XNYS:CRD.B Crawford & Company Class B Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
 Form 10-Q
R
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
for the quarterly period ended June 30, 2012
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
for the transition period from ____ to ____
Commission file number 1-10356

CRAWFORD & COMPANY
(Exact name of Registrant as specified in its charter)
 
Georgia
 
58-0506554
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
 
 
1001 Summit Boulevard
 
 
 
 
Atlanta, Georgia
 
30319
 
 
(Address of principal executive offices)
 
(Zip Code)
 
(404) 300-1000
(Registrant’s telephone number, including area code)
____________________________________________________________
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ          No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes þ          No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o          No þ
The number of shares outstanding of each of the Registrant’s classes of common stock as of July 31, 2012 was as follows:

Class A Common Stock, $1.00 par value: 29,671,970
Class B Common Stock, $1.00 par value: 24,690,172
 
 




CRAWFORD & COMPANY
Quarterly Report on Form 10-Q
Quarter Ended June 30, 2012

Table of Contents
 
 
 
 
 
Page
Part I. Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part 1 — Financial Information

Item 1. Financial Statements
CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited

 
Three Months Ended June 30,
(In thousands, except per share amounts)
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Revenues before reimbursements
$
293,847

 
$
291,713

Reimbursements
25,169

 
22,369

 
 
 
 
Total Revenues
319,016

 
314,082

 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Costs of services provided, before reimbursements
212,537

 
210,773

Reimbursements
25,169

 
22,369

Total costs of services
237,706

 
233,142

 
 
 
 
Selling, general, and administrative expenses
59,077

 
57,163

 
 
 
 
Corporate interest expense, net of interest income of $262 and $192, respectively
2,387

 
4,118

 
 
 
 
Special charges
1,571

 

 
 
 
 
Total Costs and Expenses
300,741

 
294,423

 
 
 
 
Income Before Income Taxes
18,275

 
19,659

 
 
 
 
Provision for Income Taxes
7,583

 
6,005

 
 
 
 
Net Income
10,692

 
13,654

 
 
 
 
Less: Net Income Attributable to Noncontrolling Interests
267

 
185

 
 
 
 
Net Income Attributable to Shareholders of Crawford & Company
$
10,425

 
$
13,469

 
 
 
 
Earnings Per Share - Basic:
 
 
 
Class A Common Stock
$
0.20

 
$
0.25

Class B Common Stock
$
0.19

 
$
0.25

 
 
 
 
Earnings Per Share -Diluted:
 
 
 
Class A Common Stock
$
0.19

 
$
0.25

Class B Common Stock
$
0.18

 
$
0.25

 
 
 
 
Weighted-Average Shares Used to Compute Basic Earnings Per Share:
 
 
 

Class A Common Stock
29,585

 
28,788

Class B Common Stock
24,696

 
24,697

 
 
 
 
Weighted-Average Shares Used to Compute Diluted Earnings Per Share:
 
 
 
Class A Common Stock
30,246

 
29,243

Class B Common Stock
24,696

 
24,697

 
 
 
 
Cash Dividends Per Share:
 
 
 
Class A Common Stock
$
0.03

 
$
0.02

Class B Common Stock
$
0.02

 
$
0.02

(See accompanying notes to condensed consolidated financial statements)

3


CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited

 
Six Months Ended June 30,
(In thousands, except per share amounts)
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Revenues before reimbursements
$
561,600

 
$
576,751

Reimbursements
44,762

 
41,439

 
 
 
 
Total Revenues
606,362

 
618,190

 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Costs of services provided, before reimbursements
411,939

 
417,715

Reimbursements
44,762

 
41,439

Total costs of services
456,701

 
459,154

 
 
 
 
Selling, general, and administrative expenses
114,756

 
113,159

 
 
 
 
Corporate interest expense, net of interest income of $544 and $411, respectively
4,556

 
8,254

 
 
 
 
Special charges
2,461

 

 
 
 
 
Total Costs and Expenses
578,474

 
580,567

 
 
 
 
Income Before Income Taxes
27,888

 
37,623

 
 
 
 
Provision for Income Taxes
10,976

 
12,042

 
 
 
 
Net Income
16,912

 
25,581

 
 
 
 
Less: Net Income (Loss) Attributable to Noncontrolling Interests
422

 
(35
)
 
 
 
 
Net Income Attributable to Shareholders of Crawford & Company
$
16,490

 
$
25,616

 
 
 
 
Earnings Per Share - Basic:
 
 
 
Class A Common Stock
$
0.31

 
$
0.48

Class B Common Stock
$
0.29

 
$
0.48

 
 
 
 
Earnings Per Share - Diluted:
 
 
 
Class A Common Stock
$
0.31

 
$
0.48

Class B Common Stock
$
0.29

 
$
0.48

 
 
 
 
Weighted-Average Shares Used to Compute Basic Earnings Per Share:
 
 
 

Class A Common Stock
29,417

 
28,587

Class B Common Stock
24,697

 
24,697

 
 
 
 
Weighted-Average Shares Used to Compute Diluted Earnings Per Share:
 
 
 
Class A Common Stock
30,030

 
29,067

Class B Common Stock
24,697

 
24,697

 
 
 
 
Cash Dividends Per Share:
 
 
 
Class A Common Stock
$
0.06

 
$
0.04

Class B Common Stock
$
0.04

 
$
0.04

(See accompanying notes to condensed consolidated financial statements)

4


CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited


 
Three Months Ended June 30,
(In thousands)
2012

2011
 
 
 
 
Net Income
$
10,692

 
$
13,654

 
 
 
 
Other Comprehensive Income (Loss):
 
 
 
Net foreign currency translation gain
2,034

 
9,158

 
 
 
 
Interest rate swap agreement loss reclassified into income, net of tax of $86 and $86, respectively
140

 
140

 
 
 
 
Interest rate swap agreement loss recognized during the period, net of tax of $0 and ($164), respectively

 
(267
)
 
 
 
 
Amortization of cost of retirement plans included in net periodic pension cost, net of tax of $823 and $893, respectively
1,493

 
1,727

 
 
 
 
Other Comprehensive Income
3,667

 
10,758

 
 
 
 
Comprehensive Income
14,359

 
24,412

 
 
 
 
Less: Comprehensive income attributable to noncontrolling interests
314

 
200

 
 
 
 
Comprehensive Income Attributable to Shareholders of Crawford & Company
$
14,045

 
$
24,212

 
 
 
 

 
Six Months Ended June 30,
(In thousands)
2012
 
2011
 
 
 
 
Net Income
$
16,912

 
$
25,581

 
 
 
 
Other Comprehensive (Loss) Income:
 
 
 
Net foreign currency translation (loss) gain
(1,163
)
 
9,610

 
 
 
 
Interest rate swap agreement loss reclassified into income, net of tax of $172 and $176, respectively
280

 
286

 
 
 
 
Interest rate swap agreement loss recognized during the period, net of tax of $0 and ($189), respectively

 
(308
)
 
 
 
 
Amortization of cost of retirement plans included in net periodic pension cost, net of tax of $1,646 and $1,786, respectively
2,987

 
3,454

 
 
 
 
Other Comprehensive Income
2,104

 
13,042

 
 
 
 
Comprehensive Income
19,016

 
38,623

 
 
 
 
Less: Comprehensive income (loss) attributable to noncontrolling interests
316

 
(453
)
 
 
 
 
Comprehensive Income Attributable to Shareholders of Crawford & Company
$
18,700

 
$
39,076

 
 
 
 

(See accompanying notes to condensed consolidated financial statements)


5


CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited

 
 
 
*
(In thousands)
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
45,655

 
$
77,613

Accounts receivable, less allowance for doubtful accounts of $11,816 and $10,615, respectively
185,434

 
161,543

Unbilled revenues, at estimated billable amounts
133,321

 
107,494

Prepaid expenses and other current assets
24,571

 
22,836

Total Current Assets
388,981

 
369,486

Property and Equipment:
 
 
 
Property and equipment
158,109

 
156,349

Less accumulated depreciation
(112,125
)
 
(112,465
)
Net Property and Equipment
45,984

 
43,884

Other Assets:
 
 
 
Goodwill
130,756

 
131,246

Intangible assets arising from business acquisitions, net
92,733

 
96,392

Capitalized software costs, net
63,488

 
60,332

Deferred income tax assets
82,934

 
84,454

Other noncurrent assets
26,233

 
25,864

Total Other Assets
396,144

 
398,288

TOTAL ASSETS
$
831,109

 
$
811,658

*    Derived from the audited Consolidated Balance Sheet
(See accompanying notes to condensed consolidated financial statements)

6



CRAWFORD & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS — CONTINUED
Unaudited

 
 
 
*
(In thousands, except par value amounts)
June 30,
2012
 
December 31,
2011
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
 
 
 
Current Liabilities:
 
 
 
Short-term borrowings
$
21,305

 
$
1,794

Accounts payable
48,606

 
41,806

Accrued compensation and related costs
79,153

 
96,440

Self-insured risks
16,707

 
18,817

Income taxes payable
2,672

 
292

Deferred income taxes
7,532

 
7,287

Deferred rent
15,150

 
15,820

Other accrued liabilities
41,295

 
36,104

Deferred revenues
53,788

 
53,844

Mandatory contributions due to pension plan
21,700

 
13,800

Current installments of long-term debt and capital leases
155

 
410

Total Current Liabilities
308,063

 
286,414

Noncurrent Liabilities:
 
 
 
Long-term debt and capital leases, less current installments
209,643

 
211,983

Deferred revenues
27,214

 
27,856

Self-insured risks
12,897

 
10,114

Accrued pension liabilities, less current mandatory contributions
101,606

 
120,195

Other noncurrent liabilities
16,889

 
16,808

Total Noncurrent Liabilities
368,249

 
386,956

Shareholders’ Investment:
 
 
 
Class A common stock, $1.00 par value; 50,000 shares authorized; 29,568 and 29,086 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
29,568

 
29,086

Class B common stock, $1.00 par value; 50,000 shares authorized; 24,690 and 24,697 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
24,690

 
24,697

Additional paid-in capital
33,899

 
33,969

Retained earnings
222,901

 
209,323

Accumulated other comprehensive loss
(161,393
)
 
(163,603
)
Shareholders' Investment Attributable to Shareholders of Crawford & Company
149,665

 
133,472

Noncontrolling interests
5,132

 
4,816

Total Shareholders’ Investment
154,797

 
138,288

TOTAL LIABILITIES AND SHAREHOLDERS’ INVESTMENT
$
831,109

 
$
811,658

*    Derived from the audited Consolidated Balance Sheet
(See accompanying notes to condensed consolidated financial statements)

7


CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

 
Six Months Ended June 30,
(In thousands)
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
Net income
$
16,912

 
$
25,581

Reconciliation of net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
16,246

 
15,856

Stock-based compensation
1,339

 
1,483

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
Accounts receivable, net
(24,803
)
 
(33,696
)
Unbilled revenues, net
(26,929
)
 
(7,564
)
Accrued or prepaid income taxes
2,367

 
5,604

Accounts payable and accrued liabilities
(2,168
)
 
(17,780
)
Deferred revenues
(519
)
 
1,996

Accrued retirement costs
(8,057
)
 
(22,985
)
Prepaid expenses and other operating activities
(833
)
 
(1,701
)
Net cash used in operating activities
(26,445
)
 
(33,206
)
 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Acquisitions of property and equipment
(8,302
)
 
(6,175
)
Proceeds from disposals of property and equipment
47

 
40

Capitalization of computer software costs
(8,285
)
 
(5,766
)
Payments for business acquisitions, net of cash acquired

 
(6,874
)
Net cash used in investing activities
(16,540
)
 
(18,775
)
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
Cash dividends paid
(2,763
)
 
(2,139
)
Shares used to settle withholding taxes under stock-based compensation plans
(896
)
 
(1,645
)
Repurchases of common stock
(205
)
 

Increases in short-term borrowings
42,164

 
15,268

Payments on short-term borrowings
(21,599
)
 
(14,144
)
Payments on long-term debt and capital lease obligations
(4,352
)
 
(3,422
)
Other financing activities
(328
)
 
20

Net cash provided by (used in) financing activities
12,021

 
(6,062
)
 
 
 
 
Effects of exchange rate changes on cash and cash equivalents
(994
)
 
1,709

Decrease in cash and cash equivalents
(31,958
)
 
(56,334
)
Cash and cash equivalents at beginning of year
77,613

 
93,540

Cash and cash equivalents at end of period
$
45,655

 
$
37,206

(See accompanying notes to condensed consolidated financial statements)

8


CRAWFORD & COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’  INVESTMENT

Unaudited
(In thousands)
 
Common Stock
 
 
 
 
 
                   Accumulated
 
Shareholders' Investment Attributable to
 
 
 
 
2012
Class A
Non-Voting
 
Class B
Voting
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Other
Comprehensive
Loss
 
 Shareholders of
Crawford &
Company
 
Noncontrolling
Interests
 
Total
Shareholders'
Investment
 
 
Balance at January 1, 2012
$
29,086

 
$
24,697

 
$
33,969

 
$
209,323

 
$
(163,603
)
 
$
133,472

 
$
4,816

 
$
138,288

Net income

 

 

 
6,065

 

 
6,065

 
155

 
6,220

Other comprehensive loss

 

 

 

 
(1,410
)
 
(1,410
)
 
(153
)
 
(1,563
)
Cash dividends paid

 

 

 
(1,380
)
 

 
(1,380
)
 

 
(1,380
)
Stock-based compensation

 

 
404

 

 

 
404

 

 
404

Common stock activity, net
474

 

 
(1,356
)
 

 

 
(882
)
 

 
(882
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2012
29,560

 
24,697

 
33,017

 
214,008

 
(165,013
)
 
136,269

 
4,818

 
141,087

Net income


 


 


 
10,425

 

 
10,425

 
267

 
10,692

Other comprehensive income

 

 

 

 
3,620

 
3,620

 
47

 
3,667

Cash dividends paid

 

 

 
(1,383
)
 

 
(1,383
)
 

 
(1,383
)
Stock-based compensation

 

 
935

 

 

 
935

 

 
935

Common stock activity, net
8

 
(7
)
 
(53
)
 
(149
)
 

 
(201
)
 

 
(201
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2012
$
29,568

 
$
24,690

 
$
33,899

 
$
222,901

 
$
(161,393
)
 
$
149,665

 
$
5,132

 
$
154,797

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
                   Accumulated
 
Shareholders' Investment Attributable to
 
 
 
 
2011
Class A
Non-Voting
 
Class B
Voting
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Other
Comprehensive
Loss
 
 Shareholders of
Crawford &
Company
 
Noncontrolling
Interests
 
Total
Shareholders'
Investment
 
 
Balance at January 1, 2011
$
28,002

 
$
24,697

 
$
32,348

 
$
168,791

 
$
(164,322
)
 
$
89,516

 
$
5,715

 
$
95,231

Net income (loss)

 

 

 
12,147

 

 
12,147

 
(220
)
 
11,927

Other comprehensive income (loss)

 

 

 

 
2,717

 
2,717

 
(433
)
 
2,284

Cash dividends paid

 

 

 
(1,069
)
 

 
(1,069
)
 

 
(1,069
)
Stock-based compensation

 

 
370

 

 

 
370

 

 
370

Common stock activity, net
780

 

 
(2,432
)
 

 

 
(1,652
)
 

 
(1,652
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2011
28,782

 
24,697

 
30,286

 
179,869

 
(161,605
)
 
102,029

 
5,062

 
107,091

Net income (loss)


 


 


 
13,469

 

 
13,469

 
185

 
13,654

Other comprehensive income

 

 

 

 
10,743

 
10,743

 
15

 
10,758

Cash dividends paid

 

 

 
(1,070
)
 

 
(1,070
)
 

 
(1,070
)
Stock-based compensation

 

 
1,113

 

 

 
1,113

 

 
1,113

Common stock activity, net
13

 

 
20

 

 

 
33

 

 
33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2011
$
28,795

 
$
24,697

 
$
31,419

 
$
192,268

 
$
(150,862
)
 
$
126,317

 
$
5,262

 
$
131,579

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(See accompanying notes to condensed consolidated financial statements)

9

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Based in Atlanta, Georgia, Crawford & Company (the “Company”) is the world's largest independent provider of claims management solutions to the risk management and insurance industry as well as to self-insured entities, with an expansive global network serving clients in more than 70 countries. The Crawford System of Claims Solutions® 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 Company's two classes of stock are substantially identical, except with respect to voting rights and the Company's ability to pay greater cash dividends on the Class A Common Stock than on the Class B Common Stock, subject to certain limitations. In addition, with respect to mergers or similar transactions, holders of Class A Common Stock must receive the same type and amount of consideration as holders of Class B Common Stock, unless approved by the holders of 75% of the Class A Common Stock, voting as a class. The Company's website is www.crawfordandcompany.com. The information contained on the Company's website is not a part of, and is not incorporated by reference into, this report.

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”). Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The financial statements of the Company's international subsidiaries, other than those in Canada and the Caribbean, are included in the Company's condensed 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 preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There have been no material changes to our significant accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the three months and six months ended, and our financial position as of, June 30, 2012 are not necessarily indicative of the results or financial position that may be expected for the year ending December 31, 2012 or for other future periods.
In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current presentation. Significant intercompany transactions have been eliminated in consolidation.
The Condensed Consolidated Balance Sheet information presented herein as of December 31, 2011 has been derived from the audited consolidated financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
The Company consolidates the liabilities of its deferred compensation plan and the related assets, which are held in a rabbi trust and considered a variable interest entity ("VIE") of the Company. The rabbi trust was created to fund the liabilities of the Company's deferred compensation plan. The Company is considered the primary beneficiary of the rabbi trust because the Company directs the activities of the trust and can use the assets of the trust to satisfy the liabilities of the Company's deferred compensation plan. At June 30, 2012 and December 31, 2011, the liabilities of the deferred compensation plan were $10,487,000 and $9,835,000, respectively, which represent an obligation of the Company rather than of the rabbi trust, and the values of the assets held in the related rabbi trust were $14,697,000 and $14,446,000, respectively. These liabilities and assets are included in "Other noncurrent liabilities" and "Other noncurrent assets," respectively, on the Company's Condensed Consolidated Balance Sheets.


10

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. Adoption of New Accounting Standards
Fair Value Measurement
On May 12, 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS," which amends Accounting Standards Codification ("ASC") 820, "Fair Value Measurement" to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards ("IFRS"). The amendments in this update clarify how fair value should be measured for financial reporting purposes. The update does not require additional assets or liabilities to be measured at fair value or change when fair value measurements should be applied. The amendments were effective for the Company beginning January 1, 2012, and were required to be applied prospectively.
The adoption of ASU 2011-04 did not have any impact on the Company's results of operations, financial condition, or cash flows. See Note 5 for a discussion of our fair value measurements.
Comprehensive Income
On June 16, 2011, the FASB issued ASU 2011-05, "Presentation of Comprehensive Income," which amends ASC 220, "Comprehensive Income," requiring most entities to present items of net income and other comprehensive income either in one continuous statement - referred to as the statement of comprehensive income - or in two separate, but consecutive, statements of net income and comprehensive income. The option to present items of other comprehensive income in the statement of changes in shareholders' equity has been eliminated. The new requirements do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income. Also, the earnings per share computation does not change and continues to be based on net income. The Company adopted ASU 2011-05 effective January 1, 2012, using two separate statements of net income and comprehensive income.

3. Net Income Attributable to Shareholders of Crawford & Company per Common Share
We compute earnings per share of Class A Common Stock ("CRDA") and Class B Common Stock ("CRDB") using the two-class method which allocates the undistributed earnings for each period to each class on a proportionate basis. The Company's Board of Directors has the right, but not the obligation, to declare higher dividends on CRDA than on CRDB, subject to certain limitations. In periods when the dividend is the same for CRDA and CRDB or when no dividends are declared or paid to either class, the two-class method generally will yield the same earnings per share for CRDA and CRDB. During each of the first two quarters of 2012, the Board of Directors declared a higher dividend on CRDA than on CRDB.
The computations of basic net income attributable to shareholders of Crawford & Company per common share were as follows:

 
Three months ended
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
(in thousands, except earnings per share)
CRDA
CRDB
 
CRDA
CRDB
 
CRDA
CRDB
 
CRDA
CRDB
Earnings per share - basic:
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
4,928

$
4,114

 
$
6,674

$
5,725

 
$
7,462

$
6,265

 
$
12,595

$
10,882

Dividends paid
889

494

 
576

494

 
1,775

988

 
1,151

988

Net income available to common shareholders, basic
5,817

4,608

 
7,250

6,219

 
9,237

7,253

 
13,746

11,870






 




 




 




Denominator:




 




 




 




Weighted-average common shares outstanding, basic
29,585

24,696

 
28,788

24,697

 
29,417

24,697

 
28,587

24,697

Earnings per share - basic
$
0.20

$
0.19

 
$
0.25

$
0.25

 
$
0.31

$
0.29

 
$
0.48

$
0.48


11

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The computations of diluted net income attributable to shareholders of Crawford & Company per common share were as follows:
 
Three months ended
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
(in thousands, except earnings per share)
CRDA
CRDB
 
CRDA
CRDB
 
CRDA
CRDB
 
CRDA
CRDB
Earnings per share - diluted:
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
Allocation of undistributed earnings
$
4,977

$
4,065

 
$
6,722

$
5,677

 
$
7,532

$
6,195

 
$
12,692

$
10,785

Dividends paid
889

494

 
576

494

 
1,775

988

 
1,151

988

Net income available to common shareholders, diluted
5,866

4,559

 
7,298

6,171

 
9,307

7,183

 
13,843

11,773

 
 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
Number of shares used in basic earnings per share computation
29,585

24,696

 
28,788

24,697

 
29,417

24,697

 
28,587

24,697

Weighted-average effect of dilutive securities
661


 
455


 
613


 
480


 
30,246

24,696

 
29,243

24,697

 
30,030

24,697

 
29,067

24,697

Earnings per share - diluted
$
0.19

$
0.18

 
$
0.25

$
0.25

 
$
0.31

$
0.29

 
$
0.48

$
0.48

Listed below are the shares excluded from the denominator in the above computation of diluted earnings per share for CRDA because their inclusion would have been antidilutive:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Shares underlying stock options excluded due to the options' respective exercise prices being greater than the average market price during the period
1,144
 
1,111
 
1,179
 
1,388
Performance stock grants excluded because performance conditions had not been met (1)
1,027
 
1,015
 
1,027
 
1,015
(1) Compensation cost is recognized for these performance stock grants based on expected achievement rates, however no consideration is given for these performance stock grants when calculating earnings per share until the performance measurements have actually been achieved. The performance goals for approximately 390,000 of the Company's outstanding performance stock grants as of June 30, 2012 are expected to be achieved by December 31, 2012, provided certain performance conditions are met.
The following table details additional shares issued during the three months and six months ended June 30, 2012 and June 30, 2011. These shares are included in the weighted-average common shares used to compute basic earnings per share for CRDA in the table above.
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
CRDA issued under non-employee director stock plan
7

 
5

 
58

 
64

CRDA issued under the U.K. ShareSave Scheme
2

 
8

 
8

 
8

CRDA issued upon vesting of performance shares
50

 

 
467

 
721



12

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In May 2012, the Board of Directors authorized a share repurchase program under which the Company may repurchase 2,000,000 shares of its common stock (either CRDA or CRDB or both) until May 2015. Under the repurchase program, which replaces Crawford's prior program, repurchases may be made in open market or privately negotiated transactions at such times and for such prices as management deems appropriate, subject to applicable regulatory guidelines. Through June 30, 2012, we have repurchased 50,000 shares of CRDA and 7,000 shares of CRDB at an average cost of $3.60 and $3.83 per share, respectively.

4. Derivative Instruments
The Company attempts to manage a portion of its exposure to the impact of interest rate changes by entering into interest rate swap agreements from time to time. The Company currently has a forward-starting interest rate swap agreement with a notional amount of $85,000,000, which expires September 30, 2012. At June 30, 2012 and December 31, 2011, the fair value of the Company's interest rate swap was a liability of $226,000 and $667,000, respectively. As a result of entering a new credit facility in December 2011, this interest rate swap was discontinued as a cash flow hedge of exposure to changes in interest rates. Accordingly, changes to the fair value of this swap agreement are recorded by the Company as an interest expense adjustment rather than a component of the Company's accumulated other comprehensive loss. Such amount was insignificant for the three months and six months ended June 30, 2012 and 2011. Because it is still probable that the forecasted transactions that were hedged will occur, the amount recorded in accumulated other comprehensive loss as of the hedge discontinuance date related to the interest rate swap agreement will be reclassified into earnings as an increase to interest expense over the remaining life of the interest rate swap agreement as the forecasted transactions occur.
The effective portions of the pretax losses on the Company’s interest-rate swap derivative instruments are categorized in the tables below:
 
Loss Recognized in
 
 
 
Accumulated Other
 
Loss Reclassified from
 
Comprehensive Loss (“OCL”) on
 
Accumulated OCL into Income -
(in thousands)
Derivative - Effective Portion
 
Effective Portion (1)
Three Months Ended June 30,
2012
 
2011
 
2012
 
2011
Cash Flow Hedging Relationship:
 

 
 

 
 

 
 

Interest rate hedge
$

 
$
431

 
$

 
$
226

Interest Rate Swap Discontinued as a Cash Flow Hedge

 

 
226

 

 
 
 
 
 
 
 
 
 
Loss Recognized in Accumulated
 
Loss Reclassified from
 
OCL on Derivative -
 
Accumulated OCL into Income -
(in thousands)
Effective Portion
 
Effective Portion (1)
Six Months Ended June 30,
2012
 
2011
 
2012
 
2011
Cash Flow Hedging Relationship:
 
 
 
 
 
 
 
Interest rate hedge
$

 
$
498

 
$

 
$
462

Interest Rate Swap Discontinued as a Cash Flow Hedge

 

 
452

 

 
 
 
 
 
 
 
 
___________________________________________
(1)The losses reclassified from accumulated OCL into income (effective portion) are reported in "Corporate interest expense" in the Company’s unaudited Condensed Consolidated Statements of Income.
The balances and changes in accumulated OCL related to the effective portions of the Company’s interest rate hedge for the three-month and six-month periods ended June 30, 2012 and 2011 were as follows:
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Amount in accumulated OCL at beginning of period for effective portion of interest rate hedge, net of tax
$
(274
)
 
$
(766
)
 
$
(414
)
 
$
(871
)
Loss reclassified into income, net of tax
140

 
140

 
280

 
286

Loss recognized during period, net of tax

 
(267
)
 

 
(308
)
Amount in accumulated OCL at end of period for effective portion of interest rate hedge, net of tax
$
(134
)
 
$
(893
)
 
$
(134
)
 
$
(893
)
 
 

 
 

 
 
 
 

13

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In February 2011, the Company entered into a U.S. dollar and Canadian dollar ("CAD") cross currency basis swap with an initial notional amount of CAD34,749,000 as an economic hedge to an intercompany note payable by our Canadian subsidiary to the U.S. parent. The cross currency basis swap requires the Canadian subsidiary to deliver quarterly payments of CAD589,000 to the counterparty and entitles the U.S. parent to receive quarterly payments of U.S. $593,000. The Canadian subsidiary also makes interest payments to the counterparty based on 3-month Canada Bankers Acceptances plus a spread, and the U.S. parent receives payments based on U.S. 3-month LIBOR. The cross currency basis swap expires on September 30, 2025. We have not elected to designate this swap as a hedge of the intercompany note from our Canadian subsidiary. Accordingly, changes in the fair value of this swap are recorded as gains or losses in "Selling, general and administrative expenses" in the Company’s unaudited Condensed Consolidated Statements of Income over the term of the swap and are expected to substantially offset changes in the value of the intercompany note. The changes in the fair value of the cross currency basis swap will not totally offset changes in the value of the intercompany note as the fair value of this swap is determined based on forward rates while the value of the intercompany note is determined based on end of period spot rates. The fair value of the cross currency basis swap was a net asset of $77,000 at June 30, 2012 and a net liability of $49,000 at December 31, 2011.
The Company’s swap agreements contain provisions providing that if the Company is in default under its credit facility, the Company may also be deemed to be in default under its swap agreements. If there were such a default, the Company could be required to contemporaneously settle some or all of the obligations under the swap agreements at values determined at the time of default. At June 30, 2012, no such default existed and the Company had no assets posted as collateral under its swap agreements.

5. Fair Value Measurements
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
 
 
 
Fair Value Measurements at June 30, 2012
 
 
 
 
 
 
Significant Other
 
Significant
 
 
 
 
Quoted Prices in
 
Observable
 
Unobservable
 
 
 
 
Active Markets
 
Inputs
 
Inputs
(in thousands)
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
47

 
$
47

 
$

 
$

Derivative not designated as hedging instrument:
 
 
 
 
 
 
 
 
Cross currency basis swap (2)
 
77

 

 
77

 

Liabilities:
 
 
 
 
 
 
 
 
Derivative not designated as hedging instrument:
 
 
 
 
 
 
 
 
Interest rate swap (3)
 
226

 

 
226

 

________________________________________________
(1)
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 Condensed Consolidated Balance Sheets as "Cash and cash equivalents."
(2)
The fair value of the cross currency basis swap was derived from a discounted cash flow analysis based on the terms of the contract and the forward curves for interest rates adjusted for the Company’s credit risk. The fair value of the cross currency basis swap is included in "Other noncurrent assets" on the Company’s Condensed Consolidated Balance Sheets, based upon the term of the cross currency basis swap.
(3)
The fair value of the interest rate swap was derived from a discounted cash flow analysis based on the terms of the contract and the forward interest rate curve adjusted for the Company’s credit risk. The fair value of the interest rate swap is included in "Other accrued liabilities" on the Company’s Condensed Consolidated Balance Sheets, based upon the remaining term of the instrument.

Fair Value Disclosures
The fair values of accounts receivable, unbilled revenues, accounts payable and short-term borrowings approximate their respective carrying values due to the short-term maturities of these instruments.

14

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. Defined Benefit Pension Plans
Net periodic benefit cost related to the Company’s defined benefit pension plans for the three months and six months ended June 30, 2012 and 2011 included the following components:
 
 
Three months ended
 
Six months ended
(in thousands)
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Service cost
 
$
543

 
$
665

 
$
1,075

 
$
1,299

Interest cost
 
8,729

 
8,940

 
17,391

 
17,768

Expected return on assets
 
(10,577
)
 
(10,308
)
 
(21,055
)
 
(20,486
)
Amortization of transition obligation
 
11

 
12

 
22

 
23

Amortization of actuarial loss
 
2,389

 
2,740

 
4,767

 
5,441

Net periodic benefit cost
 
$
1,095

 
$
2,049

 
$
2,200

 
$
4,045


For the three-month period ended June 30, 2012, the Company made contributions of $4,556,000 and $1,682,000, respectively, to its underfunded U.S. and U.K. defined benefit pension plans, compared with contributions of $0 and $1,750,000, respectively, for the comparable period in 2011. For the six-month period ended June 30, 2012, the Company made contributions of $4,556,000 and $3,357,000, respectively, to its underfunded U.S. and U.K. defined benefit pension plans, compared with contributions of $20,000,000 and $3,458,000, respectively, for the comparable period in 2011.

7. Income Taxes
The Company’s consolidated effective income tax rate may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from the Company’s various domestic and international operations which are subject to income taxes at different rates, the Company’s ability to utilize net operating loss and tax credit carryforwards, and amounts related to uncertain income tax positions. At June 30, 2012, the Company estimates that its effective annual income tax rate for 2012 will be approximately 37% to 39% before considering discrete items. The effective rate has increased during 2012 primarily due to changes in the mix of income.


15

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8. Segment Information
Financial information for the three months and six months ended June 30, 2012 and 2011 related to the Company’s reportable segments, including a reconciliation from segment operating earnings to income before income taxes, the most directly comparable GAAP financial measure, is presented below.
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Revenues:
 
 
 
 
 
 
 
Americas
$
77,575

 
$
95,732

 
$
155,099

 
$
181,049

EMEA/AP
93,820

 
87,271

 
175,610

 
167,046

Broadspire
59,964

 
57,910

 
120,353

 
117,706

Legal Settlement Administration
62,488

 
50,800

 
110,538

 
110,950

Total Segment Revenues before Reimbursements
293,847

 
291,713

 
561,600

 
576,751

Reimbursements
25,169

 
22,369

 
44,762

 
41,439

Total Revenues
$
319,016

 
$
314,082

 
$
606,362

 
$
618,190

 
 
 
 
 
 
 
 
Operating Earnings (Loss):
 
 
 
 
 
 
 
Americas
$
1,407

 
$
10,195

 
$
895

 
$
13,309

EMEA/AP
11,757

 
7,627

 
17,365

 
14,779

Broadspire
(338
)
 
(3,099
)
 
(201
)
 
(6,259
)
Legal Settlement Administration
15,792

 
14,758

 
26,475

 
31,756

Total Segment Operating Earnings
28,618

 
29,481

 
44,534

 
53,585

 
 
 
 
 
 
 
 
Deduct:
 
 
 
 
 
 
 
Unallocated corporate and shared costs, net
(4,662
)
 
(4,043
)
 
(6,186
)
 
(4,393
)
Net corporate interest expense
(2,387
)
 
(4,118
)
 
(4,556
)
 
(8,254
)
Stock option expense
(123
)
 
(142
)
 
(245
)
 
(297
)
Amortization of customer-relationship intangible assets
(1,600
)
 
(1,519
)
 
(3,198
)
 
(3,018
)
Special charges
(1,571
)
 

 
(2,461
)
 

Income before Income Taxes
$
18,275

 
$
19,659

 
$
27,888

 
$
37,623

Intersegment transactions are not material for any period presented.
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 represent segment earnings (loss) before certain unallocated corporate and shared costs and credits, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, special charges, income taxes, and net income or loss attributable to noncontrolling interests.
Segment operating earnings include allocations of certain corporate and shared costs. If the Company changes its allocation methods or changes the types of costs that are allocated to its four operating segments, prior period results are adjusted to reflect the current allocation process.



16

CRAWFORD & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Revenues by major service line in the U.S. and by area for other regions in the Americas segment and by major service line for the Broadspire segment are shown in the following table. It is not practicable to provide revenues by service line for the EMEA/AP segment. Legal Settlement Administration considers all of its revenues to be derived from one service line.
 
Three months ended
 
Six months ended
(in thousands)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Americas
 
 
 
 
 
 
 
U.S. Claims Field Operations
$
26,774

 
$
30,571

 
$
53,609

 
$
58,628

Contractor Connection
6,931

 
6,029

 
12,606

 
11,908

U.S. Technical Services
7,092

 
8,451

 
14,262

 
16,986

U.S. Catastrophe Services
5,461

 
10,014

 
9,158

 
15,625

Subtotal U.S. Property & Casualty
46,258

 
55,065

 
89,635

 
103,147

Canada--all service lines
28,614

 
36,322

 
58,905

 
70,820

Latin America/Caribbean--all service lines
2,703

 
4,345

 
6,559

 
7,082

Total Americas
$
77,575

 
$
95,732

 
$
155,099

 
$
181,049

 
 
 
 
 
 
 
 
Broadspire
 
 
 
 
 
 
 
Workers Compensation and Liability Claims Management
$
25,010

 
$
24,362

 
$
50,117

 
$
49,799

Medical Management
30,929

 
29,273

 
62,205

 
59,160

Risk Management Information Services
4,025

 
4,275

 
8,031

 
8,747

Total Broadspire
$
59,964

 
$
57,910

 
$
120,353

 
$
117,706


9. Commitments and Contingencies
As part of the Company’s credit facility, the Company maintains a letter of credit facility to satisfy certain of its own contractual requirements. At June 30, 2012, the aggregate committed amount of letters of credit outstanding under the credit facility was $18,837,000.
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 in the past brought, and may in the future bring, 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 known claims are of the type covered by insurance maintained by the Company. However, the Company is responsible for the deductibles and any self-insured retentions under various insurance coverages. In the opinion of Company management, adequate provisions have been made for such known and foreseeable 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. 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.

10. Special Charges
The Company is in the process of outsourcing certain aspects of its U.S. technology infrastructure to third-party providers. Special charges of $1,571,000 and $2,461,000 were incurred in the quarter and six months ended June 30, 2012 for severance costs, stay bonuses and certain other expenses in order to effect this transition. At June 30, 2012, $1,206,000 of these costs were accrued in "Accrued compensation and related costs" and $504,000 of these costs were accrued in "Accounts payable" in the accompanying unaudited Condensed Consolidated Balance Sheets. The Company expects to pay these accrued liabilities and to incur an additional $300,000 of special charges in the third quarter of 2012 related to this transition.
There were no special charges during the three months or six months ended June 30, 2011.


17


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of
Crawford & Company
We have reviewed the condensed consolidated balance sheet of Crawford & Company as of June 30, 2012, and the related condensed consolidated statements of income, comprehensive income, and shareholders' investment for the three-month and six-month periods ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2012 and 2011. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Crawford & Company as of December 31, 2011, and the related consolidated statements of operations, shareholders' investment, noncontrolling interests, and comprehensive income (loss), and cash flows for the year then ended (not presented herein) and in our report dated March 2, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011