As of December 31, 2013, the Company owned a building in Tucker, Georgia where part of its information technology facility was previously located. The Company also owned an office in Kitchener, Ontario and an additional office location in Stockport, England. As of December 31, 2013, the Company leased over 400 other office locations for use by one or more of its segments under various leases with varying terms. Other office locations are occupied under various short-term rental arrangements. The Company generally believes that its office locations are sufficient for its operations and that, if it were necessary 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 Company would be able to obtain such office locations as and when needed, or on terms it considered to be reasonable, if at all.
We typically 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 cases as services are provided, which generally occurs in the period the case is assigned to us, although sometimes a portion or substantially all of the revenues generated by a specific case assignment will be earned in subsequent periods. We cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related cases and the occurrence of natural and man-made disasters, which are a significant source of cases for us and are not subject to accurate forecasting.
During 2012, the Company recorded pretax special charges of $11.3 million, consisting of $1.2 million for severance costs, $0.6 million for retention bonuses, $0.8 million for temporary labor costs, and $0.1 million for other expenses for a project to outsource certain aspects of our U.S. technology infrastructure; $4.3 million to adjust the estimated loss on a leased facility the Company no longer uses; and $3.4 million for severance costs and $0.8 million for lease termination costs, primarily related to restructuring activities in our North American operations.
Broadspire's operating earnings improved each year from 2011 to 2013. The improvements were due to higher revenues and improved control over operating expenses. The results for 2013 also included a one-time increase in revenues and operating earnings of approximately $3.0 million due to Broadspire being relieved of the obligation to continue to service certain clients' claims under lifetime pricing contracts and the associated release of the remaining deferred revenue for those claims.
As expected, both EMEA A/P and Legal Settlement Administration's operating earnings declined in 2013 compared to 2012, reflecting the expected decline in revenues from two special projects. EMEA A/P completed the handling of claims resulting from the 2011 Thailand flooding, while Legal Settlement Administration had lower revenue from the Deepwater Horizon special project. Operating earnings in 2012 compared to 2011 were higher in both segments due to these special projects.
"Other income" includes dividend income from our unconsolidated subsidiaries and miscellaneous other income. Included in "Other income" for the year ended December 31, 2013 was a $2.3 million gain from the sale of the rights to a customer contract in Latin America in the first quarter of 2013. All of these amounts are included in the Americas segment operating earnings.
Selling, general and administrative ("SG&A") expenses were 1.7% higher in 2013 than in 2012 and 3.1% higher in 2012 than in 2011. The increases in both years were primarily due to increases in professional fees.
We believe that a discussion and analysis of the segment operating earnings (loss) 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 13, “Segment and Geographic Information," to the accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Operating earnings is the primary financial performance measure used by our senior management and CODM to evaluate the financial performance of our operating segments and make resource allocation decisions. We believe this measure is useful to others in that it allows them to evaluate segment operating performance using the same criteria used by our senior management and CODM. Segment operating earnings (loss) represent segment earnings (loss) before certain unallocated corporate and shared costs, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, special charges and credits, income taxes, and net income or loss attributable to noncontrolling interests.
Certain marketing functions that were previously included in each segment are now included in our corporate administrative costs and allocated back to the segments. The results of prior periods have been revised to conform to the current presentation.
Income taxes, net corporate interest expense, stock option expense, and amortization of customer-relationship intangible assets are recurring components of our net income, but they are not considered part of our segment operating earnings (loss) because they are managed on a corporate-wide basis. Income taxes are calculated for the Company on a consolidated basis based on statutory rates in effect in the various jurisdictions in which we provide services, and varies significantly by jurisdiction. Net corporate interest expense results from capital structure decisions made by senior management and affecting the Company as a whole. 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. Amortization expense is a non-cash expense for customer-relationship intangible assets acquired in business combinations. 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.
Unallocated corporate and shared costs and credits represent expenses and credits related to our chief executive officer 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, and certain self-insurance costs and recoveries that are not allocated to our individual operating segments.
In the normal course of business, our operating segments incur certain out-of-pocket expenses that are thereafter reimbursed by our clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are required to be included when reporting expenses and revenues, respectively, in our consolidated results of operations. In the discussion and analysis of results of operations which follows, we do not include a gross up of expenses and revenues 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 (loss) or operating earnings (loss). A reconciliation of revenues before reimbursements to consolidated revenues determined in accordance with GAAP is self-evident from the face of the accompanying statements of income. Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses.
Operating results for our segments reconciled to income before income taxes and net income attributable to shareholders of Crawford & Company, were as shown in the following table. Certain marketing functions that were previously included in each segment are now included in our corporate administrative costs and allocated back to the segments. The results of prior periods have been revised to conform to the current presentation.
YEAR ENDED DECEMBER 31, 2013 COMPARED WITH YEAR ENDED DECEMBER 31, 2012
The decline in revenues in U.S. Claims Services primarily resulted from a lack of major weather-related events, and an increase in the number of claims that clients insource. The decline in revenues in U.S. Claims Services was mitigated in part by flood losses in Canada that were partially serviced by U.S.-based adjusters. The cases received from the Canadian flooding are reported as case volumes in Canada below. Revenues resulting from these cases were split between the U.S. and Canada based on the country from which the adjuster handling the claim was based. The overall decline in U.S. Claims Services was offset by increases in revenues from Contractor Connection. Contractor Connection revenues increased due to the ongoing expansion of this service as an alternative property claims service solution as insurance carriers continued the trend of moving high-frequency, low-complexity property cases directly to repair networks. Contractor Connection revenues were also positively impacted by a price increase that was effective on July 1, 2013.
Revenues in Latin America and the Caribbean increased approximately 38.0% in local currency. The increase in 2013 was primarily due to an increase in claim volume associated with the automotive and marine business lines.
The 2013 decrease in U.S. Claims Services cases was primarily due to the lack of major weather-related claims activity in the U.S. and decisions by clients to insource certain claims handling functions. The 2013 increase in Contractor Connection cases was due to the ongoing expansion of our contractor network and to the continued trend in the insurance industry of shifting to contractor programs as an alternative property claims solution for high-frequency, low-complexity property cases, which we expect to continue for the foreseeable future.
Americas expenses other than reimbursements, direct compensation and fringe benefits increased from $110.3 million in 2012 to $112.8 million in 2013, primarily due to a $1.0 million increase in outsourced service costs associated with handling superstorm Sandy claims, a $1.7 million increase in outsourced service costs in Canada in order to handle the increase in automotive claims, a $1.8 million increase in expenses at Contractor Connection resulting from the increase in revenues, and $0.3 million of increases in various other expenses, partially offset by a $2.3 million gain from the sale of the rights to a customer contract in Latin America.
EMEA/AP operating earnings decreased to $32.2 million in 2013, a decrease of 33.7% from 2012 operating earnings of $48.5 million. The operating margin decreased from 13.2% in 2012 to 9.2% in 2013. This 2013 revenue decrease was due to a $30.2 million reduction in revenues associated with the 2011 Thailand floods and a decline in U.K. revenues, which were partially offset by increased claims volume and new sales of approximately $13.0 million in the core property and casualty markets in CEMEA and Asia-Pacific.
Reimbursements for out-of-pocket expenses incurred in our EMEA/AP segment which are included in total Company revenues decreased to $33.4 million in 2013 from $40.2 million in 2012. Reimbursements for out-of-pocket expenses were higher in 2012 because of the increased expenses associated with handling the Thailand flood claims.
The decrease in cases received in the U.K. was primarily due to the benign weather, lower fire and crime incidents and lower reported claims in the market as a whole. The increase in CEMEA cases resulted primarily from summer storms and associated flooding in Germany. In addition, the Scandinavian market saw an increase in high-frequency, low-complexity motor and residential claims from new and existing clients. Asia-Pacific grew their overall claims volumes through a mix of high-frequency, low-complexity automotive and affinity business in Malaysia, Hong Kong and Singapore coupled with growth in Australia.
As a percent of segment revenues before reimbursements, direct compensation expense, including related payroll taxes and fringe benefits, increased to 63.6% in 2013 from 60.2% in 2012. The percentage increase primarily reflected changes in the mix of services provided and lower utilization of our staff within EMEA/AP after the Thailand floods,which returned the percentage to historical operating levels. The dollar amount of these expenses increased in 2013 by $2.0 million. There was an average of 3,045 EMEA/AP FTEs in 2013, a slight decrease from 3,067 in 2012 due to a decline in FTEs in the U.K. partially offset by an increase in FTEs in Asia-Pacific.
Salaries and wages of EMEA/AP segment personnel increased slightly to $188.7 million in 2013 compared with $188.5 million in 2012, increasing as a percent of revenues before reimbursements from 51.4% in 2012 to 53.9% in 2013. Payroll taxes and fringe benefits increased 5.6% to $34.1 million in 2013 compared with $32.3 million in 2012, primarily due to higher defined benefit pension expense in the U.K. and CEMEA.
Broadspire segment revenues are primarily derived from providing a complete range of claims and risk management services to clients in the self-insured or commercially insured marketplace. In addition to field investigation and evaluation of claims, Broadspire also offers initial loss reporting services for claimants; loss mitigation services, such as medical bill review, medical case management and vocational rehabilitation; risk management information services; and administration of trust funds established to pay claims. Broadspire revenues before reimbursements by major service line were as follows:
Broadspire unit volumes by major underlying case category, as measured by cases received, for 2013 and 2012 were as follows:
Our most significant expense in our Broadspire segment is the compensation of employees, including related payroll taxes and fringe benefits. Broadspire direct compensation and fringe benefits expense, as a percent of the related revenues before reimbursements, decreased to 51.3% in 2013, compared with 54.2% in 2012. This decrease was due to both higher utilization and lower costs due to a decrease in the number of employees. Average FTEs totaled 1,595 in 2013, down from 1,659 in 2012.
Broadspire segment salaries and wages increased 0.5%, to $108.0 million in 2013 from $107.5 million in 2012, due to a $2.2 million increase in incentive compensation expense as a result of the improvement in operating results, which was partially offset by a $1.7 million reduction in salaries and wages resulting from the decline in the average number of FTEs. Payroll taxes and fringe benefits for our Broadspire segment totaled $21.3 million in 2013, decreasing 3.2% from 2012 expenses of $22.0 million, due to the decline in the average number of FTEs.
Broadspire segment expenses other than reimbursements, direct compensation and fringe benefits decreased as a percent of segment revenues before reimbursements to 45.4% in 2013 from 45.8% in 2012. Total 2013 expenses increased by $5.2 million compared with 2012, primarily due to the increased use of outsourced service providers required to service the increased revenues.
As expected, Legal Settlement Administration revenues in 2013 have declined compared with prior year levels primarily because of lower revenues from the Deepwater Horizon class action settlement project. Declines in Deepwater Horizon revenues have been partially offset by a number of other meaningful class action and bankruptcy projects. We expect activity in this special project to continue during 2014, although at a reduced rate. No assurances of timing of the Deepwater Horizon project end date and, therefore continued significant revenues from this project, can be provided.
Legal Settlement Administration revenues are primarily derived from legal settlement administration services related to securities, product liability, other class action settlements, and bankruptcies, primarily in the U.S. Legal Settlement Administration revenues before reimbursements decreased 7.5% to $218.8 million in 2013, compared with $236.6 million in 2012. Legal Settlement Administration revenues are project-based and can fluctuate significantly due primarily to the timing of projects awarded. The decrease in Legal Settlement Administration revenues was due primarily to the tapering of the special project discussed above.
The nature and volume of work performed in our Legal Settlement Administration segment typically requires more reimbursable out-of-pocket expenditures than our other operating segments. Reimbursements for out-of-pocket expenses incurred in our Legal Settlement Administration segment which are included in total Company revenues were $32.7 million in 2013, increasing from $27.3 million in 2012. Reimbursable expenses vary from year to year primarily due to the number of large mailings each year and the mail method utilized (i.e., express mail versus normal mail delivery).
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 by us in any period can vary, sometimes significantly.
Legal Settlement Administration direct compensation expense, including related payroll taxes and fringe benefits, as a percent of segment revenues before reimbursements, increased to 39.2% in 2013, compared with 35.8% in 2012. There was an average of 690 FTEs in 2013, compared with an average of 602 in 2012 as some outsourced service providers were hired as employees on a full-time basis.
YEAR ENDED DECEMBER 31, 2012 COMPARED WITH YEAR ENDED DECEMBER 31, 2011
Operating earnings for our Americas segment decreased from $20.0 million in 2011 to $11.9 million in 2012, representing an operating margin of 3.6% in 2012 compared with 5.6% in 2011. The decrease in 2012 was primarily due to a lack of weather-related claims in the U.S. and Canada, particularly in the first six months of 2012 as compared with 2011. Claims from superstorm Sandy in the northeastern U.S. improved results toward the end of 2012.
For the year ended December 31, 2012 compared with the year ended December 31, 2011, the U.S. dollar strengthened against most foreign currencies in Canada, Latin America and the Caribbean, decreasing revenues before reimbursements by 0.8%. Revenues were also negatively impacted by segment unit volume, measured principally by cases received, which decreased by 2.1% during this period. In addition, an overall unfavorable change in the mix of services provided and in the rates charged for those services decreased revenues by approximately 3.7% in 2012 compared with 2011.
Revenues in Latin America and the Caribbean decreased approximately 10.7% in local currency. The decrease in 2012 was primarily due to competitive pricing pressure and the decision by several clients in Brazil to keep their claims in-house rather than outsourcing them to us.
The 2012 decrease in U.S. Claims Field Operations, U.S. Technical Services, and Canada cases was primarily due to lower industry-wide claims volumes, primarily due to a reduction in weather-related events in the first six months of 2012, which resulted in fewer cases referred to us from our clients. The 2012 increase in Contractor Connection cases was due to the ongoing expansion of our contractor network and to the continued trend in the insurance industry of shifting to contractor programs as an alternative property claims solution for high-frequency, low-complexity property cases and also to additional cases from superstorm Sandy. The 2012 increase in U.S. Catastrophe Services cases was primarily due a large influx of cases in the fourth quarter of 2012 resulting from superstorm Sandy.
The 2012 increase in cases in Latin America and the Caribbean was primarily due to growth in high-frequency, low-complexity claims activity in Mexico and Brazil.
Americas direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, was 63.5% for 2012 and 63.4% for 2011. There was an average of 2,680 FTEs (including 181 catastrophe adjusters) in 2012 compared with an average of 2,844 (including 172 catastrophe adjusters) in 2011.
Americas expenses other than reimbursements, direct compensation and fringe benefits were relatively unchanged at $110.9 million in 2011 compared with $110.3 million in 2012. These expenses are more fixed in nature and increased as a percent of Americas revenues before reimbursements due to the overall decline in revenues to 32.9% in 2012 from 31.0% in 2011.
Reimbursements for out-of-pocket expenses incurred in our EMEA/AP segment which are included in total Company revenues increased to $40.2 million in 2012 from $35.2 million in 2011. This increase in 2012 was due primarily to reimbursed expenses from the increased weather-related activity in Asia-Pacific.
As a percent of segment revenues before reimbursements, direct compensation expense, including related payroll taxes and fringe benefits, decreased to 60.2% in 2012 from 65.2% in 2011. The percentage decrease primarily reflected increased utilization of our staff. The dollar amount of these expenses decreased in 2012 by $1.1 million. Changes in exchange rates decreased direct compensation and fringe benefits expenses by approximately $6.5 million in 2012 compared with 2011. Within the segment, there was a $5.2 million local currency reduction in direct compensation and fringe benefits in the U.K. and CEMEA in 2012 compared with 2011 primarily due to a $4.3 million reduction in pension expense in 2012 compared with 2011. This decline was offset by a $10.7 million local currency increase in compensation costs in Asia-Pacific in 2012 compared with 2011 primarily as a result of an increase in staff required to administer claims from the Thailand floods and weather-related cases in Australia and higher incentive compensation expense. There was an average of 3,067 EMEA/AP FTEs in 2012, a slight decrease from 3,114 in 2011 with a decline in FTEs in the U.K. partially offset by an increase in FTEs in Asia-Pacific.
Salaries and wages of EMEA/AP segment personnel increased 1.2% to $188.5 million in 2012 compared with $186.3 million in 2011, decreasing as a percent of revenues before reimbursements from 54.8% in 2011 to 51.4% in 2012. Payroll taxes and fringe benefits decreased 9.3% to $32.3 million in 2012 compared with $35.6 million in 2011.
Expenses other than reimbursements, direct compensation and fringe benefits increased as a percent of segment revenues before reimbursements from 26.5% in 2011 to 26.6% in 2012, and the dollar amount of these expenses increased by $7.3 million. In local currency, the increase would have been approximately $10.1 million, with the increase primarily resulting from higher outsourced services expenses incurred to administer the Thailand flood claims.
Broadspire recorded operating earnings of $21,000 in 2012, compared with an operating loss of $11.4 million, or (4.9)% of segment revenues before reimbursements in 2011. The improvement over the prior year was due to a combination of increased revenues and higher utilization of our employees, as well as the benefit of ongoing cost control measures.
Reimbursements for out-of-pocket expenses incurred in our Broadspire segment which are included in total Company revenues were $3.9 million in 2012, increasing from $3.7 million in 2011. This increase was primarily attributable to higher travel expenses incurred by our medical field case management personnel.
Broadspire direct compensation and fringe benefits expense, as a percent of the related revenues before reimbursements, decreased to 54.2% in 2012, compared with 57.8% in 2011. This decrease was due to both higher revenues and lower costs due to a decrease in the number of employees. Average FTEs totaled 1,659 in 2012, down from 1,817 in 2011.
Broadspire segment salaries and wages decreased 4.5%, to $107.5 million in 2012 from $112.6 million in 2011, reflecting the decline in FTEs in 2012. Payroll taxes and fringe benefits for our Broadspire segment totaled $22.0 million in 2012, decreasing 4.3% from 2011 expenses of $23.0 million, corresponding to the salaries and wages decreases.
Broadspire segment expenses other than reimbursements, direct compensation and fringe benefits decreased as a percent of segment revenues before reimbursements to 45.8% in 2012 from 47.1% in 2011. Total 2012 expenses declined slightly compared with 2011, primarily due to the ongoing cost control measures partially offset by higher medical bill review fees as a result of the increase in medical management revenues.
The U.K. Finance Bill 2013 was enacted in 2013. This bill includes a change in the main U.K. corporation tax rate from its current 23% rate to 21% effective April 1, 2014 and to 20% effective April 1, 2015. This tax rate change, along with other rate changes around the world, resulted in additional tax expense of approximately $1.7 million in 2013 primarily because the value of the U.K. deferred tax assets declined with the decrease in the tax rate.
Amortization of customer-relationship intangible assets represents the non-cash amortization expense for finite-lived customer-relationship and trade name intangible assets. Amortization expense associated with these intangible assets totaled $6.4 million, $6.4 million, and $6.2 million in 2013, 2012, and 2011, respectively. This amortization is included in "Selling, general and administrative expenses" in our Consolidated Statements of Income.
Certain unallocated costs and credits are excluded from the determination of segment operating earnings (loss). These unallocated corporate and shared costs and credits represent costs of our frozen U.S. defined benefit pension plan, expenses for our chief executive officer and our Board of Directors, certain adjustments to our self-insured liabilities, certain unallocated professional fees, costs of our cross currency swap, and certain adjustments and recoveries to our allowances for doubtful accounts receivable. From time to time, we evaluate which corporate costs and credits are appropriately allocated to one or more of our operating segments. If changes are made to our allocation methodology, prior period allocations are revised to conform to our then-current allocation methodology.
There were no special charges or credits in 2013. Special charges in 2012 consisted of $1.2 million for severance costs, $0.6 million for retention bonuses, $0.8 million for temporary labor costs, and $0.1 million for other expenses related to a project to outsource certain aspects of our U.S. technology infrastructure; $4.3 million to adjust the estimated loss on a leased facility the Company no longer uses; and $3.4 million for severance costs and $0.8 million for lease termination costs, primarily related to restructuring activities in our North American operations.
Special charges and credits in 2011 consisted of a purchase price dispute arbitration award of $7.0 million, partially offset by a $3.4 million write-off of deferred financing costs related to the repayment of our then-outstanding Term Loan B and $1.2 million in severance expense related to the Broadspire segment.
Borrowings under the Credit Facility, may be made in U.S. dollars, Euros, the currencies of Canada, Japan, Australia or United Kingdom, and, subject to the terms of the Credit Facility, other currencies. Borrowings under the Credit Facility bear interest, at the option of the applicable Borrower, based on the Base Rate (as defined below) or the London Interbank Offered Rate ("LIBOR"), in each case plus an applicable interest margin based on our leverage ratio (as defined in the Credit Facility), provided that borrowings in foreign currencies may bear interest based on LIBOR only. The interest margin for LIBOR loans ranges from 1.50% to 2.25% and for Base Rate loans ranges from 0.50% to 1.25%. Base Rate is defined as the highest of (i) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of 1%, (ii) the prime commercial lending rate of the Administrative Agent and (iii) LIBOR for a one-month interest period plus 1.0%.
The operations of our Americas and EMEA/AP segments expose 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 with the other functional currencies in the locations in which we do business negatively impacted our revenues and operating earnings in 2013. There was a similar negative impact in 2012 to both revenues and operating earnings, while 2011 saw a decline in the strength of the U.S. dollar, which positively impacted our 2011 results. We cannot predict the impact that foreign currency exchange rates may have on our future revenues or operating earnings in our Americas and EMEA/AP segments.
At December 31, 2013, our working capital balance (current assets less current liabilities) was approximately $52.3 million, compared with $68.6 million at December 31, 2012. The decline in working capital was due to increases in current liabilities as a result of the increase in short-term borrowings and a decline in current assets resulting from the lower level of activity in the fourth quarter of 2013 as compared to the same quarter in 2012. Cash and cash equivalents at the end of 2013 totaled $76.0 million, compared with $71.2 million at the end of 2012.
Cash used in investing activities decreased by $0.3 million in 2013, from $33.8 million in 2012 to $33.5 million in 2013. Cash used to acquire property and equipment and capitalized software, including capitalization of internal software development costs, was $31.0 million in 2013 compared with $33.2 million in 2012. We forecast that our property and equipment additions in 2014, including capitalized software, will approximate $37 million.
Cash used in investing activities decreased by $1.1 million in 2012, from $34.9 million in 2011 to $33.8 million in 2012. Cash used to acquire property and equipment and capitalized software, including capitalization of internal software development costs, was $33.2 million in 2012 compared with $29.9 million in 2011.
Cash used in financing activities was $39.1 million in 2013. We paid quarterly cash dividends totaling $8.8 million and repurchased $3.6 million of our common stock. In 2013, we borrowed $88.5 million in short-term borrowings during the year for working capital needs, and we repaid a total of $99.5 million in short-term borrowings and $15.8 million in long-term debt and capital lease obligations. Also in 2013, we received shares of our Class A common stock that were surrendered by employees to settle $1.3 million of withholding taxes owed on the issuance of restricted and performance shares.
Cash used in financing activities was $64.9 million in 2012. We paid quarterly and special cash dividends totaling $9.9 million. We borrowed $42.2 million in short-term borrowings during the year for working capital needs, and we repaid $91.4 million in short-term borrowings and $1.6 million in long-term debt and capital lease obligations. Also in 2012, we received shares of our Class A common stock that were surrendered by employees to settle $1.3 million of withholding taxes owed on the issuance of restricted and performance shares.
As disclosed in Note 4, “Short-Term and Long-Term Debt, Including Capital Leases,” to our accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, we have two principal financial covenants in our Credit Facility. The leverage ratio covenant requires us to comply with a maximum leverage ratio, defined in our Credit Facility as the ratio of (i) consolidated total funded debt minus unrestricted cash to (ii) consolidated earnings before interest expense, income taxes, depreciation, amortization, stock-based compensation expense, and certain other charges and expenses (“EBITDA”). This ratio must not be greater than 3.25 to 1.00. The fixed charge coverage ratio covenant requires us to comply with a minimum fixed charge coverage ratio, defined as the ratio of (i)(A) consolidated EBITDA minus (B) aggregate income taxes to the extent paid in cash minus (C) unfinanced capital expenditures to (ii) the sum of: (A) consolidated interest expense to the extent paid (or required to be paid) in cash, plus (B) the aggregate of all scheduled payments of principal on funded debt (including the principal component of payments made in respect of capital lease obligations) required to have been made (whether or not such payments are actually made), plus (C) the aggregate of all restricted payments (as defined) paid, plus (D) the aggregate of all earnouts paid or required to be paid, must not be less than 1.50 to 1.00 for the four-quarter period ending at the end of each fiscal quarter. At December 31, 2013, we were in compliance with all required ratios under our Credit Facility. Based on our financial plans, we expect to be able to remain in compliance with all required covenants throughout 2014. Our compliance with the leverage ratio and fixed charge coverage ratio is particularly sensitive to changes in our EBITDA, and if our financial plans for 2014 or other future periods do not meet our current projections, we could fail to remain in compliance with these financial covenants in our Credit Facility.
Borrowings under our Credit Facility bear interest at a variable rate, based on LIBOR or a Base Rate, in either case plus an applicable margin. Long-term debt refers to the required principal repayment at maturity of the Credit Facility, and may differ significantly from estimates, due to, among other things, actual amounts outstanding at maturity or any refinancings prior to such date. Interest amounts are based on projected borrowings under our Credit Facility and interest rates in effect on December 31, 2013, and the actual interest payments may differ significantly from estimates due to, among other things, changes in outstanding borrowings and prevailing interest rates in the future.
We sponsor a qualified defined benefit pension plan in the U.S., (the "U.S. Qualified Plan") three defined benefit plans in the U.K. (the "U.K. Plans"), and defined benefit pension plans in the Netherlands, Norway, Germany, and the Philippines (the "other international plans"). Future cash funding of our defined benefit pension plans will depend largely on future investment performance, interest rates, changes to mortality tables, and regulatory requirements. Effective December 31, 2002, we froze our U.S. Qualified Plan. The aggregate deficit in the funded status of the U.S. Plan, U.K. Plans and other international plans totaled $103.0 million and $168.2 million at the end of 2013 and 2012, respectively. The 2013 decrease in the unfunded deficit of our defined benefit pension plans primarily resulted from actuarial gains in the U.S. Qualified Plan due to strong asset performance and changes in the discount rates, in addition to Company contributions. During 2013, we made contributions of $18.0 million and $6.5 million to our U.S. Qualified Plan and U.K. Plans, respectively. In 2012, we made contributions of $13.5 million and $6.6 million to our U.S. Qualified Plan and U.K. Plans, respectively.
We maintain funds in trusts to administer claims for certain clients. These funds are not available for our general operating activities and, as such, have not been recorded in the accompanying consolidated balance sheets. We have concluded that we do not have material off-balance sheet financial risk related to these funds at December 31, 2013.
Noncurrent deferred income tax assets decreased by $37.9 million primarily due to the tax impact of the adjustments to retirement liabilities recorded in accumulated other comprehensive income.
Our revenues are primarily comprised of claims processing or program administration fees. Fees for professional services are recognized as unbilled revenues at estimated collectible amounts at the time such services are rendered. Substantially all unbilled revenues are billed within one year. Out-of-pocket costs incurred in administering a claim are typically passed on to our clients and included in our revenues for all purposes under GAAP. Deferred revenues represent the estimated unearned portion of fees related to future services under certain fixed-fee service arrangements. Deferred revenues are recognized based on the estimated rate at which the services are provided. These rates are primarily based on an evaluation of historical claim closing rates by major lines of coverage. Additionally, recent claim closing rates are evaluated to ensure that current claim closing history does not indicate a significant deterioration or improvement in the longer-term historical closing rates used.
We regularly evaluate whether events and circumstances have occurred which indicate that the carrying amounts of goodwill, indefinite-lived intangible assets, or other long-lived assets have been impaired. Our indefinite-lived intangible assets consist of trade names associated with acquired businesses. Our other long-lived assets consist primarily of property and equipment, deferred income tax assets, capitalized software, and amortizable intangible assets related to customer relationships and technology. When factors indicate that such assets should be evaluated for possible impairment, we perform an impairment test. We believe our goodwill, indefinite-lived intangible assets, and other long-lived assets were appropriately valued and not impaired at December 31, 2013.
We perform an annual impairment analysis of goodwill in which we compare the carrying value of our reporting units to the estimated market value of those reporting units as determined by discounting future projected cash flows. We perform an interim impairment analysis when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value. The estimated market values of our reporting units are based upon certain assumptions made by us. The estimated market values of our reporting units are reconciled to the Company’s market value as determined by its stock price in order to validate the reasonableness of the estimated market values. The estimated market value of all of our reporting units exceeded the carrying values of the reporting units.
We sponsor various defined benefit pension plans in the U.S. and U.K. that cover a substantial number of current and former employees in each location. We utilize the services of independent actuaries to help us estimate our pension obligations and measure pension costs. Our U.S. defined benefit pension plan was frozen on December 31, 2002. Our U.K. defined benefit pension plans were closed to new employees as of October 31, 1997, but existing participants may still accrue additional limited benefits based on salary levels existing at the close date. Benefits payable under our U.S. defined benefit pension plan are generally based on career compensation; however, no additional benefits accrue on our frozen U.S. plan after December 31, 2002. Benefits payable under the U.K. plans are generally based on an employee’s salary at the time the applicable plan was closed. Our funding policy is to make cash contributions in amounts sufficient to maintain the plans on an actuarially sound basis, but not in excess of amounts deductible under applicable income tax regulations. Note 8, “Retirement Plans,” of our accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K provides details about the assumptions used in determining the funded status of the plans, the unrecognized actuarial gain/(loss), the components of net periodic benefit cost, benefit payments expected to be made in the future and plan asset allocations.
The major assumptions used in accounting for our defined benefit pension plans are the discount rate and the expected long-term return on plan assets. The discount rate assumptions reflect the rates at which the benefit obligations could be effectively settled. Our discount rates were determined with the assistance of actuaries, who calculate the yield on a theoretical portfolio of high-grade corporate bonds (rated Aa or better) with cash flows that generally match our expected benefit payments in future years. At December 31, 2013, the discount rate used to compute the benefit obligations of the U.S. and U.K. plans were 4.86% and 4.30%, respectively.
The estimated average rate of return on plan assets is a long-term, forward-looking assumption that also materially affects our pension cost. It is required to be the expected future long-term rate of earnings on plan assets. Our pension plan assets are invested primarily in collective funds. As part of our strategy to manage future pension costs and net funded status volatility, we have transitioned to a liability-driven investment strategy with a greater concentration of fixed-income securities to better align plan assets with liabilities.
We review the expected long-term rate of return on an annual basis and revise it as appropriate. To support our conclusions, we periodically commission asset/liability studies performed by third-party professional investment advisors and actuaries to assist us in our reviews. These studies project our estimated future pension payments and evaluate the efficiency of the allocation of our pension plan assets into various investment categories. These studies also generate probability-adjusted expected future returns on those assets. As a result of the transition to a liability-driven investment strategy described previously, the expected long-term rates of return on plan assets assumption used to determine 2014 net periodic pension cost were estimated to be 6.75% and 7.12% for the U.S. and U.K. plans, respectively.
Pension expense is also affected by the accounting policy used to determine the value of plan assets at the measurement date. We apply our expected return on plan assets using fair market value as of the annual measurement date. The fair market value method results in greater volatility to our pension expense than the calculated value method. The amounts recognized in the balance sheet reflect a snapshot of the state of our long-term pension liabilities at the plan measurement date and the effect of mark-to-market accounting on plan assets. At December 31, 2013, we recorded an increase to equity through other comprehensive income ("OCI") of $15.7 million (net of tax) to reflect unrealized actuarial gains during 2013. At December 31, 2012, we recorded a decrease to equity through OCI of $39.9 million (net of tax) to reflect unrealized actuarial losses during 2012. Those changes are subject to amortization over future years and may be reflected in future income statements.
As of December 31, 2013 and 2012, our estimated liabilities for self-insured risks totaled $25.6 million and $28.0 million, respectively. The estimated liability is most sensitive to changes in the ultimate liability for a claim and, if applicable, the interest rate used to discount the liability. We believe our provisions for self-insured losses are adequate to cover the expected net cost of losses incurred. However, these provisions are estimates and amounts ultimately settled may be significantly greater or less than the provisions established. We used a discount rate of 1.37% to determine the present value of our self-insured workers’ compensation liabilities as of December 31, 2013. If the average discount rate was reduced by 1.0% or increased by 1.0%, reflecting either an increase or decrease in underlying interest rates, our estimated liabilities for these self-insured risks at December 31, 2013 would have been impacted by approximately $473,000, resulting in an increase or decrease to 2013 consolidated net income of approximately $294,000.
See Note 1, “Significant Accounting and Reporting Policies,” of our accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements including the dates, or expected dates of adoption, and effects, or expected effects, on our disclosures, results of operations, and financial condition.
The Company has controlling ownership interests in several entities that are not wholly-owned by the Company. The financial results and financial positions of these controlled entities are included in the Company’s consolidated financial statements, including both the controlling interests and the noncontrolling interests. The noncontrolling interests represent the equity interests in these entities that are not attributable, either directly or indirectly, to the Company. Noncontrolling interests are reported as a separate component of the Company’s Shareholders’ Investment. On the Company’s Consolidated Statements of Income, net income (or loss) is attributed to the controlling interests and the noncontrolling interests separately.
The Company consolidates the liabilities of its deferred compensation plan and the related assets, which are held in a rabbi trust and considered a variable interest entity ("VIE") of the Company. The rabbi trust was created to fund the liabilities of the Company's deferred compensation plan. The Company is considered the primary beneficiary of the rabbi trust because the Company directs the activities of the trust and can use the assets of the trust to satisfy the liabilities of the Company's deferred compensation plan. At December 31, 2013 and 2012, the liabilities of this deferred compensation plan were $10,322,000 and $10,327,000, respectively, which represented obligations of the Company rather than of the rabbi trust, and the values of the assets held in the related rabbi trust were $15,140,000 and $14,741,000, respectively. These liabilities and assets are included in "Other noncurrent liabilities" and "Other noncurrent assets" on the Company’s Consolidated Balance Sheets, respectively.
In accordance with ASC 715, "Compensation Retirement Benefits", employers are required to separately recognize liabilities, in the aggregate, for underfunded or unfunded plans, and assets, in the aggregate, for overfunded plans. Since the actuarial present value of benefit obligations payable by the Company's defined benefit pension plans in the next twelve months do not exceed the fair value of the plans' assets, the underfunded pension liabilities are recorded as noncurrent liabilities and are included in "Accrued pension liabilities." The overfunded plans are recorded as noncurrent assets and are included in "Other noncurrent assets." The prior year presentation has been revised to conform to the current year presentation. See Note 8, "Retirement Plans" for further discussion.
Both the Americas segment and the EMEA/AP segment earn revenues by providing field investigation and evaluation of property and casualty claims for insurance companies and self-insured entities and by providing access to the Company-owned direct repair networks. The Company’s Broadspire segment earns revenues by providing field investigation and claims evaluation of workers’ compensation and liability claims, initial loss reporting services for its clients' claimants, 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. The Legal Settlement Administration segment earns revenues by providing administration services related to settlements of securities cases, product liability cases, Chapter 11 bankruptcy noticing and distribution, and other legal settlements by identifying and qualifying class members, determining and dispensing settlement payments, and administering settlement funds.
Deferred revenues represent the estimated unearned portion of fees derived from certain fixed-rate claim service agreements. The Company’s fixed-fee service arrangements typically call for the Company to handle claims on either a one- or two-year basis, or for the lifetime of the claim. In cases where the claim is handled on a non-lifetime basis, an additional fee is typically received on each anniversary date that the claim remains open. For service arrangements where the Company provides services for the life of the claim, the Company receives only one fee for the life of the claim, regardless of the ultimate duration of the claim. Deferred revenues are recognized based on the estimated rate at which the services are provided. These rates are primarily based on a historical evaluation of actual claim durations by major line of coverage.
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. The fair value of cash and cash equivalents approximates carrying value due to their short-term nature. At December 31, 2013, cash and cash equivalents included time deposits of approximately $2,479,000 that were in financial institutions outside the U.S.
For the years ended December 31, 2013, 2012, and 2011, the Company’s adjustments to revenues associated with client invoice adjustments totaled $2,812,000, $2,712,000, and $3,124,000, respectively.
Goodwill is an asset that represents the excess of the purchase price over the fair value of the separately identifiable net assets (tangible and intangible) acquired in business combinations. Indefinite-lived intangible assets consist of trade names associated with acquired businesses. Other long-lived assets consist primarily of property and equipment, capitalized software, and amortizable intangible assets related to customer relationships, technology, and trade names with finite lives. Goodwill and indefinite-lived intangible assets are not amortized, but are subject to impairment testing at least annually.
Subsequent to a business acquisition in which goodwill is recorded as an asset, post-acquisition accounting requires that goodwill be tested to determine whether there has been an impairment. The Company performs an impairment test of goodwill and indefinite-lived intangible assets at least annually on October 1 of each year. The Company regularly evaluates whether events and circumstances have occurred which indicate potential impairment of goodwill, indefinite-lived intangible assets, or other long-lived assets. When factors indicate that such assets should be evaluated for possible impairment between the scheduled annual impairment tests, the Company performs an impairment test. The Company believes its goodwill, indefinite-lived intangible assets, and other long-lived assets were appropriately valued and not impaired at December 31, 2013.
For step 1 of goodwill impairment testing, the carrying value of each of the Company’s reporting units is compared with the estimated fair value of the reporting unit as determined utilizing an income approach. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of the cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The discount rate used reflects the Company’s assessment of a market participant’s view of the risks associated with the projected cash flows. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions or any other assumptions, the Company believes that the income approach provides a reasonable estimate of the fair value of its reporting units.
The Company’s four operating segments are deemed to be reporting units because the components of each operating segment have similar economic characteristics. If changes to the Company’s reporting structure impact the composition of the Company’s reporting units, existing goodwill is reallocated to the revised reporting units based on their relative estimated fair values as determined by a discounted cash flow analysis. If all of the assets and liabilities of an acquired business are assigned to a specific reporting unit, then the goodwill associated with that acquisition is assigned to that reporting unit at acquisition unless another reporting unit is also expected to benefit from the acquisition.
Property and equipment, including assets under capital leases, consisted of the following at December 31, 2013 and 2012:
Additions to property and equipment under capital leases, which are excluded from acquisitions of property and equipment in the Company's Statements of Cash Flows, totaled $340,000, $2,422,000, and $808,000 for 2013, 2012, and 2011, respectively.
The Company self-insures certain risks consisting primarily of professional liability, auto liability, and employee medical, disability, and workers’ compensation liability. Insurance coverage is obtained for catastrophic property and casualty exposures, including professional liability on a claims-made basis, and those risks required to be insured by law or contract. Most of these self-insured risks are in the U.S. Provisions for claims under the self-insured programs are made based on the Company’s estimates of the aggregate liabilities for claims incurred, losses that have occurred but have not been reported to the Company, and for adverse developments on reported losses. The estimated liabilities are calculated based on historical claims experience, the expected lives of the claims, and other factors considered relevant by management. Changes in these estimates may occur as additional information becomes available. The estimated liabilities for claims incurred under the Company’s self-insured workers’ compensation and employee disability programs are discounted at the prevailing risk-free interest rate for U.S. government securities of an appropriate duration. All other self-insured liabilities are undiscounted. At December 31, 2013 and 2012, accrued liabilities for self-insured risks totaled $25,630,000 and $28,013,000, respectively, including current liabilities of $13,100,000 and $14,120,000, respectively.
Foreign currency transactions for the years ended December 31, 2013 , 2012 , and 2011 resulted in a net loss of $1,084,000, $268,000, and $1,318,000 respectively.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." Under ASU 2013-11, an entity is required to present unrecognized tax benefits ("UTBs") as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. The determination of whether a deferred tax asset is available is based on the unrecognized tax benefit and the deferred tax asset that exists at the reporting date and presumes disallowance of the tax position at the reporting date. ASU 2013-11 eliminates the diversity in practice in the presentation of unrecognized tax benefits but does not alter the way in which entities assess deferred tax assets for realizability. ASU 2013-11 is effective for the Company on January 1, 2014 with early adoption permitted. The Company adopted this standard in 2013. The adoption of this standard did not have a material effect on the Company's results of operations, financial condition or cash flows.
The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012:
Amortization of intangible assets was $7,127,000, $7,141,000, and $6,918,000 for the years ended December 31, 2013, 2012, and 2011, respectively. For the years ended December 31, 2013, 2012, and 2011, amortization expense for finite-lived customer-relationship and trade name intangible assets in the amounts of $6,385,000, $6,373,000, and $6,177,000, respectively, were excluded from segment operating earnings (see Note 13, “Segment and Geographic Information”). The amortization expense for the technology-based intangible assets is included in segment operating earnings. Intangible assets subject to amortization are amortized on a straight-line basis over lives ranging from 3 to 15 years.
The Credit Facility currently consists of a $400.0 million revolving credit facility, with a letter of credit subfacility of $100.0 million. The Credit Facility contains sublimits of $185.0 million for borrowings by the UK Borrower, $40.0 million for borrowings by the Canadian Borrower and $15.0 million for borrowings by the Australian Borrower. The Credit Facility matures, and all amounts outstanding thereunder will be due and payable, on November 25, 2018.
Under the Credit Facility, the leverage ratio, as of the last day of any fiscal quarter, defined as the ratio of (i) consolidated total funded debt minus unrestricted cash to (ii) consolidated EBITDA, must not be greater than 3.25 to 1.00.
Short-term borrowings under the Credit Facility totaled $35,000,000 and $13,275,000 at December 31, 2013 and 2012, respectively. The Company expects, but is not required, to repay all of such short-term borrowings at December 31, 2013 in 2014.
Interest expense, including any impact from the Company’s interest rate hedge and amortization of capitalized loan costs, on the Company’s short-term and long-term borrowings was $7,191,000, $9,574,000, and $16,931,000 for the years ended December 31, 2013, 2012, and 2011, respectively. Interest paid on the Company’s short-term and long-term borrowings was $6,379,000, $8,728,000, and $14,117,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
Principal repayments of long-term debt, including current portions and capital leases, as of December 31, 2013 are expected to be as follows:
The Company and its subsidiaries lease certain office space, computer equipment, and automobiles under operating leases. For office leases that contain scheduled rent increases or rent concessions, the Company recognizes monthly rent expense based on a calculated average monthly rent amount that considers the rent increases and rent concessions over the life of the lease term. Leasehold improvements of a capital nature that are made to leased office space under operating leases are amortized over the shorter of the term of the lease or the estimated useful life of the improvement. License and maintenance costs related to leased vehicles are paid by the Company.
At December 31, 2013, future minimum payments under non-cancelable operating leases with terms of more than 12 months were as follows:
In January 2013, the Company entered into a 10-year operating lease agreement for approximately 24,000 square feet of office space in Berkeley Heights, NJ, primarily for our Broadspire segment. The lease began July 1, 2013. Total lease payments over the 10-year term are approximately $6,747,000. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
Included in the acquired commitments of Broadspire Management Services, Inc. was a long-term operating lease for a two-building office complex in Plantation, Florida. The term of this lease ends in December 2021. Included in the future minimum office lease payments for operating leases noted above are total lease payments of $35,013,000 related to this Plantation, Florida lease. A majority of this office space was subleased at December 31, 2013. Under executed sublease arrangements at December 31, 2013 between the Company and sublessors, as described below, the sublessors are obligated to pay the Company minimum sublease payments as follows:
Net cash payments for income taxes were $21,030,000, $14,378,000, and $14,243,000 in 2013, 2012, and 2011, respectively.
The tax rate change was primarily due to the U.K. Finance Bill 2013 that was enacted in 2013. This bill includes a change in the main U.K. corporation tax rate from its current 23% rate to 21% effective April 1, 2014 and to 20% effective April 1, 2015. This tax rate change resulted in a discrete tax expense of approximately $1,300,000 in 2013 as the value of the U.K. deferred tax assets declined with the decrease in the tax rate.
Deferred income taxes consisted of the following at December 31, 2013 and 2012:
The Company accrues interest and, if applicable, penalties related to unrecognized tax benefits in income taxes. Total accrued interest expense at December 31, 2013, 2012, and 2011, was $134,000, $619,000, and $634,000, respectively.
Included in the total unrecognized tax benefits at December 31, 2013, 2012, and 2011 were $2,693,000, $1,401,000, and $1,360,000, respectively, of tax benefits that, if recognized, would affect the effective income tax rate.
The Company and its subsidiaries sponsor various retirement plans. Substantially all employees in the U.S. and certain employees outside the U.S. are covered under the Company’s defined contribution plans. Certain employees, retirees, and eligible dependents are also covered under the Company’s defined benefit pension plans.
The Company sponsors a qualified defined benefit pension plan in the U.S. (the "U.S. Qualified Plan") and three defined benefit pension plans in the U.K. (the "U.K. Plans"). Effective December 31, 2002, the Company elected to freeze its U.S. Qualified Plan. Benefits payable under the Company’s U.S. Qualified Plan are generally based on career compensation; however, no additional benefits have accrued on this plan since December 31, 2002. The Company’s U.K. Plans were closed to new participants as of October 31, 1997, but existing participants may still accrue additional limited benefits based on salary amounts in effect at the time the relevant plan was closed.
External trusts are maintained to hold assets of the Company’s U.S. Qualified Plan, U.K. Plans, and other international plans. The Company’s funding policy is to make cash contributions in amounts at least sufficient to meet regulatory funding requirements and, in certain instances, to make contributions in excess thereof if such contributions would otherwise be in accordance with the Company's capital allocation plans. Assets of the plans are measured at fair value at the end of each reporting period, but the plan assets are not recorded on the Company’s Consolidated Balance Sheets. Instead, the funded or unfunded status of the Company’s U.S. Qualified Plan, U.K. Plans, and the other international plans are recorded in "Accrued pension liabilities" on the Company’s Consolidated Balance Sheets based on the projected benefit obligations less the fair values of the plans’ assets.
A fixed number of U.S. employees, retirees, and eligible dependents are covered under a frozen post-retirement medical benefits plan. The liabilities for this plan are included in the Company's self-insured risks liabilities, and contributions from employees generally equals payments for their medical costs. This plan was frozen effective December 31, 2002.
In addition, the Company sponsors two frozen nonqualified, unfunded defined benefit pension plans for certain employees and retirees, which are based on career compensation. These plans were frozen effective December 31, 2002. The liabilities for these plans, which equal their projected benefit obligations, are included in "Other accrued liabilities" and "Other noncurrent liabilities" based on these expected timing of funding these obligations, since they are funded as needed from Company assets.
Net periodic benefit cost related to all of the Company’s defined benefit pension plans recognized in the Company’s Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011 included the following components:
The discount rate assumptions reflect the rates at which the Company believes the benefit obligations could be effectively settled. The discount rates were determined based on the yield for a portfolio of investment grade corporate bonds with maturity dates matched to the estimated future payments of the plans’ benefit obligations. The expected long-term rates of return on plan assets were based on the plans’ asset mix, historical returns on equity securities and fixed income investments, and an assessment of expected future returns. The expected long-term rates of return on plan assets assumption used to determine 2014 net periodic pension cost are estimated to be 6.75% and 7.12% for the U.S. and U.K. plans, respectively. If actual long-term rates of return differ from those assumed or if the Company used materially different assumptions, actual funding obligations could differ materially from these estimates. Due to the frozen status of the U.S. plan and closed status of the U.K. plans, increases in compensation rates are not material to the computations of benefit obligations or net periodic benefit cost.
In May 2012, the Board of Directors authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock (either CRDA or CRDB or both) until May 2015. Under the repurchase program, repurchases may be made in open market or privately negotiated transactions at such times and for such prices as management deems appropriate, subject to applicable regulatory guidelines. Through December 31, 2013, the Company has reacquired 1,162,335 shares of CRDA and 7,000 shares of CRDB at an average cost of $5.55 and $3.83 per share, respectively, under this program.
Comprehensive income (loss) for the Company consists of the total of net income, foreign currency translations, the effective portions of the Company’s interest rate hedges (if any), and accrued pension and retiree medical liability adjustments. The changes in components of "Accumulated other comprehensive loss" ("AOCL") included in the Company’s Consolidated Balance Sheets were as follows:
Interest rate swap agreement loss reclassified to net income is related to the reclassification of interest expense as the hedged transaction occurred and is included in "Corporate interest expense, net" in the Company's Consolidated Statements of Income. See Note 5, "Derivative Instruments" for additional details.
The Company has granted nonqualified and incentive stock options to key employees and directors. All stock options were for shares of CRDA. Option awards were granted with an exercise price equal to the fair market value of the Company’s stock on the date of grant. The Company’s stock option plans have been approved by shareholders, and the Company’s Board of Directors is authorized to make specific grants of stock options under active plans. Employee stock options typically are subject to graded vesting over three years (33% each year) and have a typical life of ten years. Compensation cost for stock options is recognized on a straight-line basis over the requisite service period for the entire award. For the years ended December 31, 2013, 2012, and 2011, compensation expense of $640,000, $0, and $72,000, respectively, was recognized for employee stock option awards.
A summary of option activity as of December 31, 2013, 2012, and 2011, and changes during each year, is presented below:
At December 31, 2013, the unrecognized compensation cost related to unvested employee stock options was $729,000. Directors’ stock options had no unrecognized compensation cost since directors’ options were vested when granted, and the grant-date fair values were fully expensed on grant date.
Performance share grants are made to certain key employees of the Company. Such employees are eligible to earn shares of CRDA upon the achievement of certain individual and corporate objectives. Grants of performance shares are made at the discretion of the Company’s Board of Directors, or the Board’s Compensation Committee, and are subject to graded or cliff vesting over three-year periods. Shares are not issued until the vesting requirements have been met. Dividends are not paid or accrued on unvested/unissued shares. The grant-date fair value of a performance share grant is based on the market value of CRDA on the date of grant, reduced for the present value of any dividends expected to be paid on CRDA shares but not paid to holders of unvested/unissued performance grants. Compensation expense for each award is recognized ratably from the grant date to the vesting date for each tranche.
The total fair value of the performance shares that vested in 2013, 2012, and 2011 was $1,693,000, $1,849,000, and $2,534,000, respectively.
Compensation expense recognized for all restricted shares for the years ended December 31, 2013, 2012, and 2011 was $664,000, $607,000, and $557,000, respectively. As of December 31, 2013, there was $187,000 of total unearned compensation cost related to nonvested restricted shares which is expected to be recognized by December 31, 2016.
The Company has three employee stock purchase plans: the U.S. Plan, the U.K. Plan, and the International Plan. The U.S. Plan is also available to eligible employees in Canada, Puerto Rico, and the U.S. Virgin Islands. The International Plan is for eligible employees located in certain other countries who are not covered by the U.S. Plan or the U.K. Plan. All plans are compensatory.
At December 31, 2013, an estimated 1,426,000 shares will be eligible for purchase under the U.K. Plan at the end of the current withholding periods. This estimate is subject to change based on future fluctuations in the value of the British pound against the U.S. dollar, future changes in the market price of CRDA, and future employee participation rates. The purchase price for a share of CRDA under the U.K. Plan ranges from $1.87 to $3.60. For the years ended December 31, 2013, 2012, and 2011, compensation cost of $110,000, $138,000, and $153,000, respectively, was recognized for the U.K. Plan. During 2013, 2012, and 2011, a total of 495,968 shares, 15,008, shares and 20,363 shares of CRDA were issued under the U.K. Plan, respectively.
Under the International Plan, up to 1,000,000 shares of CRDA may be issued. Participating employees can elect to have up to $21,250 of their eligible annual earnings withheld to purchase up to 5,000 shares of CRDA at the end of the one-year withholding period which starts each July 1 and ends the following June 30. The purchase price of the stock is 85% of the lesser of the closing price for a share of such stock on the first day or the last day of the withholding period. Participating employees may cease payroll withholdings during the withholding period and/or request a refund of all amounts withheld before any shares are purchased. During 2013 10,794 shares were issued under the International Plan. No shares were issued under the International Plan in 2012 or 2011.
The fair value of the cross currency basis swap was derived from a discounted cash flow analysis based on the terms of the swap and the forward curves for interest rates adjusted for the Company's credit risk. The fair value of the cross currency basis swap is included in "Other noncurrent assets" on the Company’s Consolidated Balance Sheets, based upon the term of the cross currency basis swap.
The fair values of accounts receivable, unbilled revenues, accounts payable and short-term borrowings approximate their respective carrying values due to the short-term maturities of the instruments. The interest rate on the Company's variable rate long-term debt resets at least every 90 days; therefore, the recorded value approximates fair value.
The following table summarizes the level within the fair value hierarchy used to determine the fair value of the Company's pension plan assets for its U.S. plan at December 31, 2013 and 2012:
The following table summarizes the level within the fair value hierarchy used to determine the fair value of the Company's pension plan assets for its U.K. plans at December 31, 2013 and 2012:
Equity securities consist primarily of common and preferred stocks of publicly traded U.S. companies and international companies and common collective funds. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded. Common collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date.
The Company’s four reportable segments represent components of the business for which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing operating performance. The segments are organized based upon the nature of services and/or geographic areas served and are: Americas, which primarily serves the property and casualty insurance company markets in the U.S., Canada, Latin America, and the Caribbean; EMEA/AP which serves the property and casualty insurance company and self-insurance markets in Europe, including the U.K., the Middle East, Africa, and the Asia-Pacific region (which includes Australia and New Zealand); Broadspire which serves the self-insurance marketplace, primarily in the U.S.; and Legal Settlement Administration which serves the securities, bankruptcy, and other legal settlement markets, primarily in the U.S. Intersegment sales are recorded at cost and are not material.
Segment operating earnings (loss) includes allocations of certain corporate and shared costs. If the Company changes its allocation methods or changes the types of costs that are allocated to its four operating segments, prior period amounts presented in the current period financial statements are adjusted to conform to the current allocation process.
The Company considers all Legal Settlement Administration revenues to be derived from one service line. For the years ended December 31, 2012, and 2011, it had revenues before reimbursements associated with two related special projects that exceeded 10% of the Company's consolidated revenues before reimbursements. Revenues from these special projects were $165.6 million and $121.1 million in 2012 and 2011, respectively.
Capital expenditures for the years ended December 31, 2013, 2012, and 2011 are shown in the following table:
In the EMEA/AP segment, only the U.K. is considered material for disclosure.
The Company maintains funds in custodial accounts at financial institutions to administer claims for certain clients. These funds are not available for the Company’s general operating activities and, as such, have not been recorded in the accompanying Consolidated Balance Sheets. The amount of these funds totaled $337,424,000 and $815,608,000 at December 31, 2013 and 2012, respectively. In addition, the Company’s Legal Settlement Administration segment administers funds in noncustodial accounts at financial institutions that totaled $504,074,000 and $350,705,000 at December 31, 2013 and 2012, respectively.
As part of the Company’s Credit Facility, the Company maintains a letter of credit facility to satisfy certain of its own contractual requirements. At December 31, 2013, the aggregate committed amount of letters of credit outstanding under the facility was $17,837,000.
As of December 31, 2013, the following liabilities remained on the Company's Consolidated Balance Sheets related to the special charges recorded in 2012. The rollforwards of these costs for the year ended December 31, 2013 follows:
Other income includes dividend income from the Company's unconsolidated subsidiaries and miscellaneous other income. Included in "Other income" for the year ended December 31, 2013 was a $2,286,000 gain from the sale of the rights to a customer contract in Latin America in the first quarter of 2013. All of these amounts are included in the Americas segment operating earnings.
This is a segment financial measure representing segment earnings (loss) before certain unallocated corporate and shared costs and credits, goodwill and intangible asset impairment charges, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, special charges and credits, income taxes, and net income attributable to noncontrolling interests. See Note 13, “Segment and Geographic Information,” to the audited consolidated financial statements contained in this Item 8.