UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 10-K

 

Commission file number 1-10356.

CRAWFORD & COMPANY
(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code
(404) 300-1000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 (§ 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 o     No o

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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 aggregate market value of the Registrant’s voting and non-voting common stock held by non-affiliates of the Registrant was $109,660,997 as of June 30, 2009, based upon the closing prices of such stock as reported on the NYSE on such date. For purposes hereof, beneficial ownership is determined under rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934, and excludes voting and non-voting common stock that may be deemed beneficially owned by the directors and executive officers of the Registrant, some of whom may not be deemed to be affiliates upon judicial determination.

 

The number of shares outstanding of each of the Registrant’s classes of common stock, as of March 1, 2010, was:

Class A Common Stock — $1.00 Par Value — 27,654,905 Shares
Class B Common Stock — $1.00 Par Value — 24,697,172 Shares

 

Documents incorporated by reference:

 

Portions of the Registrant’s Proxy Statement for its annual shareholders’ meeting to be held May 4, 2010 are incorporated by reference into Part III hereof.

 

 

CRAWFORD & COMPANY

FORM 10-K
For The Year Ended December 31, 2009

Table of Contents

 

We use the terms “Crawford”, “the Company”, “the Registrant”, “we”, “us” and “our” to refer to the business of Crawford & Company and its subsidiaries.

 

Cautionary Statement Concerning Forward-Looking Statements

 

This report contains and incorporates by reference forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Exchange Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Statements contained in this report that are not statements of historical fact are forward-looking statements made pursuant to the “safe harbor” provisions thereof. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, case volumes, profitability, contingencies, and capital resources. The words “anticipate”, “believe”, “could”, “would”, “should”, “estimate”, “expect”, “intend”, “may”, “plan”, “goal”, “strategy”, “predict”, “project”, “will” and similar terms and phrases identify forward-looking statements in this report and in the documents incorporated by reference in this report. These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” and elsewhere in this report and those described from time to time in our reports filed with the Securities and Exchange Commission.

 

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations and the forward-looking statements related to our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. You should not place undue reliance on any forward-looking statements. Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements. Forward-looking statements speak only as of the date they are made and we undertake no obligation to publicly update any of these forward-looking statements in light of new information or future events.

 

 

Headquartered in Atlanta, Georgia, Crawford & Company, founded in 1941, is the world’s largest (based on annual revenues) independent provider of claims management solutions to insurance companies and self-insured entities, with a global network of more than 700 locations in 63 countries. The Crawford System of Claims Solutions^sm offers comprehensive integrated claims services, business process outsourcing and consulting services for major product lines including property and casualty claims management, warranty inspection, workers’ compensation claims and medical management, and legal settlement administration, including class action and bankruptcy administration, as well as risk management information services.

 

DESCRIPTION OF SERVICES

 

The Registrant has four operating segments: U.S. Property & Casualty, which serves the U.S. property and casualty insurance company and product warranty and inspection markets; 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 settlements market.

 

Revenues and expenses from the Company’s subsidiaries outside of the U.S., Canada and the Caribbean are reported and consolidated on a two-month delayed basis in accordance with the provisions of Accounting Standards Codification 810, “Consolidation,” in order to provide sufficient time for accumulation of their results and, accordingly, the Registrant’s December 31, 2009, 2008, and 2007 consolidated financial statements include the financial position of such subsidiaries as of October 31, 2009, 2008, and 2007, respectively, and the results of those subsidiaries’ operations and cash flows for the 12-month periods ended October 31, 2009, 2008, and 2007, respectively.

 

In the normal course of the Registrant’s business, it sometimes incurs certain out-of-pocket expenses that are reimbursed by its clients. Under U.S. generally accepted accounting principles (“GAAP”), these out-of-pocket expenses and associated reimbursements are required to be included when reporting revenues and expenses in the Registrant’s consolidated statements of income. However, because the amounts of reimbursed expenses and related revenues offset each other in the accompanying consolidated statements of income with no impact to net income, management does not necessarily believe it is informative or beneficial to include these amounts in revenues or expenses, respectively. In addition, unless otherwise indicated, revenue amounts for each of our operating segments described herein exclude reimbursements for out-of-pocket expenses and expense amounts exclude reimbursed out-of-pocket expenses, income taxes, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, certain other gains and expenses, and unallocated corporate and shared costs.

 

The percentages of the Registrant’s total revenues before reimbursements derived from each operating segment is shown in the following schedule:

 

 

U.S. PROPERTY & CASUALTY.  The Registrant’s U.S. Property & Casualty segment provides claims management services in the U.S. mainly to insurance companies, which customarily manage their own claims administration function, but often rely upon third party service providers for the various services which the

Registrant provides, primarily with respect to the field investigation and evaluation of property and casualty insurance claims.

 

Since its inception, quality has been a cornerstone of the Company, and the Registrant’s current quality program is integral to its operations. The Registrant approaches each claim with significant importance, and strives to differentiate itself by focusing on service quality, and quick and fair claims resolution on all claims. To achieve its quality goals, the Registrant has:

 

 

U.S. Property & Casualty services are provided through four major service lines; Claims Field Operations, Catastrophe Services. Technical Services and Contractor Connection.

 

Claims Field Operations

 

Claims Field Operations is the largest service line of our U.S. Property & Casualty segment. Services provided by Claims Field Operations include property claims management, casualty claims management, vehicle services and strategic warranty services.

 

Property Claims Management Services — Property claims management services are designed to service all types of losses. Upon assignment, the Registrant assembles a team of claims professionals, consultants, and project management specialists, as needed, to evaluate and, if appropriate settle a claim, and prevent further loss. The Registrant maintains an extensive network of property and general adjusters in order to service assignments efficiently, regardless of location. No matter which service is contracted, the Registrant has designed its strict service standards to deliver quality service on every assignment. Property claims management services include:

 

 

 

 

Casualty Claims Management Services — The Registrant has designed its casualty claims management services to resolve claims quickly, regardless of the adjusting services required. The Registrant provides a comprehensive menu of services ranging from task assignment to investigation and claims resolution. Casualty claims management services include:

 

 

 

Vehicle Services — Our vehicle services are a comprehensive suite of services which can accommodate appraisal needs ranging from private automobiles to tanker trucks or other specialty equipment. These services include:

 

 

Strategic Warranty Services — The Registrant’s Strategic Warranty Services division provides services to manufacturers seeking to outsource all or a portion of their warranty administration and inspection work. On January 1, 2008, the Registrant transferred this division to its U.S. Property & Casualty segment from the Legal Settlement Administration segment. While still performing inspections for a number of building product class action settlements, the division’s product offerings have been expanded to include warranty services for manufacturers of other products, including composite decking, doors, windows, vinyl siding and trim. Inspections include a determination of the extent and compensability of damage incurred primarily related to product liability class action settlements.

 

Catastrophe Services

 

A catastrophe, as defined by the insurance industry, is a disaster that causes a certain dollar amount of damage, generally set at $25 million in insured damage. Individual insurance companies may have their own definitions, and may declare a “catastrophe” based on the anticipated loss to their policyholders in the impacted area. Our Catastrophe Services line is an independent adjusting resource for insurance claim management in response to natural or man-made disasters. We have one of the largest trained and credentialed field forces in the industry. Catastrophe Services utilizes a proprietary response mechanism to ensure quick, effective management of each and every event for our clients. In most cases of catastrophe, an insurance company may want to set up special claims processing centers, establish 24-hour emergency hotlines and send additional, specially trained claims adjusters to the catastrophe scene. These “catastrophe teams” generally arrive as soon as possible and stay as long as they are needed. In the aftermath of any catastrophic event, policyholders and claimants expect fast, responsive service. Catastrophe Services is uniquely equipped to handle the increases in volume, complexity and the additional stress and strain on the system of carrier infrastructure.

 

Technical Services

 

Our Technical Services line is devoted to large, complex claims. Our team of strategic loss managers and technical adjusters are experts with specific experience and industry focus required to evaluate and assess damages under extreme conditions. Our technical adjusting staff function as strategic loss managers, offering the security and confidence that every aspect of loss management will be planned, organized and executed at required levels of industry, technical and regulatory standards.

Contractor Connection

 

Crawford Contractor Connection^sm is the largest independently managed contractor network in the industry, with more than 3,000 residential and commercial contractors in the U.S. and Canada. Contractor Connection offers a cost-effective and worry-free solution for the insurance and consumer industries. This innovative service solution for high-frequency, low severity claims optimizes the time and work process needed to resolve property claims while giving the policyholder peace of mind. Contractor Connection supports our broad business process outsourcing strategy by providing outsourced contractor management to national and regional insurance carriers. Contractor Connection is quality focused and performance driven. All network contractors provide a workmanship warranty for their work. The Contractor Connection five point Quality Assurance Program uses performance management tools to track timeline, efficiency and customer satisfaction, to help deliver a consistent high level of customer satisfaction aligned with the insurance carrier focus on policy holder retention.

 

Insured Risk Categories

 

The claims administration services offered by the U.S. Property & Casualty segment are provided to clients pursuant to a variety of different referral assignments which generally are classified by the underlying insured risk categories, or major types of loss, used by insurance companies. These major risk categories are:

 

 

BROADSPIRE.  Broadspire Services, Inc. (“Broadspire”), a wholly owned subsidiary of the Registrant, is a leading third-party administrator to employers and insurance companies, offering a comprehensive integrated platform of workers’ compensation and liability claims management and medical management services. Through this segment, the Registrant serves clients in the self-insured or commercially insured market by providing them with a complete range of claims and risk management services. In addition to field investigation and claims evaluation, Broadspire also offers initial loss reporting services, loss mitigation services such as medical bill review, medical case management and vocational rehabilitation, administration of trust funds established to pay claims and risk management information services. Broadspire’s services are provided through three major service lines: Claims Management Services, Medical Management Services and Risk Management Information Services.

 

Claims Management Services

 

Worker’s Compensation and Liability Claim Management — Broadspire offers a comprehensive, integrated approach to workers’ compensation and liability claims management. Its service model applies a standardized, streamlined and strategic process designed to shorten claim duration and reduce overall claim costs, while at the same time helping to ensure that covered employees receive any medical or related care they need to enable a healthy and prompt return to work. By combining web-based advanced software with

strategic plans of action, Broadspire can quickly identify and counteract issues that may otherwise delay claim closure. Claims management includes:

 

 

In August 2009, Broadspire completed the first phase of the implementation of RiskTech, a proprietary claims-management system embedded with client instructions, jurisdictional rules and regulations, and Broadspire’s service standards. RiskTech is a rules-based system designed specifically to control claims quality and consistency. Additional phases of RiskTech are planned for implementation in 2010 and 2011. Broadspire also provides e-Triage^®, a proprietary web-based application that addresses core problems such as inconsistency in claim practices and failure to identify complex files early in the life of a claim. By using a multi-tiered interview process backed by a database of research, e-Triage functions as a decision support system that helps claims and medical professionals identify potential complications and recommends actions for management of each individual claim.

 

Medical Management Services

 

Medical Field Case Management — Broadspire’s case managers proactively manage medical treatment while facilitating understanding of, and participation in, the rehabilitation process. These programs aim to help employees recover as quickly as possible in the most cost-effective method. Medical management offerings include:

 

 

Disability — Through its partnerships with leading providers of disability administration, absence management and integrated benefits delivery, Broadspire offers leave of absence, FMLA/state leaves, short-term disability and long-term disability administration programs.

 

Risk and Safety Consulting — Through its relationship with a large, comprehensive loss control firm, Broadspire also offers risk and safety services.

 

Risk Management Information Services

 

The Registrant’s wholly owned subsidiary Risk Sciences Group, Inc. (“RSG”), which reports through the Broadspire segment, is a leading risk management information systems (“RMIS”) software and services company with a history of providing customized risk management solutions to Fortune 1000 companies. RSG’s software is designed for corporate risk managers to consolidate disparate property and casualty claims data to allow them to more accurately analyze and manage their losses and their risk to exposures. RSG’s flagship product, Sigma Encore, is a suite of software applications launched through the RSG portal and is web accessible by users worldwide. Application components include claims administration, exposures, first

notice of loss, policy and property management. Data consolidation and validation services are core to every solution. RSG consolidates data from multiple sources into a single repository and applies proprietary data validation routines. RSG markets these products and services nationally through its sales force directly to corporations and indirectly through its broker channel partners.

 

Insured Risk Categories

 

The claims administration services offered by the Broadspire segment are provided to clients pursuant to similar underlying insured risk categories as our U.S. Property & Casualty segment. Major risk categories for the Broadspire segment are:

 

 

INTERNATIONAL OPERATIONS.  Substantially all of the Registrant’s international revenues are derived from the insurance company market in which it provides field investigation and evaluation of property and casualty insurance claims. The major elements of international claims management services are substantially the same as those provided to U.S. property and casualty insurance company clients by the U.S. Property & Casualty segment. These services are generally classified by the underlying risk categories, or major types of loss, used by insurance companies. The major risk categories and primary related services offered by the Registrant are described below:

 

 

 

For a discussion of certain risks attendant to foreign operations, See “Item 1A — Risk Factors — A significant portion of our operations are international. These international operations face political, legal, operational, exchange rate and other risks not generally present in U.S. operations, and which could negatively affect those operations or our business as a whole.”

 

LEGAL SETTLEMENT ADMINISTRATION.  The Registrant provides legal settlement administration services related to settlements of securities cases, product liability cases, bankruptcy noticing and distribution, and other legal settlements, by identifying and qualifying class members, determining and dispensing settlement payments, and administering the settlement funds. Such services are generally referred to by the Registrant as class action services and are performed by The Garden City Group, Inc. (“GCG”), a wholly owned subsidiary of the Registrant. As of December 31, 2009, GCG had more than 350 employees, including attorneys on staff, in 11 offices throughout the U.S. This diversity of employee base is designed to allow GCG to target or broaden its efforts, as needed, to suit any applicable situation. An executive team, including attorneys with class action, bankruptcy and mass tort litigation experience, guides each project initiative. Since 1984, GCG has been focusing on diligently helping its clients bring their toughest cases to timely, positive conclusions. GCG reinforces its reputation with field-experienced, multi-disciplined and technology-driven teams to support each case with appropriate administrative services and resources. GCG offers:

 

 

Information Technologies — The cornerstone of GCG’s success lies in its case-customizable proprietary software. Engineered and maintained by GCG’s dedicated I.T. team, GCG’s information management and claims settlement processing technologies are designed to sustain the highest level of data integrity in legal administration and claim management. GCG deploys quality assurance tools and techniques to check and balance its output, and its claims processing systems allow for immediate access to case details at any level.

 

Additional financial information regarding each of the Registrant’s segments and geographic areas, including the information required by Item 101(b) of Regulation S-K, is included in Note 10, “Segment and Geographic Information,” to the consolidated financial statements included elsewhere herein.

 

MATERIAL CUSTOMERS

 

For the year ended December 31, 2009, the Registrant did not have consolidated sales to any single customer that exceeded ten percent of total revenue before reimbursement. However, the Registrant’s International Operations segment did derive in excess of ten, but less than fifteen, percent of its revenue from a single customer. The loss of this customer could have a material adverse effect on the results of the International Operations segment. During 2009, we were notified by a major client of our Broadspire segment that the client did not intend to renew its then existing contract with us upon the scheduled expiration of that

contract in December 2009. For the year ended December 31, 2009, revenue related to that client totaled approximately 7.3% of total segment revenues.

 

INTELLECTUAL PROPERTY AND TRADEMARKS

 

While the Registrant’s intellectual property portfolio is an important asset which it expands and protects globally through a combination of trademarks, copyrights and trade secrets, the Registrant does not believe its business as a whole, or any particular segment, is materially dependent upon any one particular trademark, copyright or trade secret. The Registrant owns a number of active trademark applications and registrations, which expire at various times. As the laws of many countries do not protect intellectual property to the same extent as the laws of the United States, the Registrant cannot ensure that it will be able to adequately protect its intellectual property assets outside of the United States.

 

SERVICE DELIVERY

 

The Registrant’s claims management services are offered primarily through its more than 350 locations throughout the U.S. and approximately 350 locations in 62 other countries throughout the rest of the world.

 

COMPETITION

 

The claims services markets, both in the U.S. and internationally, are highly competitive and are comprised of a large number of companies of varying size and offering a varying scope of services. Within these service markets, the Registrant competes primarily based on quality and scope of service offerings, price and geographic location. Competitors include large insurance companies and insurance brokerage firms which, in addition to their primary services of insurance underwriting or insurance brokerage, also often provide services such as claims administration, healthcare and disability management, and risk management information systems. Many of these companies are larger than the Registrant in terms of annual revenues and total assets, and may, at any time, be able to significantly expand their resource allocation in order to more effectively compete with the Company; however, based on experience in the market, the Registrant believes that few, if any, of such organizations derive revenues from independent claims administration activities which equal the Registrant’s.

 

In addition to large insurance companies and insurance brokerage firms, the Registrant competes with a great number of smaller local and regional claims management services firms located throughout the U.S. and internationally. Many of these smaller firms have rate structures that are lower than the Registrant’s or may, in certain markets, have local knowledge which provides them a competitive advantage, but the Registrant does not believe that they offer the broad spectrum of claims management services in the range of locations the Registrant provides and, although such firms may secure business which has a local or regional source, the Registrant believes its quality product offerings, broader scope of services, and large number of geographically dispersed offices provide the Registrant with an overall competitive advantage in securing business from both U.S. and international clients. There are also national independent companies that provide a similar broad spectrum of claims management services and who directly compete with the Registrant.

 

The legal settlement administration market is also highly competitive but comprised of a smaller number of specialized entities. 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. Unfavorable macro-economic events have slowed the pace of overall activity in the class action services market.

 

EMPLOYEES

 

At December 31, 2009, the total number of full-time equivalent employees was 8,852. The Registrant generally considers its relations with its employees to be good. In addition, the Registrant has available a significant number of on-call employees, as and when the demand for services requires, primarily as a result of catastrophic events. The Registrant, through Crawford Educational Services, provides many of its employees with formal classroom training in basic and advanced skills relating to claims administration and healthcare

management services. Such training is generally provided at the Registrant’s education facility in Atlanta, Georgia, although much of the material is also available through correspondence courses and the Internet. In many cases, employees are required to complete these or other professional courses in order to qualify for promotion from their existing positions.

 

In addition to technical training through Crawford Educational Services, the Registrant also provides ongoing professional education for certain of its management personnel on general management, marketing, and sales topics. These programs involve both in-house and external resources.

 

BACKLOG

 

At December 31, 2009 and 2008, our Legal Settlement Administration segment had a backlog of projects awarded totaling $55.0 and $41.9 million, respectively. Additional information regarding this backlog is contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K under the caption “Legal Settlement Administration.”

 

AVAILABLE INFORMATION

 

The Registrant’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after these reports are electronically filed or furnished to the Securities and Exchange Commission on our website, www.crawfordandcompany.com via a link to a third party website with SEC filings. The information contained on, or hyperlinked from, our website is not a part of, nor is it incorporated by reference into, this Annual Report on Form 10-K. Copies of the Company’s annual report will also be made available, free of charge, upon written request to Corporate Secretary, Legal Department, Crawford & Company, 1001 Summit Boulevard, Atlanta, Georgia 30319.

 

 

You should carefully consider the risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other filings with the SEC from time to time when evaluating our business and prospects. Any of the events discussed in the risk factors below may occur. If they do, our business, results of operations or financial condition could be materially adversely affected. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our financial condition or results of operations.

 

We have experienced declines in the volume of cases referred to us for many of our service lines and are unable to determine future trends in case volumes. We depend on case volumes for our revenues, and a continued decline will result in a reduction of revenue.

 

We have experienced declines in the volume of cases referred to us for many of our service lines associated with the property and casualty and self-insurance insurance industry. Because we depend on case volume for revenue streams, future reductions may adversely impact our results of operation and financial condition. We are unable to predict the future of this trend for a number of reasons, including the following:

 

 

 

If our case volume referrals further decline for any of the foregoing, or any other reason, our revenues would decline, which could materially adversely affect our financial condition and results of operations.

 

Our U.S. and United Kingdom (“U.K.”) defined benefit pension plans are significantly underfunded. Future funding requirements, including those imposed by recent and potential regulatory changes, could restrict cash available for our operating, financing and investing requirements.

 

At the end of the most recent measurement periods for our defined benefit pension plans, our projected benefit obligations were underfunded by $216.3 million. The Pension Protection Act of 2006 (the “Act”) (as amended by the Worker, Retiree and Employer Recovery Act of 2008) will require us to make substantial contributions to our frozen U.S. defined benefit pension plan over the next eight years in order for us to meet the “Funding Target Liability” as defined in the Act. In addition, regulatory requirements in the U.K. require us to make additional contributions to our underfunded U.K. defined benefit pension plans. Continued volatility in the capital markets may also have a further negative impact on our U.S. and U.K. pension funds, which may further increase the underfunded portion of our pension plans and our attendant funding obligations. The required contributions to our underfunded defined benefit pension plans will reduce our liquidity, restrict available cash for our operating, financing, and investing needs and may materially adversely effect our financial condition.

 

While we intend to comply with our funding requirements through the use of cash from operations, there can be no assurance that we will generate enough cash to do so. Our inability to fund these obligations through cash from operations could require us to seek funding from other sources, including through borrowings under our Credit Agreement, if available, or proceeds from any debt or equity offerings. There can be no assurance that we would be able to obtain any such external funding in amounts, at times and on terms that we deem commercially reasonable, in order for us to meet these obligations. Furthermore, any of the foregoing could materially increase our outstanding debt or debt service requirements, or dilute the value of the holdings of our current shareholders, as the case may be. Our inability to comply with any funding obligations in a timely manner could materially adversely affect our financial condition.

 

Continued effects from the recent global financial crisis, including economic uncertainty, could further negatively affect our business, results of operations, and financial condition.

 

The recent global financial crisis has affected, among other things, the banking system, financial markets, general economic development, employment levels and, to a lesser extent, some of our insurance company clients. The effects of this crisis have significantly impacted our business, including resulting in reduced claims volumes and revenues. There could be a number of other follow-on effects from the financial crisis on our business, including: insolvency of key clients; the inability of our clients to obtain credit to pay us for the services that we render; counterparty failures negatively impacting our and our clients’ treasury operations; increased expense or inability to obtain financing for our operations; and requirements for us to further materially increase the periodic expense and the funding obligations under our various defined benefit pension plans. We cannot predict the further extent to which any of the foregoing may impact our business, results of operations or financial condition, although it may be material.

We have debt covenants in our Credit Agreement that require us to maintain compliance with certain financial ratios and other requirements. If we are not able to maintain compliance with these requirements, all of our outstanding debt could become immediately due and payable.

 

We are party to a Credit Agreement, along with Crawford & Company International, Inc., the lenders party thereto and SunTrust Bank, as Issuing Bank and Administrative Agent for the Lenders (the “Credit Agreement”). The Credit Agreement contains customary representations, warranties and covenants, including covenants limiting liens, indebtedness, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, restrictions on dividends and distributions, and other fundamental changes. Additionally, the Credit Agreement contains covenants requiring us to remain in compliance with a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum consolidated net worth. The covenants become more restrictive in the future and, if we do not maintain compliance with the covenant requirements, we will be in default under the Credit Agreement. In such an event, the lenders under the Credit Agreement would generally have the right to declare all then-outstanding amounts thereunder immediately due and payable. If we could not obtain a required waiver on satisfactory terms, we could be required to renegotiate the terms of the Credit Agreement or immediately repay this indebtedness. Any such renegotiation could result in less favorable terms, including additional fees, higher interest rates and accelerated payments, and would necessitate significant time and attention of management, which could divert their focus from business operations. While we do not presently expect to be in violation of any of these requirements, no assurances can be given that we will be able to continue to comply with the increasingly restrictive nature thereof. There can be no assurance that our actual financial results will match our projected results or that we will not violate such covenants. Any failure to continue to comply with such requirements could materially adversely affect our borrowing ability and access to liquidity, and thus our overall financial condition.

 

We are subject to potential challenges relating to overtime pay and other regulations that could affect our relationship with our employees, and which could adversely affect our business, financial conditions and results of operations.

 

We are subject to numerous federal, state and foreign employment laws, and from time to time we face, and expect to continue to face, claims by our employees and former employees under such laws. In addition, we have become aware that a number of employers are becoming subject to an increasing number of claims involving alleged violations of wage and hour laws. The outcome 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. We do not know which, or how many, of these allegations will result in litigation and we cannot predict the outcome of any such litigation. Such claims or litigation involving us and any of our current or former employees could divert our management’s time and attention from our business operations and could potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on our results of operations, financial position, and cash flows.

 

The Broadspire segment currently operates on multiple claims platforms. We have begun to consolidate the multiple claims platforms into RiskTech, our proprietary claims platform. While we expect to benefit from certain cost savings and other synergies from migrating to this proprietary platform, no assurances can be provided we will achieve any such benefits.

 

Our Broadspire segment currently utilizes multiple claims adjudication platforms for collection of client data. Broadspire began the process of consolidating these platforms into the RiskTech platform in November 2008. The achievement of operational efficiencies, including reduced costs of maintaining multiple claims platforms, depends upon the successful integration of all claims platforms into RiskTech. The first phase of the consolidation was completed in August 2009. Consolidation of the claims platforms is anticipated to continue through 2011; however, the Registrant cannot guarantee that it will complete the scheduled integration on time, or that, once completed, the integrated platform will provide the expected benefits. Failure to achieve targeted integration goals or the scheduled timeline may adversely affect our results of operations.

We may not be able to identify new revenue sources not directly tied to the insurance underwriting cycle and therefore may be subject to underwriting cycle market risk.

 

The insurance industry has in the past, and may in the future go through a hard market cycle. Indicators of a hard insurance underwriting cycle generally include higher premiums, higher deductibles, lower liability limits, excluded coverages, reservation of rights letters and unpaid claims. During a hard insurance underwriting market, insurance companies typically become very selective in the risks they underwrite and insurance premiums and policy deductibles increase. This often results in a reduction in industry-wide claims volumes, which reduces claim referrals to us unless we can offset the decline in claim referrals with growth in our market share. In softer insurance markets, when insurance premium and deductible levels are generally in decline, industry-wide claim volumes generally increase, which should increase claim referrals to us provided property and casualty insurance carriers do not reduce the number of claims they outsource to independent firms such as ours.

 

We are subject to this insurance underwriting market risk and try to mitigate this risk through the development and marketing of services that are not affected by the insurance underwriting cycle, such as those related to class action and warranty services. However, there can be no assurance that our mitigating efforts will be effective with respect to eliminating or reducing underwriting market risk. To the extent we cannot effectively minimize the risk through diversification, our financial condition and results of operations could be materially adversely impacted in future hard market cycles.

 

We may not be able to develop or acquire necessary I.T. resources to support and grow our business. Our failure to do this could materially adversely affect our business, results of operations and financial condition.

 

We have made substantial investments in software and related technologies that are critical to the core operations of our business. These I.T. resources will require future maintenance and enhancements, potentially at substantial costs. Additionally, these I.T. resources may become obsolete in the future and require replacement, potentially at substantial costs. We may not be able to develop or acquire replacement resources or to identify and acquire new technology resources necessary to support and grow our business. Any failure to do so, or to do so in a timely manner or at a cost considered reasonable by us, could materially adversely affect our business, results of operations and financial condition.

 

A significant portion of our businesses are international. These international operations face political, legal, operational, exchange rate and other risks not generally present in U.S. operations, and which could negatively affect those operations or our business as a whole.

 

Our international operations face political, legal, operational, exchange rate and other risks that we do not face in our domestic operations. We face the risk of discriminatory regulation, nationalization or expropriation of assets, changes in both domestic and foreign laws regarding trade and investment abroad, potential loss of proprietary information due to piracy, misappropriation or laws that may be less protective of our intellectual property rights, price controls and exchange controls or other restrictions that prevent us from transferring funds from these operations out of the countries in which they operate or converting local currencies we hold into U.S. dollars or other currencies.

 

Foreign operations also subject us to numerous additional laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export and anticorruption, including but not limited to the Foreign Corrupt Practices Act. The FCPA prohibits giving anything of value intended to influence government officials. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate any of these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business, financial condition or results of operations.

We operate in highly competitive markets and face intense competition from both established entities and new entrants into those markets. Our failure to compete effectively may adversely affect us.

 

The claims services markets, both in the U.S. and internationally, are highly competitive and are comprised of a large number of companies of varying size and offering a varying scope of services. These include large insurance companies and insurance brokerage firms which, in addition to their primary services of insurance underwriting or insurance brokerage, also provide services such as claims administration, healthcare and disability management, and risk management information systems. Many of these companies are larger than us in terms of annual revenues and total assets, and may be more able to devote significant resources to advertising, marketing and price competition. In addition, we also compete with a great number of smaller local and regional claims management services firms located throughout the U.S. and internationally. Many of these smaller firms have rate structures that are generally lower than ours, or may, in certain markets, have local knowledge that provides them with a competitive advantage. There are also national independent companies that provide a similar broad spectrum of claims management services and who directly compete with us. In addition, we have recently encountered increased pricing pressures from both our clients and competitors, and we expect this trend to continue. In the event we are not able to successfully compete in the markets in which we operate, we could experience an adverse effect on our results of operations, cash flows or financial position.

 

We may not be able to recruit, train, and retain qualified personnel, including retaining a sufficient number of on-call claims adjusters, to respond to catastrophic events that may, singularly or in combination, significantly increase our clients’ needs for adjusters.

 

Our catastrophe revenues can fluctuate dramatically based on the frequency and severity of natural and man-made disasters. When such events happen, our clients usually require a sudden and substantial increase in the need for catastrophic claims services, which can place strains on the capacity of our catastrophe adjusters. Our internal resources are sometimes not sufficient to meet these sudden and substantial increases in demand. When these situations occur, we must retain outside adjusters (temporary employees and contractors) to increase our capacity. There can be no assurance that we will be able to retain such outside adjusters with the requisite qualifications, at the times needed or on terms that we believe are economically reasonable. Insurance companies and other loss adjusting firms also aggressively compete for these independent adjusters, who often command high prices for their services at such times of peak demand. Such competition could reduce availability, increase our costs and reduce our revenues. Our failure to timely, efficiently and competently provide these services to our clients could result in reduced revenues, loss of customer goodwill and a negative impact on our results of operations.

 

Legal Settlement Administration service revenues are project-based and can fluctuate significantly from period to period for any number of reasons, any of which can materially impact our financial condition and results of operations.

 

Our Legal Settlement Administration service revenues are project-based and can fluctuate significantly from period to period. Revenues from this segment are in part dependent on product liability, bankruptcy and securities class action cases and settlements. Legislation or a change in market conditions could curtail, slow or limit growth of this part of our business. Tort reforms in the U.S., both at the national and state levels, could limit the number and size of future class action cases and settlements. Any slowdown in the referral of projects to the Legal Settlement Administration segment or the commencement of services under the projects in any period could materially adversely impact our financial condition and results of operations.

 

We face restrictions and limitations on our ability to, and have not recently paid, cash dividends to our shareholders, which could materially impact the market for, and price of, our common stock.

 

In considering the purchase of common stock, many investors consider the dividend-paying nature of the issuer thereof. We have not, since August 2006, paid dividends on either class of our common stock. The covenants in our Credit Agreement significantly limit our ability to make any dividend payments to shareholders and permit dividends only if certain ratios are met. In addition, if permitted, our Board of

Directors makes dividend decisions based in part on an assessment of current and projected earnings and cash flows. The decision and ability to pay dividends is also impacted by many other factors, including the expected funding requirements for our defined benefit pension plans, future repayments of outstanding borrowings and future levels of cash generated by our operating activities. The significant contractual restrictions, and other matters, which have resulted in the Company not having paid dividends on its outstanding common stock in recent history could reduce the overall market demand for such stock, leading to a reduced price thereof.

 

If we do not protect our proprietary information and technology resources and prevent third parties from making unauthorized use of our products and technology, our financial results could be harmed.

 

We rely on a combination of procedures and patent, trademark and trade secret laws to protect our proprietary information. However, all of these measures afford only limited protection and may be challenged, invalidated or circumvented by third parties. Third parties may copy aspects of our processes, products or materials, or otherwise obtain and use our proprietary information without authorization. Third parties may also develop similar or superior technology independently, including by designing around any of our proprietary technology. Furthermore, the laws of some foreign countries do not offer the same level of protection of our proprietary rights as the laws of the U.S., and we may be subject to unauthorized use of our products in those countries. Any legal action that we may bring to protect proprietary information could be expensive and may distract management from day-to-day operations. Unauthorized copying or use of our products or proprietary information could materially adversely affect us.

 

We are party to lawsuits that could adversely impact our business.

 

In the normal course of the claims administration services business, we are named as a defendant in suits by insureds or claimants contesting decisions by us or our clients with respect to the settlement of claims. Additionally, our clients have periodically brought actions for indemnification on the basis of alleged negligence on our part or on the part of our agents or our employees in rendering service to clients. There can be no assurance that additional lawsuits will not be filed against us. There also can be no assurance that any such lawsuits will not have a disruptive impact upon the operation of our business, that the defense of the lawsuits will not consume the time and attention of our senior management and financial resources or that the resolution of any such litigation will not have a material adverse effect on our business, financial condition and results of operations.

 

The Registrant’s International Operations segment derives a significant portion of its revenue from a single customer. The loss of this customer could have a material adverse effect on the results of the International Operations segment.

 

For the year ended December 31, 2009, our International Operations segment derived in excess of ten, but less than fifteen, percent of its revenue from a single customer. The services provided to this customer vary on a country-by-country basis, and are covered by the terms of various contractual arrangements. Should this customer elect to cease its business relationship with us entirely, such event could have a material adverse effect on the results of the International Operations segment.

 

The risks described above are not the only ones facing the Company, but are the ones currently deemed the most material by us based on available information. New risks may emerge from time to time, and it is not possible for management to predict all such risks, nor can we assess the impact of known risks on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement.

 

 

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following are the names, positions held, and ages of each of the executive officers of the Registrant:

 

 

Mr. Bowman was appointed to his present position with the Registrant on January 1, 2008. From January 1, 2006 to December 31, 2007 he was Executive Vice President and Chief Operating Officer — Global Property and Casualty of the Registrant, and was in charge of the Registrant’s U.S. Property & Casualty and International Operations segments. From April 1, 2001 to December 31, 2005 he was President of Crawford & Company International, Inc. managing the Registrant’s international operations.

 

Mr. Swain was appointed to his present position with the Registrant on October 6, 2006 and from May 2, 2006 acted as interim Chief Financial Officer. Prior to that and from January 1, 2000 he was Senior Vice President and Controller of the Registrant.

 

Mr. Nelson was appointed to his present position with the Registrant on January 7, 2008. From October 17, 2005 through January 6, 2008 he was Executive Vice President — General Counsel and Corporate Secretary of the Registrant. Prior to that and from October 1997 he served in various positions with BellSouth Corporation, a telecommunications company, most recently as Chief Compliance Counsel. In that capacity he was in charge of all legal compliance issues facing BellSouth domestically and internationally.

 

Mr. Frawley was appointed to his present position as CEO — Americas in charge of the Registrant’s U.S. Property & Casualty segment and certain international operations in all the Americas effective January 7, 2008. Prior to that and from February 23, 2005 when he joined the Registrant, he was responsible for the Legal Settlement Administration segment of the Registrant’s business. Prior to joining the Registrant and since 1996 he was Chief Compliance Officer — Insurance Division for Prudential Financial, Inc. which, through its subsidiaries, provides various financial products and services.

Mr. Isaac was appointed to his current position with GCG, a wholly owned subsidiary of the Registrant in October 2006. Prior to that and from February 2000 he was President of GCG.

 

Mr. Martino was appointed to his present position as CEO & President, Broadspire Services, Inc. effective December 29, 2008. Prior to that and from November 27, 2007, when he joined the Registrant, he was President of Broadspire Services, Inc., responsible for operations. Prior to joining the Registrant and since February 1999, he was employed by Specialty Risk Services, a claims administration and risk management services provider, where he served as Senior Vice President, chief financial officer and Senior Vice President — account management.

 

Mr. Muress was appointed to his present position as CEO — EMEA/Asia-Pacific, in charge of the Registrant’s European, Middle Eastern, African and Asia-Pacific operations effective January 7, 2008. Prior to that and from January 2006 he was CEO-EMEA and from August 2002, when he joined the Registrant’s U.K. subsidiary, until January 2006 he was CEO — UK & Ireland, in charge of the Registrant’s operations in the United Kingdom and Ireland.

 

Mr. Gibson was appointed to his present position in charge of Global Strategy, Projects and Development effective January 7, 2008. Prior to that and from January 2006 he was Chief Executive Officer — The Americas, in charge of the international operations for the Registrant in the Americas outside of the United States. From January 2000 to January 2006 he was Chief Executive Officer — Canada in charge of the Registrant’s Canadian operations.

 

Mr. Reeves was appointed to his present position in charge of Global Markets effective January 7, 2008. Prior to that and from November 1, 2004 he was Senior Vice President — Corporate Multinational Risks, responsible for the strategy, sales and account management of the Registrant’s relationship with the Fortune 1000 market. From November 1, 2002 to November 1, 2004 he was Senior Vice President — Technical Services (UK) responsible for the Registrant’s Technical Services business unit in the United Kingdom.

 

Mr. Porter was appointed to his current position January 19, 2005 and was interim Senior Vice President — Claims Management from December 15, 2004. Prior to that and from May 1, 2001 he was Senior Vice President in charge of business development for Claims Management Services.

 

Mr. Flynn was appointed to his present position in charge of the Registrant’s global information technology operation effective December 10, 2007. Prior to joining the Registrant and since May 2001 he was Senior Vice President-Technology of BCD Travel USA, LLC, a travel management company.

 

Ms. Austin was appointed to her present position with the Registrant on April 24, 2006. Prior to joining the Registrant and since October 1998 she was Vice President-Human Resources of D. S. Waters of America LP, a bottled water distributor.

 

Mr. Cormican was appointed to his present position February 15, 2005. Prior to joining the Registrant from August 2002 until February 2005 he was Senior Vice President and Chief Financial Officer of Assurance America Corporation, an insurance holding company.

 

Officers of the Registrant are appointed by the Board of Directors.

 

The Registrant has adopted a Code of Business Conduct and Ethics for its CEO, CFO, principal accounting officer and all other officers, directors and employees of the Registrant. The Code of Business Conduct and Ethics, as well as the Registrant’s Corporate Governance Guidelines and Committee Charters, are available at www.crawfordandcompany.com. Any amendment or waiver of the Code of Business Conduct and Ethics will be posted on this website within four business days after the effectiveness thereof. The Code of Business Conduct and Ethics may also be obtained without charge by writing to Corporate Secretary, Legal Department, Crawford & Company, 1001 Summit Boulevard, N.E., Atlanta, Georgia 30319.

 

 

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

office location in Stockport, England, both of which are utilized by the Registrant’s International Operations segment. As of December 31, 2009, the Registrant leased approximately 526 other office locations under various leases with varying terms. The remainder of its office locations are occupied under various short-term rental arrangements. The Registrant generally believes that its office locations are sufficient for its operations and that, in the event it was required to obtain different or additional office locations, such locations would be available at times, and on commercially reasonable terms, as would be necessary for the conduct of its business. No assurances can be given, however, that the Registrant would be able to obtain such office locations as and when needed, or on terms it considered to be reasonable, if at all.

 

 

In the normal course of the claims administration services business, the Registrant is named as a defendant in suits by insureds or claimants contesting decisions by the Registrant or its clients with respect to the settlement of claims. Additionally, clients of the Registrant have, in the past, brought actions for indemnification on the basis of alleged negligence on the part of the Registrant, 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 Registrant; however, the Registrant is responsible for the deductibles and self-insured retentions under its various insurance coverages. In the opinion of the Registrant, adequate reserves have been provided for such risks. No assurances can be provided, however, that the result of any such action, claim or proceeding, now known or occurring in the future, will not result in a material adverse effect on our business, financial condition or results of operations.

 

 

Our Class A common stock and Class B common stock are traded on the New York Stock Exchange (NYSE) under the symbol “CRDA” and “CRDB,” respectively. The following table sets forth, for the quarterly periods indicated, the high and low sales prices per share for the Company’s Class A common stock and Class B common stock, as reported on the New York Stock Exchange:

 

 

 

We have not paid or declared cash dividends to our shareholders since 2006. The declaration of dividends is subject to the discretion of our Board of Directors in light of all relevant factors, including any funding requirements for our defined benefit pension plans, required or other considered repayments of outstanding borrowings under our Credit Agreement, future levels of cash generated by our operating activities, general business conditions, and restrictions related to the covenants contained in our Credit Agreement. The covenants in our Credit Agreement currently limit dividend payments. See Note 4, “Short-Term and Long-Term Debt,” to the audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

During 2009 and 2008, we did not repurchase any shares of our Class A or Class B Common Stock under our discretionary 1999 share repurchase program authorized by the Board of Directors. As of December 31,

2009, we have the availability to purchase up to 705,863 additional shares under the program. We believe it is unlikely that we will repurchase shares under this program in the foreseeable future due to, among other things, the underfunded status of our defined benefit pension plans and the covenants and related restrictions contained in our Credit Agreement.

 

The approximate number of record holders of the Company’s stock as of December 31, 2009: Class A — 2,745 and Class B — 589.

 

There were no purchases of common stock of the Company made during the three months ended December 31, 2009, by the Company or any “affiliated purchaser” of the Company as defined in Rule 10b-18(a)(3) under the Exchange Act.

 

The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto contained in “Item 8. Financial Statements and Supplementary Data” of this report.

 

 

 

 

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Crawford & Company, our operations, and our business environment. This MD&A is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” of this report. As described in Note 1, “Major Accounting and Reporting Policies,” of those accompanying audited consolidated financial statements, the financial statements of our subsidiaries comprising 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 U.S. generally accepted accounting principles (“GAAP”) in order to provide sufficient time for accumulation of their results.

 

Business Overview

 

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 Solutions^smoffers 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, warranty inspections, legal settlement administration, including class action and bankruptcy administration and risk management information services. Shares of the Company’s two classes of common stock are traded on the NYSE under the symbols CRDA and CRDB, respectively.

 

As discussed in more detail in subsequent sections of this MD&A, we have four operating segments: U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration. Our four operating segments represent components of our Company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing operating performance. U.S. Property & Casualty serves the U.S. property and casualty insurance company market, including the product warranties and inspections marketplace. International Operations serves the property and casualty insurance company markets outside of the U.S. Broadspire serves the self-insurance marketplace primarily in the U.S. Legal Settlement Administration serves the securities, bankruptcy, and other legal settlements markets primarily in the U.S.

 

Insurance companies, which represent the major source of our global revenues, customarily manage their own claims administration function but often rely on third parties for certain services which we provide, primarily field investigation and the evaluation of property and casualty insurance claims. We also conduct inspections of building component products related to warranty and product performance claims.

 

Self-insured entities typically rely on us for a broader range of services. In addition to field investigation and evaluation of their claims, we may also provide initial loss reporting services for their claimants, loss mitigation services such as medical case management and vocational rehabilitation, risk management information services, and administration of trust funds established to pay their claims.

 

We also perform legal settlement administration services related to securities, product liability, and other class action settlements and bankruptcies, including identifying and qualifying class members, determining and dispensing settlement payments, and administering settlement funds. Such services are generally referred to by us as class action services.

 

The claims management services market, both in the U.S. and internationally, is highly competitive and comprised of a large number of companies of varying size and offering a varied scope of services. The demand from insurance companies and self-insured entities for services provided by independent claims service firms like us is largely dependent on industry-wide claims volumes, which are affected by, among other things, the insurance underwriting cycle, weather-related events, general economic activity, overall

employment levels, and associated workplace injury rates. Accordingly, we are limited in our ability to predict case volumes that may be referred to us in the future. In addition, our ability to retain clients and maintain and increase case referrals is also dependent in part on our ability to continue to provide high-quality, competitively priced services.

 

We generally earn our revenues on an individual fee-per-claim basis for claims management services we provide to property and casualty insurance companies and self-insured entities. Accordingly, the volume of claim referrals to us is a key driver of our revenues. Generally, fees are earned on claims in the period the claim is assigned to us, although sometimes a portion or substantially all of the revenue will be earned in subsequent periods. Industry-wide claims volume in general will vary depending upon the insurance underwriting cycle.

 

In the insurance industry, the underwriting cycle is often said to be in either a “soft” or “hard” market. A soft market generally results when insurance companies focus more on increasing their premium income and focus less on controlling underwriting risks. A soft market often occurs in conjunction with strong financial markets 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.

 

We are also impacted by decisions insurance companies and other clients may make to change the level of claims outsourced to independent claim service firms as opposed to those handled by their own in-house claims adjusters or contracted to other third party administrators, whether or not associated with insurance companies. Our ability to grow our market share in a highly fragmented and competitive market is primarily dependent on the delivery of superior quality service and effective sales efforts.

 

The legal settlement administration market is also highly competitive but comprised of a smaller number of specialized entities. The demand for legal settlement administration services is generally not directly tied to or affected by the insurance underwriting cycle. The demand for these services is largely dependent on the volume of securities and product liability class action settlements, the volume of Chapter 11 bankruptcy filings and the resulting settlements, and general economic conditions. Our revenues for legal settlement administration services are generally project-based and we earn these revenues as we perform individual tasks and deliver the outputs as outlined in each project.

Results of Operations

 

Executive Summary

 

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.

 

For 2008, net income attributable to Crawford & Company was impacted by a non-taxable gain of $2.5 million related to the sale of a lower-tier subsidiary in the Netherlands (the “Netherlands subsidiary”). Our net income in 2008 also included a charge of $3.3 million, or approximately $2.4 million after income tax, from certain internal restructuring activities in our U.S. Property & Casualty and International Operations 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.

 

Compared to 2008, our consolidated revenues before reimbursements (“revenues”) were lower in 2009 due to several key factors. International Operations segment revenues in 2009 were negatively impacted by $62.5 million in exchange rate fluctuations due to a stronger U.S. dollar during most of 2009. U.S. Property & Casualty segment revenues were lower in 2009 due primarily to an overall industry-wide softness in property and casualty claims. Broadspire segment revenues decreased in 2009 primarily due to the reduced number of workers’ compensation claims resulting primarily from lower U.S. employment levels. However, Legal Settlement Administration segment revenues increased in 2009 reflecting the positive impact of several major bankruptcy and securities class action administration projects awarded to this operating segment during 2008 and 2009.

 

Operating Earnings (Loss) of our Operating Segments

 

We believe that a discussion and analysis of the operating earnings of our four operating segments is helpful in understanding the results of our operations. Operating earnings is our segment measure of profitability as discussed in Note 12, “Segment and Geographic Information, to the accompanying audited consolidated financial statements under Item 8 in this Annual Report on Form 10-K. Operating earnings is the primary financial performance measure used by our senior management and chief operating decision maker (“CODM”) to evaluate the financial performance of our operating segments and make resource allocation decisions. Unlike net income, our operating earnings measure is not a standard performance measure found in GAAP. However, since it is our segment measure of profitability presented in conformity with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting,” it is not considered a non-GAAP measure requiring reconciliation pursuant to Securities and Exchange Commission (“SEC”) guidance contained in Regulation G and Item 10(e) of Regulation S-K. We believe this measure is useful to others in that it allows them to evaluate segment operating performance using the same criteria our management and CODM use. Operating earnings represent segment earnings excluding

income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, certain other gains and expenses, and certain unallocated corporate and shared costs. Net income or loss attributable to noncontrolling interests has been removed from operating earnings.

 

Income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, and stock option expense are recurring components of our net income or loss, but they are not considered part of our segment operating earnings because they are managed on a corporate-wide basis. Income tax expense is based on statutory rates in effect in each of the jurisdictions where we provide services, and vary throughout the world. Net corporate interest expense results from company-level capital structure decisions made by management. Amortization expense relates to non-cash amortization expense of customer-relationship intangible assets resulting from business combinations. Stock option expense represents the non-cash costs generally related to stock options and employee stock purchase plan expenses which are not allocated to our operating segments. None of these costs relate directly to the performance of our services or operating activities and, therefore, are excluded from segment operating earnings in order to better assess the results of each segment’s operating activities on a consistent basis.

 

Certain other gains and expenses may arise from events (such as gains on sales of businesses and real estate, expenses related to restructurings, and goodwill impairment charges) that are not allocated to any particular segment since they historically have not regularly impacted our performance and are not expected to impact our future performance on a regular basis.

 

Unallocated corporate and shared costs represent expenses and credits related to 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.

 

Additional discussion and analysis of our income taxes, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, unallocated corporate and shared costs, and other gains and expenses follows the discussion and analysis of the results of operations of our four operating segments.

 

Segment Revenues

 

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.

 

Segment Expenses

 

Our discussion and analysis of segment operating expenses is comprised of two components. “Direct Compensation and Fringe Benefits” includes all compensation, payroll taxes, and benefits provided to our employees which, as a service company, represents our most significant and variable operating expense. “Expenses Other Than Direct Compensation and Fringe Benefits” includes outsourced services, office rent and occupancy costs, office operating expenses, cost of risk, amortization and depreciation expense other than amortization of customer-relationship intangible assets, and allocated corporate and shared costs. These costs are more fixed in nature as compared to direct compensation and fringe benefits.

 

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.

Operating results for our U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration segments reconciled to pretax (loss) income attributable to Crawford & Company and net (loss) income attributable to Crawford & Company, were as follows:

 

 

nm = not meaningful

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

U.S. PROPERTY & CASUALTY SEGMENT

 

Operating Earnings

 

Operating earnings for our U.S. Property & Casualty segment decreased from $22.6 million in 2008 to $18.9 million in 2009, representing an operating margin of 9.1% in 2009 compared to 10.4% in 2008. The decrease in 2009 was primarily due to a decrease in revenues as discussed below.

 

Revenues before Reimbursements

 

U.S. Property & Casualty revenues are primarily generated from the property and casualty insurance company markets, with additional revenues generated from the warranties and inspections marketplace. U.S. Property & Casualty revenues before reimbursements by major service line were as follows:

 

 

U.S. Property & Casualty revenues before reimbursements decreased 4.7% to $206.6 million in 2009 compared to $216.8 million in 2008. This 2009 decrease was due primarily to a decrease in claims field operations driven by reduced property, vehicle and warranty services claims, partially offset by increases in revenues in our technical services unit, which primarily handles major commercial losses, and in our direct repair network, Contractor Connection.

 

U.S. Property & Casualty’s 4.7% revenue decline from 2008 to 2009 was due to a 2.3% decrease from changes in the mix of services provided and in the rates charged for those services, and a 2.4% decrease in segment unit volume, measured principally by cases received.

 

Reimbursed Expenses Included in Total Revenues

 

Reimbursements for out-of-pocket expenses included in total revenues for our U.S. Property & Casualty operations were $10.0 million in 2009, decreasing from $11.2 million in 2008. The decrease in 2009 was due primarily to a decline in claims field operations cases received.

 

Case Volume Analysis

 

U.S. Property & Casualty unit volumes by underlying case category, as measured by cases received, for 2009 and 2008 were as follows:

 

The 2009 decrease in property and casualty claims was due primarily to lower industry-wide claims volumes, which have resulted in fewer claims referred to us from our clients. The 2009 decline in vehicle claims was due primarily to general economic conditions which we believe have resulted in fewer miles driven and thus fewer claims, and also due to decisions by certain insurance companies to reduce adjuster involvement in handling vehicle-related claims. We expect the trend of reduced adjuster involvement in vehicle claims to continue. The 2009 decrease in warranty services claims resulted from the expiration of several long-running class action contracts. This trend is expected to continue as we are not aware of any large new class action warranty claims that will replace the expiring contracts. The 2009 decrease in workers’ compensation claims was due primarily to decreased referrals for outside investigations from insurance carriers and internal referrals from our Broadspire segment. The 2009 increase in Contractor Connection cases was due to the ongoing expansion of our contractor network and due to the trend of insurance carriers moving high-frequency, low-severity property claims directly to repair networks, which we expect to continue. The 2009 increase in catastrophe services claims was due primarily to severe weather earlier in the year. The 2009 increase in technical services claims was due primarily to our continued expansion in this market by increasing the number of executive general adjusters that we employ and due to the resulting increase in market share. As discussed in more detail elsewhere herein, we cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related claims and the occurrence of natural and man-made disasters, which are a significant source of claims for us and are generally not subject to accurate forecasting.

 

Direct Compensation and Fringe Benefits

 

U.S. Property & Casualty direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, decreased to 61.0% in 2009 compared to 61.8% in 2008. This decrease in 2009 was due primarily to a reduction in full-time equivalent employees (“FTEs”) and lower incentive compensation expense. There was an average of 1,607 FTEs (including 90 catastrophe adjusters) in 2009 compared to an average of 1,676 (including 132 catastrophe adjusters) in 2008. During the 2008 fourth quarter, we deployed over 300 catastrophe adjusters to the Gulf Coast region of the U.S in response to hurricanes Dolly, Gustav and Ike.

 

U.S. Property & Casualty salaries and wages decreased 4.8%, to $106.2 million in 2009 from $111.6 million in 2008. The decrease in 2009 compared to 2008 was due primarily to the reduction in FTEs. Payroll taxes and fringe benefits for U.S. Property & Casualty totaled $19.8 million in 2009, decreasing 11.6% from 2008 expenses of $22.4 million. The decrease in 2009 compared to 2008 was due primarily to the reduction in FTEs, lower incentive compensation expense, and temporary reductions in planned contributions to defined contribution retirement plans. 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.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

U.S. Property & Casualty expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits increased as a percent of U.S. Property & Casualty revenues before reimbursements to 29.9% in 2009 from 27.8% in 2008. The increase in 2009 was primarily due to lower revenues in 2009 since these expenses tend to be more fixed in nature. In addition, the segment’s bad debt expense was $1.8 million lower in 2008 compared to 2009. In 2008, the segment collected a previously charged-off account receivable and also introduced an incentive compensation plan that includes a focus on reducing outstanding accounts receivable balances.

 

INTERNATIONAL OPERATIONS SEGMENT

 

Operating Earnings

 

International Operations’ operating earnings decreased to $33.3 million in 2009, a decrease of 14.4% from 2008 operating earnings of $38.9 million for the reasons described below. This decline resulted in a slight decline in the operating margin from 8.7% in 2008 to 8.5% in 2009.

Revenues before Reimbursements

 

Substantially all International Operations segment revenues are earned from the property and casualty insurance company market outside of the U.S. International Operations revenues before reimbursements by major region were as follows:

 

 

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%.

 

Excluding the disposition of the Netherlands subsidiary in 2008, International Operations unit volume, measured by cases received, declined 5.5% in 2009 compared to 2008. This decline primarily reflected decreased case referrals during 2009 in the U.K. and Canada, partially offset by increases in case referrals in other major regions of our International Operations segment, as discussed below. Average revenue per claim increased 9.2% from changes in the mix of services provided and in the rates charged for those services. Net decreases in 2009 of high-frequency, low-severity claims primarily in Canada raised the average revenue per claim in 2009, as discussed below. The disposition of the Netherlands subsidiary in 2008 decreased revenues by $6.6 million, or 1.5%, in 2009 compared to 2008.

 

Reimbursed Expenses Included in Total Revenues

 

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.

 

Case Volume Analysis

 

Excluding the impact of the 2008 disposition of the Netherlands subsidiary, International Operations unit volumes by region for 2009 and 2008 were as follows:

 

The 2009 decrease in the U.K. was due primarily to a reduction of storm-related claims in the current year. The 2009 decrease in Canada was due primarily to a reduction in weather-related activity. The 2009 increase in CEMEA was due primarily to an increase in high-frequency, low severity claims in Scandinavia and Belgium. The changes in Asia-Pacific volumes were primarily due to high frequency, low severity claims activity in China and an increase in weather-related activity in Australia. The increase in the Americas was due primarily to an increase in high frequency, low severity claims in Brazil. As discussed in more detail elsewhere herein, we cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related claims and the occurrence of natural and man-made disasters, which are a significant source of claims for us and are generally not subject to accurate forecasting.

 

Direct Compensation and Fringe Benefits

 

As a percent of segment revenues before reimbursements, direct compensation expense, including related payroll taxes and fringe benefits, increased slightly to 68.9% in 2009 from 68.1% in 2008. This percentage increase in 2009 was primarily due to higher costs related to our U.K. defined benefit retirement plans in 2009. The dollar amount of these expenses decreased in 2009 by $32.6 million, due primarily to a stronger U.S. dollar in 2009, offset partially by the higher costs in the U.K. for defined benefit retirement plans. There was an average of 4,279 International Operations FTEs in 2009, up slightly from 4,229 in 2008.

 

Salaries and wages of International Operations segment personnel decreased 12.5% to $227.1 million in 2009 compared to $259.5 million in 2008, decreasing as a percent of revenues before reimbursements from 58.3% in 2008 to 57.9% in 2009. The decrease in these expenses in 2009 was primarily related to the stronger U.S. dollar during 2009. Payroll taxes and fringe benefits decreased slightly to $43.5 million in 2009 compared to $43.7 million in 2008 as the increased U.K. defined benefit retirement plan expense substantially offset the impact of a stronger U.S. dollar.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

Expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of segment revenues before reimbursements from 23.2% in 2008 to 22.6% in 2009. This percentage decrease in 2009 was due primarily to increased operational efficiencies which allowed us to service additional revenue when measured on a constant-dollar basis without adding an equivalent amount of costs which are generally more fixed in nature. The dollar amount of these expenses decreased in 2009 by $14.3 million due primarily to a stronger U.S. dollar in 2009.

 

BROADSPIRE SEGMENT

 

As disclosed in Note 3, “Goodwill and Intangible Asset,” to the accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K, we recorded a noncash goodwill and intangible asset impairment charge totaling $140.9 million related to our Broadspire segment during 2009. These impairment charges have been excluded from Broadspire’s segment operating earnings (loss) and are not included in the following discussion and analysis of Broadspire’s segment operating results.

 

Operating (Loss) Earnings

 

Our Broadspire segment recorded an operating loss of $1.6 million, or (0.6)% of segment revenues before reimbursements in 2009, compared to operating earnings of $3.5 million, or 1.1% of segment revenues before reimbursements in 2008. Declining case volumes in 2009 and the weakened labor market in the U.S. have negatively impacted Broadspire’s operating results.

 

Revenues before Reimbursements

 

Broadspire segment revenues are primarily derived from workers’ compensation and liability claims management services, medical management for workers’ compensation, including vocational rehabilitation,

and risk management information services provided to the U.S. self-insured marketplace. Broadspire revenues before reimbursements by major service line were as follows:

 

 

Broadspire segment revenues before reimbursements decreased 7.4% to $288.7 million in 2009 compared to $311.8 million in 2008. Unit volumes for the Broadspire segment, measured principally by cases received, decreased 11.2% from 2008 to 2009. Partially offsetting the decline in unit volumes was a 3.8% increase from changes in the mix of services provided and in the rates charged for those services. The change in the mix of services provided reflected the utilization of medical management services at a higher rate compared to claim management services. During periods of high unemployment, we tend to see the duration of workers’ compensation claims extended which generally results in higher utilization of medical management services such as field and telephonic case management and medical bill review. The net result of these factors was a 7.4% decrease in Broadspire segment revenues before reimbursements from 2008 to 2009.

 

Reimbursed Expenses Included in Total Revenues

 

Reimbursements for out-of-pocket expenses included in total revenues for our Broadspire segment were $5.2 million in 2009, decreasing slightly from $5.3 million in 2008. This decrease was primarily attributable to the declines in case volumes, substantially offset by increased out-of-pocket expenses for the medical management of workers’ compensation claims.

 

Case Volume Analysis

 

Broadspire unit volumes by major underlying case category, as measured by cases received, for 2009 and 2008 were as follows:

 

 

The 2009 declines in workers’ compensation claims reflected a continuing decline in reported workplace injuries in the U.S primarily as a result of the overall decline in employment due to the current economic climate. The U.S. market has experienced a decline in reported workplace injuries over the past decade resulting in a loss in revenue from our existing customer base. The 2009 declines in casualty claims were primarily due to reductions in claims from our existing clients as a result of the overall industry-wide reduction in claims volume, partially offset by net new business gains. The 2009 increases in other claims were primarily due to increases in health management services resulting from employers that added such services to their employee benefits programs. As discussed in more detail elsewhere herein, we cannot predict the future trend of case volumes as they are generally dependent on the timing and extent of job creation in the U.S. and the occurrence of casualty-related events which are not subject to accurate forecasting.

 

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.

Direct Compensation and Fringe Benefits

 

Broadspire’s direct compensation and fringe benefits expense, as a percent of the related revenues before reimbursements, decreased to 56.0% in 2009 compared to 56.3% in 2008. The decrease in 2009 was primarily due to fewer FTEs in 2009 as a result of reduced case volumes, lower incentive compensation expense, and lower costs related to temporary reductions in planned contributions to defined contribution retirement plans. Average FTEs totaled 2,243 in 2009, down from 2,362 in 2008.

 

Broadspire segment salaries and wages decreased 6.8%, to $135.0 million in 2009 from $144.8 million in 2008, reflecting the decline in FTEs and lower incentive compensation expense in 2009. Payroll taxes and fringe benefits for our Broadspire segment totaled $26.8 million in 2009, decreasing 12.4% from 2008 expenses of $30.6 million, reflecting the temporary reduction in planned contributions to defined contribution retirement plans in 2009.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

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.

 

LEGAL SETTLEMENT ADMINISTRATION SEGMENT

 

Operating Earnings

 

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.

 

Revenues before Reimbursements

 

Legal Settlement Administration revenues are primarily derived from securities, product liability and other legal settlements, and Chapter 11 bankruptcy administration in the U.S.

 

Legal Settlement Administration revenues before reimbursements increased 9.5% to $82.0 million in 2009, compared to $74.9 million in 2008. Legal Settlement Administration revenues are project-based and can fluctuate significantly due primarily to the timing of securities class action and bankruptcy settlements. During 2009, we were awarded 275 new settlement administration assignments compared to 182 in 2008. The growth in revenues and the number of new assignments is due primarily to an increase in the number of bankruptcy assignments received as a result of current economic conditions.

 

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.

 

Reimbursed Expenses Included in Total Revenues

 

Reimbursements for out-of-pocket expenses included in total revenues for Legal Settlement Administration were $32.1 million in 2009, increasing from $28.7 million in 2008. The increase in 2009 was due primarily to the overall increase in activity in 2009 that required significant amounts of out-of-pocket reimbursable expenses. The nature and volume of work performed in our Legal Settlement Administration segment typically requires more incurred and reimbursable out-of pocket expenditures than our other operating segments.

Transaction Volume

 

Legal Settlement Administration services are generally project-based and not denominated by individual claims. Depending upon the nature of projects and their respective stages of 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.

 

Direct Compensation and Fringe Benefits

 

Legal Settlement Administration’s direct compensation expense, including related payroll taxes and fringe benefits, as a percent of segment revenues before reimbursements, decreased to 43.7% in 2009 compared to 47.2% in 2008. The 2009 percentage decrease was primarily due to operating efficiencies achieved as a result of the increase in revenues. The slight increase in the 2009 dollar amount of these expenses was due primarily to the increased number of FTEs in 2009. There was an average of 347 FTEs in 2009, compared to an average of 336 in 2008.

 

Legal Settlement Administration salaries and wages, including incentive compensation, increased 1.0% to $31.3 million in 2009 from $31.0 million in 2008. Payroll taxes and fringe benefits for Legal Settlement Administration totaled $4.5 million in 2009, increasing 2.3% from 2008 costs of $4.4 million. This 2009 increase was primarily the result of the increase in the number of FTEs in 2009.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

Legal Settlement Administration expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits increased as a percent of related segment revenues before reimbursements to 40.3% in 2009 from 38.4% in 2008. The 2009 increase was primarily due to an increase in expenses related to the use of our outsourced service providers.

 

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

 

U.S. PROPERTY & CASUALTY SEGMENT

 

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.

 

In the first quarter of 2007, we sold our subrogation services business.

 

Operating Earnings

 

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.

 

Revenues before Reimbursements

 

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

catastrophic claims activity in 2008 which drove revenue increases in each of our major service lines. U.S. Property & Casualty revenues before reimbursements by major service line were as follows:

 

 

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.

 

Reimbursed Expenses Included in Total Revenues

 

Reimbursements for out-of-pocket expenses included in total revenues for our U.S. Property & Casualty segment were $11.2 million in 2008, increasing from $10.8 million in 2007. The increase in 2008 was due primarily to increased vehicle fuel costs and mileage reimbursements.

 

Case Volume Analysis

 

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

due to increases in referrals made within our managed repair network as a result of catastrophic claims activity and the expansion of our contractor network. The 2008 decline in technical services claims was due to declines in construction defect cases which were expected.

 

Direct Compensation and Fringe Benefits

 

U.S. Property & Casualty direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, decreased to 61.8% in 2008 compared to 65.4% in 2007. This percentage decrease in 2008 was due primarily to higher revenues and increased operating efficiencies obtained from the Company’s technology investments in this segment. There was an average of 1,676 FTEs (including 132 catastrophe adjusters) in 2008 compared to an average of 1,746 (including 62 catastrophe adjusters) in 2007. During the 2008 fourth quarter, we deployed over 300 catastrophe adjusters to the Gulf Coast region of the U.S in response to hurricanes.

 

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.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

U.S. Property & Casualty expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of U.S. Property & Casualty revenues before reimbursements to 27.8% in 2008 from 30.7% in 2007. The decrease in the amount as a percentage of segment revenues before reimbursements in 2008 was primarily due to higher revenues in 2008 as these expenses are typically more fixed in nature. The dollar amount of these expenses increased slightly in 2008 due mainly to the increased number of catastrophe adjusters.

 

INTERNATIONAL OPERATIONS SEGMENT

 

Operating Earnings

 

International Operations’ operating earnings increased to $38.9 million in 2008, an increase of 57.7% from 2007 operating earnings of $24.7 million for the reasons described below. This improvement reflected an increase in the operating margin from 6.5% in 2007 to 8.7% in 2008.

 

Revenues before Reimbursements

 

Revenues before reimbursements from our International Operations segment totaled $445.1 million in 2008, an 18.2% increase from the $376.6 million in 2007. This 2008 revenue increase was due to currency exchange rates and changes in the mix of services provided and in the rates charged for those services. Compared to 2007, the U.S. dollar was weaker in 2008 against most major foreign currencies, resulting in a net exchange rate benefit in 2008 of 2.8% or $10.6 million. Excluding the benefit of exchange rate fluctuations, International Operations revenues would have been $434.5 million in 2008, reflecting growth in

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.

 

Reimbursed Expenses Included in Total Revenues

 

Reimbursements for out-of-pocket expenses included in total revenues for our International Operations segment increased to $42.1 million in 2008 from $38.7 million in 2007. This increase in 2008 was due primarily to increased out-of-pocket reimbursable expenses related to a major Canadian service agreement and also due to a weaker U.S. dollar in 2008.

 

Case Volume Analysis

 

Excluding the impact of the 2008 disposition of the Netherlands business, International Operations unit volumes by region for 2008 and 2007 were as follows:

 

 

The 2008 decrease in the United Kingdom case volumes was due primarily to higher flood claims in the prior year. The higher case volume in Canada was due to storm-related activity during 2008 and higher case volume from new and existing clients. The decrease in CEMEA case volume was due primarily to a reduction in storm-related claims in the current year in France, Holland, and Germany, and a decrease in high frequency, low severity claims activity in Spain. The 2008 decrease in the Americas case volumes was due primarily to a decrease in high-frequency, low-severity claims activity in Brazil. The 2008 increase in Asia-Pacific case volumes was primarily due to high frequency, low severity claims activity in China and Singapore and an increase in weather-related activity in Australia.

Direct Compensation and Fringe Benefits

 

As a percent of segment revenues before reimbursements, direct compensation expense including related payroll taxes and fringe benefits, decreased to 68.1% in 2008 from 69.1% in 2007. This percentage decrease in 2008 was primarily due to higher revenues in Canada and the U.K. and the management of related expenses. There was an average of 4,229 International Operations FTEs in 2008, up from 3,702 in 2007.

 

Salaries and wages of International Operations segment personnel increased 17.4% to $259.5 million in 2008 compared to $221.0 million in 2007, decreasing as a percent of revenues before reimbursements from 58.7% in 2007 to 58.3% in 2008. The dollar amount of increase in these expenses in 2008 was primarily related to the increase in employees necessary to service the increased revenues and a weaker U.S. dollar during 2008. Payroll taxes and fringe benefits increased 12.1% to $43.7 million in 2008 compared to $39.0 million in 2007, decreasing as a percent of revenues before reimbursements from 10.4% in 2007 to 9.8% in 2008.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

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 SEGMENT

 

Operating Earnings

 

Our Broadspire segment recorded operating earnings of $3.5 million, or 1.1% of segment revenues before reimbursements in 2008, compared to $3.1 million, or 1.0% of segment revenues before reimbursements in 2007.

 

Revenues before Reimbursements

 

Broadspire segment revenues before reimbursements decreased 3.0% to $311.8 million in 2008 compared to $321.3 million in 2007. Unit volumes for the Broadspire segment, measured principally by cases received, decreased 11.1% from 2007 to 2008. Revenues increased by 8.1% from changes in the mix of services provided and in the rates charged for those services due to higher risk management information services revenues and the higher utilization of medical management services, resulting in a net 3.0% decrease in Broadspire segment revenues before reimbursements from 2007 to 2008. Broadspire revenues before reimbursements by major service line were as follows:

 

 

Reimbursed Expenses Included in Total Revenues

 

Reimbursements for out-of-pocket expenses included in total revenues for our Broadspire segment were $5.3 million in 2008, decreasing from $6.2 million in 2007. This 2008 decrease was primarily attributable to the declines in case volumes.

Case Volume Analysis

 

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.

 

Direct Compensation and Fringe Benefits

 

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 salaries and wages decreased 4.3%, to $144.8 million in 2008 from $151.3 million in 2007. Payroll taxes and fringe benefits for our Broadspire segment totaled $30.6 million in 2008, decreasing 5.0% from 2007 expenses of $32.2 million. These 2008 decreases were primarily the result of the reduction in the number of FTEs in 2008.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

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.

 

LEGAL SETTLEMENT ADMINISTRATION SEGMENT

 

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.

 

Operating Earnings

 

Our Legal Settlement Administration segment reported 2008 operating earnings of $10.8 million, increasing slightly from $10.7 million in 2007 with the related operating margin increasing from 12.7% in 2007 to 14.4% in 2008 for the reasons discussed below.

 

Revenues before Reimbursements

 

Legal Settlement Administration revenues before reimbursements declined 11.0% to $74.9 million in 2008, compared to $84.2 million in 2007. Legal Settlement Administration revenues are project-based and can fluctuate significantly due primarily to the timing of securities class action and bankruptcy settlements. During 2008, we were awarded 182 new settlement administration assignments compared to 192 in 2007. At

December 31, 2008 we had a backlog of awarded projects totaling approximately $41.9 million, compared to $45.0 million at December 31, 2007.

 

Reimbursed Expenses Included in Total Revenues

 

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.

 

Transaction Volume

 

Legal Settlement Administration services are generally project-based and not denominated by individual claims. Depending upon the nature of projects and their respective stages of 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.

 

Direct Compensation and Fringe Benefits

 

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.

 

Legal Settlement Administration salaries and wages, including incentive compensation, decreased 10.1% to $31.0 million in 2008 from $34.5 million in 2007. This 2008 decrease was primarily the result of lower incentive compensation cost as a result of lower revenues and the decrease in the number of FTEs. Payroll taxes and fringe benefits for Legal Settlement Administration totaled $4.4 million in 2008, decreasing 12.0% from 2007 expenses of $5.0 million. This 2008 decrease was primarily the result of the decrease in the number of FTEs in 2008.

 

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

 

Legal Settlement Administration expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of related segment revenues before reimbursements to 38.4% in 2008 from 40.4% in 2007. The 2008 decrease was primarily due to changes in the utilization of outsourced service providers.

 

Expenses and Gains Excluded from Segment Operating Earnings

 

Income Taxes

 

Income tax provisions totaled $2.6 million, $11.6 million, and $5.4 million for 2009, 2008, and 2007, respectively. Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our various domestic and international operations which may be subject to differing tax rates, our ability to utilize net operating loss and tax credit carryforwards, and amounts related to uncertain income tax positions. Our effective tax rate, including discrete items and adjustments related to uncertain tax positions, for financial reporting purposes was 2.3%, 26.0%, and 24.8% for 2009, 2008, and 2007, respectively. Compared to 2007 and 2008, our effective tax rate was lower in 2009. After adjusting for the $140.3 million non-deductible goodwill charge, our effective tax rate was 9.7% in 2009. The lower rate in 2009 was due to a one-time $3.3 million income tax benefit for foreign tax credits and $2.4 million in ongoing reduced foreign taxes as a result of the completion of an internal restructuring of certain of our international operations in the second quarter of 2009.

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.

 

Net Corporate Interest Expense

 

Net corporate interest expense is comprised of interest expense that we incur on our short- and long-term borrowings, partially offset by interest income we earn on available cash balances and short-term investments. These amounts vary based on interest rates, borrowings outstanding, and the amounts of invested cash and investments. Interest expense is also impacted by our interest rate swap agreements. Corporate interest expense totaled $15.2 million, $19.6 million, and $19.2 million for 2009, 2008, and 2007, respectively. The decrease in interest expense in 2009 compared to 2008 and 2007 was due primarily to lower interest rates and lower levels of outstanding borrowings in 2009. Corporate interest income totaled $1.1 million, $2.0 million, and $1.9 million in 2009, 2008, and 2007, respectively. Corporate interest income decreased in 2009 compared to 2008 and 2007 primarily due to the overall decline in interest rates during 2009 and lower levels of available cash balances for investing during the course of 2009.

 

Amortization of Customer-Relationship Intangible Assets

 

Amortization of customer-relationship intangible assets represents the non-cash amortization expense of customer-relationship intangible assets arising from our 2006 acquisitions of Broadspire Management Services Inc. and Specialty Liability Services, Ltd. Amortization expense associated with these intangible assets totaled $6.0 million in 2009, 2008, and 2007, respectively. This amortization is included in Selling, General, and Administrative expenses in our Consolidated Statements of Operations.

 

Stock Option Expense

 

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.

 

Unallocated Corporate and Shared Costs

 

Certain unallocated costs and credits are excluded from the determination of segment operating earnings. These unallocated corporate and shared costs primarily represent 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.

Unallocated corporate and shared costs were a net expense of $10.7 million, $6.7 million, and $8.9 million in 2009, 2008 and 2007, respectively. These costs increased in 2009 compared to 2008 due primarily to a $12.1 million increase in U.S. defined benefit pension expense, partially offset by lower self-insurance expenses and lower incentive compensation expense for our CEO. Unallocated corporate and shared costs in 2008 also included a loss of approximately $900,000 on the sublease of a portion of a Legal Settlement Administration facility. This loss affects the comparison of 2009 to 2008 and 2008 to 2007. Unallocated corporate and shared costs decreased in 2008 compared to 2007 due primarily to a $5.0 million decrease in U.S. defined benefit pension expense, partially offset by higher self-insurance expenses and higher incentive compensation expense for our CEO. In addition, during 2007 we incurred moving and relocation expenses associated with the move of our corporate headquarters and had lower expenses due to a bad debt recovery that was not allocated to any of our operating segments.

 

Other Gains and Expenses

 

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.

 

Other gains and expenses in 2007 consisted of a $4.0 million pre-tax gain from the sale of our subrogation services business and a $4.8 million pre-tax gain from the sale of the land and building utilized as our former corporate headquarters in Atlanta, Georgia.

 

During October 2009, we entered into an agreement to sublease a portion of our leased Broadspire office building located in Plantation, Florida. The agreement currently provides the sublessor with options to sublease all or a portion of the remainder of the building at various dates in 2010. The sublease is for the remaining term of the lease. In February 2010, the subtenant exercised one of its options for additional space in the building and the sublessor may still exercise its option in 2010 for all of the remaining space. We have entered into a new lease for our Broadspire operations in Plantation and expect to vacate the current premises in April 2010. In connection with our move and the subleases, we estimate moving and sublease losses could be approximately $3.5 million in 2010. These charges represent the loss on the sublease space and the cost of moving from the current facility into the new facility.

 

Liquidity, Capital Resources, and Financial Condition

 

We continue to evaluate current and forecasted economic conditions and their potential implications for us, including, among other things, estimating the fair value of our financial instruments, asset impairments, liquidity, compliance with our debt covenants, and relationships with our financing agreement counterparties and customers.

Currently, we believe that all of our material financial assets subject to fair value accounting have readily observable market prices. Most of our liquid assets are invested in cash and cash equivalents consisting of payable-on-demand bank deposit accounts and short-term money market funds. However, the recent financial crisis which affected the banking system and financial markets and the going-concern threats to banks and other financial institutions has resulted in significant market volatility. As a result, we intend to continue to monitor these assets for any changes in marketability. While we are not aware of any losses, or expected losses, related to these bank deposits or money market funds, in the U.S. or abroad, we cannot provide any assurances that future market events will not materially adversely impact the values of any such assets.

 

We are not aware of any additional restrictions placed on us, or being considered to be placed on us, related to our ability to access capital, such as borrowing against the revolving credit portion of our Credit Agreement (defined below). We do not rely on repurchase agreements or the commercial paper market to meet our short-term or long-term funding needs. At December 31, 2009, we were in compliance with all of the covenants in our Credit Agreement. The previously discussed noncash impairment charges for goodwill and an intangible asset in 2009 did not impact this covenant compliance. As previously disclosed and described below, we entered into an amendment to our Credit Agreement in the fourth quarter of 2009 in order to extend the maturity date of the revolving credit facility and to obtain certain additional operational and financing flexibility.

 

In May 2007, we entered into a three-year interest rate swap agreement that effectively converts the LIBOR-based portion of the interest rate under our Credit Agreement on an initial notional amount of $175.0 million of our floating-rate debt to a fixed rate of 5.25% ($80.0 million at December 31, 2009). This swap expires on May 31, 2010. 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 $90.0 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 $85.0 million on March 31, 2011 to match the expected repayment of the Company’s outstanding debt. The swap expires on September 30, 2012.

 

In connection with the Fifth Amendment to the Company’s Credit Agreement, dated as of October 31, 2006, by and among the Company, Crawford & Company International, Inc., SunTrust Bank, as agent and a lender, and the other lenders party thereto (as amended, the “Credit Agreement”) executed on October 27, 2009, the May 2007 interest rate swap was discontinued as a cash flow hedge of exposure to changes in cash flows due to changes in interest rates. Accordingly, any future changes in the fair value of this swap agreement will be recorded by the Company as an expense adjustment rather than a component of the Company’s accumulated other comprehensive loss. Such amount was not material for the year ended December 31, 2009. The amount in accumulated comprehensive loss at the time the hedge was discontinued was $2,652,000 and was $1,593,000 at December 31, 2009. Because it is still probable that the forecasted transactions that were hedged will occur, this loss on 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. Although highly unlikely, should it become probable that the forecasted transactions will not occur, any amount in accumulated other comprehensive loss at such time would be reclassified as an expense adjustment.

 

We continue the ongoing monitoring of our customers’ ability to pay us for the services that we render to them. However, we have not experienced recent increases in bad-debt-related charge-offs of our accounts receivable. Based on historical results, we currently believe there is a low likelihood that writeoffs of our accounts receivable will have a material impact on our financial results. However, if one or more of our key customers files bankruptcy or otherwise becomes unable to make required payments to us, or if overall economic conditions continue to deteriorate, we may need to make material provisions in the future to increase our allowance for accounts receivable.

Our International Operations segment exposes us to foreign currency exchange rate changes that can impact translations of foreign-denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results. Increases in the value of the U.S. dollar compared to the other functional currencies in the locations in which we do business have negatively impacted our revenues and operating earnings in 2009 compared to recent years. We can not predict the impact that foreign currency exchanges rates may have on our future revenues or operating earnings in our International Operations segment.

 

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.

 

At December 31, 2009, our working capital balance (current assets less current liabilities) was approximately $66.7 million, an increase of $7.4 million from the working capital balance at December 31, 2008. The primary causes of this increase at December 31, 2009 were a net reduction of $30.0 million in current liabilities, offset partially by a $23.5 net decrease in accounts receivable and unbilled revenues. During 2009, $15.1 million of cash was used to fund our defined benefit pension plans in the U.S. and U.K. Cash and cash equivalents at the end of 2009 totaled $70.4 million, decreasing $2.8 million from $73.1 million at the end of 2008.

 

Cash Provided by Operating Activities

 

Cash provided by operating activities decreased by $19.9 million in 2009, from $71.6 million in 2008 to $51.7 million in 2009. This decrease was due primarily to lower net income, and reductions in other current liabilities partially offset by continuing improvements in receivables management. In 2009, we reduced the average days-sales-outstanding in billed and unbilled accounts receivable by nearly 3 days. The 2009 cash flow from operations included $10.3 million in contributions to our frozen U.S. defined benefit plan. In 2010, we plan to make contributions of $4.3 million to our U.S. defined contribution retirement plans, $33.5 million to our U.S. defined benefit pension plan (including a discretionary $10.0 million contribution which was made in January 2010), and $8.0 million to our U.K. defined benefit pension plans. We expect to fund these contributions with cash provided by operating activities in 2010, which we expect to be less than 2009 as a result. Interest payments on our debt were $14.3 million in 2009, and tax payments, net of refunds, were $10.3 million in 2009.

 

Cash provided by operating activities increased by $47.7 million in 2008, from $23.3 million in 2007 to $71.0 million in 2008. This increase was due primarily to higher net income and improved receivables management, offset partially by increased cash contributions to our underfunded defined benefit pension plans. In 2008, we reduced the average days-sales-outstanding in billed and unbilled accounts receivable by 19 days. The 2008 improvement in cash flow from operations was net of $17.4 million in additional contributions to our frozen U.S. defined benefit pension plan. Interest payments on our debt were $19.0 million in 2008, and tax payments, net of refunds, were $8.0 million in 2008.

 

Cash Used in Investing Activities

 

Cash used in investing activities increased by $3.1 million in 2009, from $28.0 million in 2008 to $31.2 million in 2009. Cash used to acquire property and equipment and capitalized software, including capitalization of internal software development costs, was $24.7 million in 2009 compared to $32.0 million in 2008. During 2009 we made cash payments for acquisitions of $6.3 million, primarily consisting of earnout

payments due on the 2002 acquisition of Robertson and Company Group. We estimate our property and equipment additions in 2010, including capitalized software, will approximate $27.0 million.

 

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

 

Cash used in financing activities was $26.6 million in 2009. In 2009, we repaid a net of $20.7 million of short- and long-term borrowings and incurred $4.1 million of costs in connection with various amendments to our Credit Agreement. Also in 2009, we used shares of our Class A common stock to settle $1.9 million of withholding taxes owed on the issuance of restricted and performance shares.

 

Cash used in financing activities was $12.8 million in 2008. In 2008, we repaid a net of $14.2 million of short-term and long-term borrowings.

 

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.

 

Other Matters Concerning Liquidity and Capital Resources

 

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.

 

Our compliance with the leverage ratio covenant is also sensitive to changes in our level of consolidated total funded debt, as defined in our Credit Agreement. In addition to short- and long-term borrowings, capital leases, and bank overdrafts, among other things, consolidated total funded debt includes letters of credit which can fluctuate based on our business requirements. An increase in borrowings under our Credit Agreement could negatively impact our leverage ratio, unless those increased borrowings are offset by a corresponding increase in our EBITDA. In addition, a reduction in EBITDA in the future could limit our ability to utilize available credit under the revolving credit facility contained in our Credit Agreement, which could negatively impact our ability to fund our current operations or make needed capital investments.

 

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:

 

 

We believe our current financial resources, together with funds generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations for the next 12 months. The most significant obligation we currently have which will become due after 12 months is the repayment of our Term Loan which is required in October 2013. We currently intend to enter into a new credit facility by December 31, 2012. We expect that we would use proceeds thereof to repay amounts outstanding under the term loan and, along with funds generated from operations, provide financial flexibility beyond 2012. No assurances can be provided that we will be able to enter into a new credit facility in a timely manner, or as to the terms or requirements thereunder.

Contractual Obligations

 

As of December 31, 2009, the impact that our contractual obligations, including estimated interest payments, are expected to have on our liquidity and cash flow in future periods is as follows:

 

(Note references in the following table refer to the note in the accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K)