, the accumulated benefit obligations and the projected benefits obligations are not materially different.
The following tables set forth the 2009 and 2008 changes in accumulated other comprehensive loss for the Company’s defined benefit retirement plans and post-retirement medical benefits plan on a combined basis. For the U.S. defined benefit pension plan and the post-retirement medical plan, the 2008 amounts in the tables below cover the fifteen month period between October 1, 2007 and December 31, 2008.
Net unrecognized actuarial losses included in accumulated other comprehensive loss and expected to be recognized in net periodic benefit costs during the year ending December 31, 2010 for the U.S. and U.K. plans are $9,909,000 ($6,531,000 net of tax).
Net periodic benefit cost (credit) related to the Company’s defined benefit pension plans recognized in the Company’s Consolidated Statements of Income for the years ended December 31, 2009, 2008, and 2007 included the following components:
Assets of the U.S. and U.K. plans are invested in equity securities and fixed income investments, with a target allocation of approximately 65% in equity securities and 35% in fixed income investments.
The long-term goal for the U.S. and U.K. plans is to reach fully-funded status and to maintain that status. The investment policies recognize that the plans’ asset return requirements and risk tolerances will change over time. Accordingly, reallocation of the portfolios’ mix of return-seeking assets and liability-hedging assets will be performed as the plans’ funded status improves.
The Company has two classes of common stock outstanding, Class A Common Stock (“CRDA”) and Class B Common Stock (“CRDB”). These two classes of stock have essentially identical rights, except that shares of CRDA generally do not have any voting rights. Under the Company’s Articles of Incorporation, the Board of Directors may pay higher (but not lower) cash dividends on the non-voting CRDA than on the voting CRDB. As described in Note 11, certain shares of CRDA are issued with restrictions under executive compensation plans.
In 2008, a maximum of 550,000 shares of CRDA were authorized for issuance in 2009 under the Company’s Frozen Accrued Vacation Stock Purchase Plan (the “Plan”). Under this Plan, certain officers and employees of the Company could voluntarily make a one-time irrevocable election to convert accrued vacation into shares of CRDA. Accrued vacation in the amount of $372,000 was used to purchase 54,768 (net of 28,090 shares used to fund payroll and withholding taxes) shares of CRDA under the Plan.
Historically, stock options granted to members of the Company’s board of directors typically were fully vested on grant date with a typical life of ten years. For the years ended December 31, 2008 and 2007, compensation expense of $28,000 and $248,000, respectively, was recognized for directors’ stock options.
A summary of option activity as of December 31, 2009, and changes during 2009, 2008, and 2007, is presented below:
At December 31, 2009, there was $297,000 of unrecognized compensation cost related to unvested stock options for employee stock option awards. This cost is being recognized on a straight-line basis and will be fully recognized by April 2011. Directors’ stock options had no unrecognized compensation cost since directors’ options were vested when granted and the grant-date fair values were fully expensed on grant date.
The total fair value of the 542,063, the 1,063,754, and the 47,414 performance shares vesting in 2009, 2008, and 2007 was $2,412,000, $4,957,000, and $250,000, respectively.
The Company’s Board of Directors may elect to issue restricted shares of stock in lieu of, or in addition to, cash bonus payments to certain key employees. Employees receiving these shares have restrictions on the ability to sell the shares. Such restrictions lapse ratably over vesting periods ranging from several months to five years. For grants of restricted shares, vested and unvested shares issued are eligible to receive nonforfeitable dividends if dividends are declared by the Company’s Board of Directors. The grant-date fair value of a restricted share is based on the market value of the stock on the date of grant. Compensation cost is recognized on a straight-line basis over the requisite service period since these awards only have service conditions once granted.
A summary of the status of the Company’s nonvested restricted shares as of December 31, 2009, and changes during 2009, 2008, and 2007, is presented below:
Under the U.S. Plan, the Company is authorized to issue up to 1,500,000 shares of CRDA to eligible employees. Participating employees can elect to have up to $21,000 of their eligible annual earnings withheld to purchase shares at the end of the one-year withholding period which starts July 1 and ends June 30. The purchase price of the stock is 85% of the lesser of the closing price for a share of such stock on the first day or the last day of the withholding period. Participating employees may cease payroll withholdings during the withholding period and/or request a refund of all amounts withheld before any shares are purchased.
The Company’s four reportable operating segments are organized based upon the nature of services and/or geographic areas served and include: 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 securities, bankruptcy, and other legal settlement markets. The Company’s four 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 recorded at cost and are not material.
Operating earnings is the primary financial performance measure used by the Company’s senior management and chief operating decision maker to evaluate the financial performance of the Company’s four operating segments. The Company believes this measure is useful to investors in that it allows investors to evaluate segment operating performance using the same criteria used by the Company’s senior management. Operating earnings will differ from net income computed in accordance with GAAP since 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. Net income or loss attributable to noncontrolling interests has been removed from segment operating earnings.
Financial information as of and for the years ended December 31, 2009, 2008, and 2007 covering the Company’s reportable segments was as follows:
Substantially all revenues earned in the U.S. Property & Casualty, Broadspire, and Legal Settlement Administration segments are earned in the U.S. Substantially all of the revenues earned in the International Operations segment are earned outside of the U.S.
Capital expenditures for the years ended December 31, 2009 and 2008 are shown in the following table:
The total of the Company’s reportable segments’ revenues reconciled to total consolidated revenues for the years ended December 31, 2009, 2008, and 2007 was as follows:
The Company’s reportable segments’ total assets reconciled to consolidated total assets of the Company at December 31, 2009 and 2008 are presented in the following table. All foreign-denominated cash and cash equivalents are reported within the International Operations segment, while all U.S. cash and cash equivalents are reported as corporate assets in the following table:
The Company’s most significant international operations are in the U.K. and Canada, as presented in the following table:
As part of the Company’s Credit Agreement, the Company maintains a letter of credit facility to satisfy certain of its own contractual requirements. At December 31, 2009, the aggregate amount committed under the facility was $19,569,000.
In the normal course of the claims administration services business, the Company is sometimes 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, certain 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 responsible for the deductibles and self-insured retentions under various insurance coverages. In the opinion of Company management, adequate provisions have been made for such risks.
The Company is subject to numerous federal, state, and foreign employment laws, and from time to time the Company faces claims by its employees and former employees under such laws. In addition, the Company has become aware that certain employers are becoming subject to an increasing number of claims involving alleged violations of wage and hour laws. The outcome of any of these allegations is expected to be highly fact specific, and there has been a substantial amount of recent legislative and judicial activity pertaining to employment-related issues. Such claims or litigation involving the Company or any of the Company’s current or former employees could divert management’s time and attention from the Company’s business operations and could potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on the Company’s results of operations, financial position, and cash flows.
As previously disclosed, on October 31, 2006, the Company completed its acquisition of BMSI from Platinum Equity, LLC (“Platinum”). BMSI and Platinum are together engaged in certain legal proceedings against the former owners of certain entities acquired by BMSI prior to the Company’s acquisition of BMSI. Pursuant to the agreement under which the Company acquired BMSI (the “Stock Purchase Agreement”), Platinum has full responsibility to resolve all of these matters and is obligated to fully indemnify BMSI and the Company for all monetary payments that BMSI may be required to make as a result of any unfavorable outcomes related to these pre-existing legal proceedings. Pursuant thereto, Platinum has also agreed to indemnify the Company for any additional payments required under any purchase price adjustment mechanism, earnout, or similar provision in any of BMSI’s purchase and sale agreements entered into prior to the Company’s acquisition of BMSI. In the event of an unfavorable outcome in which Platinum does not indemnify the Company under the terms of the Stock Purchase Agreement, the Company may be responsible for funding any such unfavorable outcomes. At this time, the Company’s management does not believe the Company will be responsible for the funding of any of these matters. The Company has not recognized any loss contingencies for these matters in its consolidated financial statements.
15. Sale of the Former Corporate Headquarters and Recognition of Deferred Gain
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 received in cash at closing. Also on June 30, 2006, the Company entered into a 12-month leaseback agreement for these same facilities. During the second quarter of 2007, the company relocated its corporate headquarters to nearby leased facilities. The Company deferred recognition of the gain related to this sale due to its leaseback of the facility. Net of transaction costs, a pretax gain of $4,844,000 was recognized by the Company upon the expiration of the leaseback agreement during the second quarter of 2007.
In 2009, the Company recorded pretax restructuring and other costs that totaled $4,059,000. Included in the 2009 restructuring costs were $1,815,000 in professional fees related to the internal realignment of certain of our legal entities in the U.S. and internationally that commenced in 2008, and $434,000 in severance expense in our International Operations segment. These restructuring efforts were substantially completed at December 31, 2009. The internal realignment did not impact the composition of our segments for financial reporting purposes. Other costs of $1,810,000 in 2009 related to the partial sublease of our Broadspire facility in Plantation, Florida (see Note 7, “Commitments Under Operating Leases”).
The management of Crawford & Company is responsible for the integrity and objectivity of the financial information in this Annual Report on Form 10-K. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, using informed judgements and estimates where appropriate.
The management of Crawford & Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are made only in accordance with authorizations of the Company’s management and directors; and
As discussed in Note 1 to the consolidated financial statements, in 2009 the Company adopted Financial Accounting Standards Board No. 160, Noncontrolling Interests in Consolidated Financial Statements (codified in FASB Accounting Standards Codification ASC 810, Consolidation) and FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (codified in FASB Accounting Standards Codification ASC 260, Earnings Per Share). Also, as discussed in Note 1, in 2008 the Company adopted Financial Accounting Standards Board No. 157, Fair Value Measurements (codified in FASB Accounting Standards Codification ASC 820, Fair Value Measurements and Disclosures) and in 2007 the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codified in FASB Accounting Standards Codification ASC 740, Income Taxes).
In our opinion, Crawford & Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Crawford & Company as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ investment, noncontrolling interests and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009, and our report dated March 5, 2010 expressed an unqualified opinion thereon.