As of December 31, 2014, the Company owned an office in Kitchener, Ontario and an additional office location in Stockport, England. As of December 31, 2014, the Company leased approximately 350 other office locations for use by the Company of 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.
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 audited consolidated financial statements and notes thereto contained in Item 8, "Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
The Company computes earnings per share of CRDA and CRDB using the two-class method, which allocates the undistributed earnings for each period to each class on a proportionate basis. The Company's Board of Directors has the right, but not the obligation, to declare higher dividends on the non-voting CRDA shares than on the voting CRDB shares, subject to certain limitations. In periods when the dividend is the same for CRDA and CRDB or when no dividends are declared or paid to either class, the two-class method generally will yield the same earnings per share for CRDA and CRDB. Unless otherwise indicated, references to earnings per share refer to CRDB, which is a more dilutive presentation.
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 audited consolidated financial statements and the accompanying notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. As described in Note 1, “Significant Accounting and Reporting Policies,” of those accompanying audited consolidated financial statements, financial results from the Company's operations outside of the U.S., Canada, the Caribbean, and certain subsidiaries in the Philippines, are reported and consolidated on a two-month delayed basis in accordance with the provisions of ASC 810, “Consolidation,” in order to provide sufficient time for accumulation of their results. Accordingly, the Company's December 31, 2014, 2013, and 2012 consolidated financial statements include the financial position of such operations as of October 31, 2014 and 2013, respectively, and the results of their operations and cash flows for the fiscal periods ended October 31, 2014, 2013 and 2012, respectively. Thus, the results of operations and cash flows from the date of acquisition and the balance sheet impact from the GAB Robins acquisition discussed below are excluded from our consolidated financial statements as of and for the year ended December 31, 2014.
Based in Atlanta, Georgia, Crawford & Company (www.crawfordandcompany.com) is the world’s largest (based on annual revenues) independent provider of claims management solutions to the risk management and insurance industry, as well as to self-insured entities, with an expansive global network serving clients in more than 70 countries. The Crawford SolutionSM offers comprehensive, integrated claims services, business process outsourcing and consulting services for major product lines including property and casualty claims management, workers’ compensation claims and medical management, and legal settlement administration.
As discussed in more detail in subsequent sections of this MD&A, we have four operating segments: Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. Our four operating segments represent components of our Company for which separate financial information is available, and which is evaluated regularly by our chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing operating performance. Americas primarily serves the property and casualty insurance company markets in the U.S., Canada, Latin America, and the Caribbean. EMEA/AP 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 serves the U.S. self-insurance marketplace. Legal Settlement Administration serves the securities, bankruptcy, and other legal settlements markets, primarily in the U.S.
The legal settlement administration market is also highly competitive but is 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 largely project-based and we earn these revenues as we perform individual tasks and deliver the outputs as outlined in each project.
On December 1, 2014, we borrowed $78.4 million under our Credit Facility to acquire 100% of the capital stock of GAB Robins, a loss adjusting and claims management provider headquartered in the U.K. which will report through our EMEA/AP segment. The acquisition is currently being reviewed by the CMA as a part of its routine acquisition review process, and we cannot begin the integration process until this review is completed. Although we currently expect that this review will be concluded during the first half of 2015, no assurances of the timing, or any material conditions being placed on this approval can be provided. The success of the GAB Robins acquisition will depend, in part, on our ability to realize the anticipated synergies and cost savings from integrating GAB Robins on a timely basis. The integration process may be complex, costly and time-consuming. We expect to record special charges of approximately $7 million in 2015 related to these efforts. Because the financial results of certain of our international subsidiaries, including those in the U.K. through which GAB Robins will report, are included in our consolidated financial statements on a two-month delayed basis as described above, the results of GAB Robins' business since the acquisition date have not been included in our consolidated results of operations. In addition, the Credit Facility borrowings used to complete the GAB Robins acquisition are not included in outstanding borrowings on our Consolidated Balance Sheet at December 31, 2014, because the U.K.-based borrowing entity has an October 31 fiscal year end, and the balance sheet of that entity was consolidated as of October 31, 2014.
On January 22, 2015, we announced the establishment of a wholly-owned global business services center (the "Center") in Manila, Philippines. The Center provides us a venue for global consolidation of certain business functions, shared services, and currently outsourced processes. The Center, which is expected to be phased in through 2018, is expected to allow us to continue to strengthen our client service, realize additional operational efficiencies, and invest in new capabilities for growth. Operations in the Center are expected to deliver cumulative expense savings of approximately $60 million through 2019 and annual cost savings of approximately $20 million per year thereafter. To achieve these savings, we expect to record charges totaling approximately $20 million through 2018. An initial estimated charge of approximately $9 million is expected to be incurred in 2015, which is expected to be partially offset by initial savings in 2015 of approximately $2 million. No assurances can be provided of our ability to timely or cost effectively complete and ramp up operations at the Center, or to achieve expected cost savings on a timely basis, or at all.
There were no special charges or credits in 2014 or 2013. 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.
Segment operating earnings (a measure of segment operating performance used by our management that is defined and discussed in more detail below) improved in our Americas and Broadspire segments from 2012 to 2013 and from 2013 to 2014, while we experienced expected declines in our EMEA/AP and Legal Settlement Administration segments in those periods.
In the Americas segment, operating earnings improved from 2013 to 2014 due to continued growth in our U.S. Contractor Connection managed repair network, and higher revenues and operating earnings in Canada due to the impact of case volume increases resulting from business growth in 2014 from both insurer markets and our expanding Canadian Contractor Connection managed repair network. These increases were partially offset by the absence of weather related cases in the U.S. and cases from flood losses in Ontario, Canada in 2013. Also reducing the 2014 increase in operating earnings was a $2.3 million gain from the sale of the rights to a customer contract in Latin America in 2013, compared to a $0.4 million gain from the contingent consideration provision of the same agreement during 2014.
Broadspire's operating earnings improved each year from 2012 to 2014. The improvements were due to higher revenues from both new and existing clients, 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.
For most of our international operations, including our EMEA/AP, Canadian and Latin American operations, and for Legal Settlement Administration, most administrative functions, such as finance, human resources, information technology, quality and compliance, are embedded in those locations and are considered direct costs of those operations. For our domestic operations (primarily Broadspire and U.S. Claims Services within the Americas segment), we have a centralized shared-services arrangement for most of these administrative functions, and we allocate the costs of those services to the segments as indirect costs based on usage. Although some of the administrative services in our shared-services center benefit, and are allocated to, more than one of our operating segments, the majority of these shared services are allocated to Broadspire and U.S. Claims Services within the Americas segment.
Special charges and credits arise from time to time from events (such as expenses related to restructurings, losses on subleases, arbitration awards, debt refinancings, 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.
“Direct Compensation, Fringe Benefits & Non-Employee Labor” includes direct compensation, payroll taxes, and benefits provided to the employees of each segment, as well as payments to outsourced service providers that augment our staff in each segment. As a service company, these costs represent our most significant and variable operating expenses. In our EMEA/AP and Legal Settlement Administration segments, these costs include direct compensation, payroll taxes, and benefits of certain administrative functions that are embedded in those locations and are considered direct operating costs of those locations. Likewise, in the Americas segment, administrative costs for Canada, Latin America and the Caribbean operations are embedded in those locations and are considered direct operating costs. In our U.S. Claims Services and Broadspire operations, certain administrative functions are performed by centralized headquarters staff. These costs are considered indirect and are not included in "Direct Compensation, Fringe Benefits & Non-Employee Labor". Accordingly, the "Direct Compensation, Fringe Benefits & Non-Employee Labor" and "Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor" components are not comparable across segments, but are comparable within each segment across periods.
Operating earnings for our Americas segment increased from $18.5 million in 2013 to $23.7 million in 2014, representing an operating margin of 6.6% in 2014 compared with 5.4% in 2013. Operating earnings improved 27.7% from 2013 to 2014 due to continued growth in our U.S. Contractor Connection managed repair network, and higher revenues and operating earnings in Canada due to the impact of case volume increases resulting from business growth in 2014 from both insurer markets and our expanding Canadian Contractor Connection managed repair network. These increases were partially offset by the absence of weather related cases in the U.S. from superstorm Sandy and cases from flood losses in Ontario, Canada in 2013. Also reducing the 2014 increase in operating earnings was a $2.3 million gain from the sale of the rights to a customer contract in Latin America in 2013, compared to a $0.4 million gain from the contingent consideration provision of the same agreement during 2014.
For the year ended December 31, 2014 compared with the year ended December 31, 2013, revenues were positively impacted by segment unit volume, measured principally by cases received, which increased by 9.7% during this period. The U.S. dollar strengthened against most foreign currencies in the segment, decreasing revenues before reimbursements by $10.2 million, or 3.0% of segment revenues, from 2013 to 2014. In addition, an overall unfavorable change in the mix of services provided and in the rates charged for those services also decreased revenues by approximately 1.7% in 2014 compared with 2013.
The decrease in revenues in Latin America and the Caribbean in 2014 compared with 2013 was primarily due to the change in the mix of services provided and amounts charged for those services in Brazil. The growth in cases received in Brazil in 2014 was primarily due to increases in high-frequency, low-complexity automotive and property cases, which resulted in a reduced average fee per case within the region compared to the prior year.
Americas unit volumes by underlying case category, as measured by cases received, for 2014 and 2013 were as follows:
The 2014 increase in U.S. Claims Services cases was primarily due to an increase in high-frequency, low-complexity affinity cases, which more than offset the reduction in weather-related cases and the internal transfer of workers' compensation cases. The previously described 2014 outsourcing project involved the Company providing adjusters to work on the client's premises; accordingly, there are no associated case volumes referred to the Company in 2014 for these revenues. The 2014 increase in U.S. 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 managed repair networks as an alternative property claims solution for high-frequency, low-complexity property cases, which we expect to continue for the foreseeable future. The increases in high-frequency, low-complexity automotive, property, and affinity cases resulted in a reduced average fee per case within the region compared to 2013.
The 2014 increase in cases in Canada was primarily due to increases in high-frequency, low-complexity automotive and affinity cases. Canada also experienced an increase in market share compared with the prior year, significant growth in its Contractor Connection business, and growth in its desk-adjusted case assignments in both corporate self-insured and insurer markets.
The dollar amount of these expenses increased from $230.7 million in 2013 to $236.3 million in 2014. There was an average of 2,760 FTEs (including 317 catastrophe adjusters) in 2014 compared with an average of 2,675 FTEs (including 197 catastrophe adjusters) in 2013. The increase in expenses and FTEs in 2014 was due to revenue growth in U.S. Contractor Connection and Canada, expansion of our Specialty Markets service line, and the outsourcing project discussed above.
Americas expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor increased from $93.1 million in 2013 to $99.4 million in 2014, primarily due to $4.1 million in increased allocation of centralized administrative costs, amortization for internally developed software and self-insured professional liability expenses. In addition, 2013 expense included a $2.3 million gain from the sale of the rights to a customer contract in Latin America in this category, which reduced net expenses by this amount, compared to a $0.4 million gain in 2014. The remaining increase was due to the continued investment in the start-up operations of our Specialty Markets service line, and increases in U.S. Contractor Connection and Canada due to the growth in revenues.
EMEA/AP revenues are primarily derived from 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). Revenues before reimbursements by major region were as follows:
The lower revenues in Asia-Pacific were associated with an expected decline in fees for the ongoing handling of cases resulting from the 2011 Thailand flooding event. Claims handling associated with the Thailand flooding event was substantially completed during 2013. There was also a decline in revenues in Australia due to flooding and bush fire activity in 2013, partially offset by an increase in weather-related activity in the Philippines in 2014.
Expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor increased as a percent of segment revenues before reimbursements from 23.8% in 2013 to 25.3% in 2014, and the dollar amount of these expenses increased by $3.7 million, primarily resulting from increased Specialty Market expenses, bad debt expense, and professional fees compared to the prior year.
Broadspire segment revenues before reimbursements increased 6.6% to $268.9 million in 2014 compared with $252.2 million in 2013. Excluding the $3.0 million one-time benefit in 2013 discussed above, the revenue increase would have been 7.9%. Unit volumes for the Broadspire segment, measured principally by cases received, increased 7.9% from 2013 to 2014. Excluding approximately 5,000 one-time incident reports received from a major client in 2013 for which we received little or no revenue and incurred little or no associated costs, unit volume increased 9.5% for 2014 compared with 2013. After adjusting for the 5,000 incident reports and $3.0 million one-time benefit in 2013 discussed above, Broadspire had a negative price/mix variance of 1.6% in 2014 compared to 2013.
The 2014 increase in workers’ compensation cases primarily resulted from new clients and from a transfer of approximately 2,000 workers' compensation cases from our U.S. Claims Services service line in the Americas segment, as all workers' compensation cases in the U.S. are now handled by our Broadspire segment. The decrease in casualty cases in 2014 compared with 2013 was due to a decline of approximately 6,300 cases from two clients that were new in 2013, one of whose cases were expected to decline over time and the other a one-time takeover of cases. Casualty cases in 2013 were also positively impacted by the receipt in 2013 of approximately 5,000 incident reports from a major client for which we received little or no revenue and incurred little or no associated costs. The 2014 increase in other cases was primarily due to increased referrals to our medical management services from both new and existing clients.
Broadspire segment expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased as a percent of segment revenues before reimbursements to 38.7% in 2014 from 40.1% in 2013. This decrease is because many of the fixed costs within the segment will not increase proportionately with an increase in revenues. Total 2014 expenses increased by $3.0 million compared with 2013, due to an increase in amortization for internally developed software and other expenses related to the growth in revenues.
As expected, Legal Settlement Administration revenues in 2014 declined compared with prior year levels primarily because of lower revenues from the Deepwater Horizon class action settlement special project and a few other large projects. The projects continue to wind down, and we expect these revenues, and related operating earnings, to be at a reduced rate in all future periods as compared to 2014.
Our Legal Settlement Administration segment reported 2014 operating earnings of $22.8 million, decreasing 51.1% from $46.8 million in 2013, with the related operating margin decreasing from 21.4% in 2013 to 13.4% in 2014. The changes in the operating margin were primarily the result of changes in the mix of services 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 22.2% to $170.3 million in 2014, compared with $218.8 million in 2013. 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 winding down of the special projects 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 $29.7 million in 2014, decreasing from $32.7 million in 2013. This decrease was due to a lower volume of case administration work for settlements in the 2014 period. Reimbursable expenses may vary materially from year to year primarily due to the number of mailings each year and the mail method utilized (i.e., express mail versus normal mail delivery).
Legal Settlement Administration direct compensation expense, fringe benefits, and non-employee labor, as a percent of segment revenues before reimbursements, increased to 69.1% in 2014 compared with 65.3% in 2013. The amount of related expenses declined to $117.6 million in 2014 compared with $143.0 million in 2013. The decreased amounts were primarily due to lower utilization of outsourced service providers because of the winding down of the Deepwater Horizon special project. There was an average of 805 FTEs in 2014, compared with an average of 690 in 2013. The increase in full-time equivalent employees resulted from the hiring of some previously temporary employees where it was cost effective to do so.
For the year ended December 31, 2013 compared with the year ended December 31, 2012, the U.S. dollar strengthened against most foreign currencies in Canada, Latin America and the Caribbean, decreasing revenues before reimbursements by 1.6%. Revenues were positively impacted by segment unit volume, measured principally by cases received, which increased by 4.0% during this period. In addition, an overall unfavorable change in the mix of services provided and in the rates charged for those services also decreased revenues by approximately 0.1% in 2013 compared with 2012.
The decline in revenues in U.S. Claims Services primarily resulted from a reduction in major weather-related cases, and an increase in the number of cases 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, and cases received from superstorm Sandy. 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 case was based. The overall decline in U.S. Claims Services was offset by increases in revenues from U.S. Contractor Connection. U.S. 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 managed repair networks. U.S. Contractor Connection revenues were also positively impacted by a price increase that was effective on July 1, 2013.
Reimbursements for out-of-pocket expenses incurred in our Americas segment which are included in total Company revenues were $19.8 million in 2013, increasing from $18.0 million in 2012. The increase in 2013 was due primarily to increased expenses resulting from the increased cases related to the flood losses in Canada.
The 2013 decrease in U.S. Claims Services cases was primarily due to a reduction in major weather-related claims activity in the U.S. and decisions by clients to insource certain claims handling functions. The 2013 increase in U.S. Contractor Connection cases was due to the ongoing expansion of our managed repair 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.
The 2013 increase in cases in Canada was due to the aforementioned flood losses in Ontario and British Columbia, and also an overall growth in business from new and existing clients.
The increase in Latin America and the Caribbean was due to increases in high-frequency, low-complexity automotive and affinity cases in Brazil.
Americas direct compensation, fringe benefits, and non-employee labor expense, as a percent of segment revenues before reimbursements, was 67.4% for 2013 and 69.3% for 2012. This decline was due to improved employee utilization, and a change in the mix of cases received. There was an average of 2,675 FTEs (including 197 catastrophe adjusters) in 2013 compared with an average of 2,680 (including 181 catastrophe adjusters) in 2012.
U.K. revenues declined due to a reduction in cases in the market, largely attributable to benign weather, lower reported fire and crime incidents and insourcing by some insurers when compared with the prior year. The increase in revenue in CEMEA for 2013 compared with 2012 was primarily due to an increase in high-frequency, low-complexity motor and residential cases from new and existing clients in Scandinavia, flooding in Germany and a $900,000 performance bonus from a client.
The decrease in cases received in the U.K. was primarily due to the benign weather, lower fire and crime incidents and lower reported cases 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 experienced an increase in high-frequency, low-complexity motor and residential cases from new and existing clients. Overall case volumes increased in Asia-Pacific through a mix of high-frequency, low-complexity automotive and affinity business in Malaysia, Hong Kong and Singapore, coupled with growth in Australia.
Expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased as a percent of segment revenues before reimbursements from 24.0% in 2012 to 23.8% in 2013, and the dollar amount of these expenses decreased by $4.8 million. In local currency, the decrease would have been approximately $3.5 million, primarily resulting from higher outsourced services expenses incurred to administer the Thailand flood cases in 2012.
Reimbursements for out-of-pocket expenses incurred in our Broadspire segment which are included in total Company revenues were $4.0 million in 2013, increasing slightly from $3.9 million in 2012.
Broadspire segment expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased as a percent of segment revenues before reimbursements to 40.1% in 2013 from 41.8% in 2012. The decrease was due to a decrease in lease costs, self-insured professional liability expenses, and various other expenses due to cost control measures implemented during the year, partially offset by an increase in amortization for internally developed software.
Our Legal Settlement Administration segment reported 2013 operating earnings of $46.8 million, decreasing 22.4% from $60.3 million in 2012, with the related operating margin decreasing from 25.5% in 2012 to 21.4% in 2013. The changes in the operating margin were primarily the result of changes in the mix of services provided.
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. The increase was primarily due to the number of mailings each year and the mail method utilized (i.e., express mail versus normal mail delivery).
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 are subject to income taxes at different rates, our ability to utilize loss and tax credit carryforwards, and amounts related to uncertain income tax positions. Income tax provisions totaled $28.8 million, $29.8 million, and $33.7 million for 2014, 2013, and 2012, respectively. Our effective tax rate for financial reporting purposes was 48.1%, 36.7%, and 40.4% for 2014, 2013, and 2012, respectively. Fluctuations in the mix of income earned in the jurisdictions in which the Company operates, our inability to recognize the tax benefits from net operating losses in certain international operations, the revaluation of our net U.S. deferred tax assets resulting from a decrease in state income tax rates, and an increase in partially disallowable meals and entertainment expenses increased the overall effective rate in 2014 as compared with 2013. Based on our 2015 operating plans, we anticipate our effective tax rate for financial reporting purposes in 2015 to be in the 38% to 40% range before considering any discrete items.
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 $6.3 million, $6.4 million, and $6.4 million in 2014, 2013, and 2012, respectively. This amortization is included in "Selling, general and administrative expenses" in our Consolidated Statements of Income.
There were no special charges or credits in 2014 or 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.
The Company, its subsidiaries Crawford & Company Risk Services Investments Limited (the “UK Borrower”), Crawford & Company (Canada) Inc. (the “Canadian Borrower”) and Crawford & Company (Australia) Pty. Ltd. (the “Australian Borrower”) (the Company, together with such subsidiaries, as borrowers (the “Borrowers”)), the Company’s guarantor subsidiaries party thereto, Wells Fargo Bank, National Association, as administrative agent and a lender (“Wells Fargo”), and the other lenders party thereto (together with Wells Fargo, the “Lenders”), are party to a Credit Agreement, dated as of December 8, 2011 (as amended, the “Credit Facility”). On November 28, 2014, the Credit Facility was amended to provide us the ability to complete its previously announced acquisition of GAB Robins, which was completed on December 1, 2014, and to make certain other technical amendments. See Note 17. "Subsequent Events," for further discussion of the GAB Robins acquisition.
The obligations of the Borrowers under the Credit Facility are guaranteed by each of our existing domestic subsidiaries and certain existing material foreign subsidiaries that are disregarded entities for U.S. income tax purposes (each a "Disregarded Foreign Entity"). Such obligations are required to be guaranteed by each subsequently acquired or formed material domestic subsidiary and Disregarded Foreign Entity (each, a "Guarantor"), and the obligations of the Foreign Borrowers are also guaranteed. In addition, the Borrowers' obligations under the Credit Facility are secured by a first priority lien on substantially all of the personal property of us and the Guarantors, including, without limitation, intellectual property, 100% of our capital stock in the Guarantors' present and future domestic subsidiaries and 65% of the voting stock and 100% of the non-voting stock issued by any present and future first-tier material foreign subsidiary of us or any Guarantor. In addition, the obligations of the Foreign Borrowers are secured by a first priority lien on 100% of the capital stock of the Foreign Borrowers.
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%.
At December 31, 2014 and 2013, a total of $155.0 million and $135.0 million, respectively, was outstanding under the Credit Facility and included in our Consolidated Balance Sheets. In addition, undrawn commitments under letters of credit totaling $17.5 million and $17.8 million were outstanding at December 31, 2014 and 2013, respectively, under the letters of credit subfacility of the Credit Facility. These letter of credit commitments were for our own obligations. Including the amounts committed under the letters of credit subfacility, the available balance of the revolving credit portion of the Credit Facility totaled $149.1 million and $247.2 million at December 31, 2014 and 2013, respectively. The available balance at December 31, 2014 reflects the incurrence of an additional $78.4 million in debt by the UK Borrower under the Credit Facility as a result of the GAB Robins acquisition discussed in Note 17, "Subsequent Events." This debt and the balance sheet impact of the GAB Robins acquisition are not included in our balance sheet at December 31, 2014, due to the two-month delayed consolidation of our U.K. subsidiaries as allowed by ASC 810, "Consolidation."
The representations, covenants, and events of default in the Credit Facility are customary for financing transactions of this nature, including required compliance with a minimum fixed charge coverage ratio and a maximum leverage ratio (each as defined below). Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Credit Facility and ancillary loan documents.
The operations of our EMEA/AP segment and portions of our Americas segment 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 certain of the locations in which we do business negatively impacted our revenues and operating earnings in 2014, 2013, and 2012. 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, 2014, our working capital balance (current assets less current liabilities) was approximately $108.0 million, compared with $52.3 million at December 31, 2013. The increase in working capital was due to increases in accounts receivable and a classification of $2.0 million of borrowings under the Credit Facility as short term at December 31, 2014, compared with $35.0 million classified as short-term at December 31, 2013. Cash and cash equivalents at the end of 2014 totaled $52.5 million, compared with $76.0 million at the end of 2013.
Cash used in financing activities was $39.1 million in 2013. We paid quarterly and special cash dividends totaling $8.8 million and repurchased $3.6 million of our common stock. 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.
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, 2014, 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 2015. 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 2015 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.
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 Facility. In addition to short- and long-term borrowings, capital leases, and bank overdrafts, among other things, consolidated total funded debt includes letters of credit, the need for which can fluctuate based on our business requirements. An increase in borrowings under our Credit Facility 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 Credit Facility, which could negatively impact our ability to fund our current operations or make needed capital investments.
As of December 31, 2014, 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:
Long-term debt, including current portions shown as due in one year or less in the table above consists of $2.0 million of outstanding borrowings under the Credit Facility that we expect, but are not required, to repay in 2015.
Amounts in the table above exclude the impact of the additional $78.4 million in borrowings by the UK Borrower under the Credit Facility discussed in Note 17, "Subsequent Events" to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. This debt is not on the Company's Consolidated Balance Sheet at December 31, 2014, due to the two-month delay in consolidating the results of our U.K. subsidiaries as allowed by ASC 810, "Consolidation." Such amounts will be due upon maturity of the Credit Facility in 2018.
Gross deferred income tax liabilities as of December 31, 2014 were approximately $86.4 million. This amount is not included in the contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their respective book basis, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, we believe scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not relate to liquidity needs.
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 $142.3 million and $103.0 million at the end of 2014 and 2013, respectively. The 2014 increase in the unfunded deficit of our defined benefit pension plans primarily resulted from the adoption of updated mortality tables used to determine U.S. Qualified Plan liabilities, which increased our U.S. projected benefit obligation by approximately $35.4 million. During 2014, we made contributions of $14.9 million and $7.0 million to our U.S. Qualified Plan and U.K. Plans, respectively. In 2013, we made contributions of $18.0 million and $6.5 million to our U.S. Qualified Plan and U.K. Plans, respectively.
Our frozen U.S. Qualified Plan was underfunded by $126.9 million at December 31, 2014 based on an accumulated benefit obligation of $548.2 million. The Highway Transportation Funding Act of 2014 ("HAFTA") included pension funding reform which greatly reduced the contributions required to the U.S. Plan, and no contributions are required in fiscal 2015. Required contributions are anticipated in future years as the impact of the HATFA funding reform is phased out. As such, Crawford plans to contribute $9.0 million per annum to the U.S. Plan for the next four fiscal years to improve the funded status of the plan and minimize future required contributions. We estimate that we will make the following annual minimum contributions over the next five years to our frozen U.S. Qualified Plan:
As a component of our Credit Facility, we maintain a letter of credit facility to satisfy certain contractual obligations. At December 31, 2014, the issued, but undrawn, letters of credit totaled approximately $17.5 million. These letters of credit are typically renewed annually, but unless renewed, will expire as follows:
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, 2014.
Accounts receivable increased by $19.7 million, or $24.4 million, net of currency exchange impacts, in 2014 compared with 2013 primarily due to the timing of collections in Legal Settlement Administration on certain large cases.
Prepaid expenses and other current assets and other noncurrent assets increased by $11.6 million in 2014 compared with 2013 primarily due to prepayment of $3.5 million of payroll taxes that related to the first pay period of 2015, an increase of $2.3 million in the net prepaid pension balances of two U.K. defined benefit plans that are in an overfunded position, and a $2.0 million increase in the value of our Canadian cross currency basis swap.
Accrued compensation and related costs decreased by $16.5 million in 2014 compared with 2013, primarily due to reduced incentive compensation payments accrued at year end due to lower than anticipated operating results.
As of December 31, 2014 and 2013, our allowance for doubtful accounts totaled $11.0 million and $10.2 million, or approximately 5.6% and 6.0% of gross billed receivables at December 31, 2014 and 2013, respectively. If the financial condition of our clients deteriorates, resulting in an inability to make required payments to us, or if economic conditions deteriorate, additional allowances may be deemed to be appropriate or required. If the allowance for doubtful accounts changed by 1.0% of gross billed receivables, reflecting either an increase or decrease in expected future write-offs, the impact to consolidated pretax income would have been approximately $1.9 million in 2014, $1.7 million in 2013, and $1.8 million in 2012.
We perform an annual impairment analysis of goodwill in which we compare the carrying value of our reporting units to the estimated fair values 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.
The key variables in estimating the fair value of reporting units include the discount rate, the terminal growth rate, and the net working capital turnover. The discount rates utilized in estimating the fair value of goodwill in 2014 for each reporting unit were between the range of 10.5% and 13.5%, reflecting our assessment of a market participant's view of the risks associated with the projected cash flows. The terminal growth rate used in the analysis was 2.0%. The net working capital turnover assumption ranged from 4 to 10.
The indefinite-lived intangible asset consisting of the Broadspire and SLS trade names, with carrying values of $29.1 million and $2.1 million, respectively, are also evaluated for potential impairment on an annual basis or when indicators of potential impairment are identified. Based on our 2014 analysis, we do not believe these tradenames are exposed to potential impairments. The indefinite-lived intangible asset impairment test is similar to the goodwill impairment test as both involve estimating the fair value using an internally prepared discounted cash flow analysis. The fair values of the trade names were established using the relief-from-royalty method. This method recognizes that, by virtue of owning the trade name as opposed to licensing it, a company or reporting unit is relieved from paying a royalty, usually expressed as a percentage of sales, for the asset's use. The present value of the after-tax costs savings (i.e., royalty relief) at an appropriate discount rate indicates the value of the trade name.
The values of the Broadspire and SLS trade names are each sensitive to changes in the assumptions used above. A decline in the U.S. royalty rate to 1.0%, in conjunction with an increase in the discount rate to 15.0%, could potentially trigger an impairment. In addition, an increase to the discount rate above 18.0%, assuming no changes in the other key inputs, could potentially trigger an impairment. We will continue to monitor the value of these trade names for potential indicators of impairment.
The major assumptions used in accounting for our defined benefit pension plans are the discount rate, the expected long-term return on plan assets, and the mortality expectations for plan participants. 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, 2014, the discount rate used to compute the benefit obligations of the U.S. and U.K. plans were 4.06% and 3.90%, respectively.
We review our employee demographic assumptions annually and update the assumptions as necessary. During 2014, we revised the mortality assumptions for the U.S. plans to incorporate the new set of mortality tables issued by the Society of Actuaries, adjusted to reflect Company-specific experience and future expectations. This resulted in an increase in the projected benefit obligation of approximately $35.4 million for the U.S. plans.
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, 2014, we recorded an decrease to equity through other comprehensive income ("OCI") of $43.2 million (net of tax) to reflect unrealized actuarial losses during 2014. At December 31, 2013, we recorded an increase to equity through OCI of $15.7 million (net of tax) to reflect unrealized actuarial gains during 2013. Those changes are subject to amortization over future years and may be reflected in future income statements.
Net periodic pension expense for our defined benefit pension plans is sensitive to changes in the underlying assumptions for the expected rates of return on plan assets and the discount rates used to determine the present value of projected benefits payable under the plans. If our assumptions for the expected returns on plan assets of our U.S. and U.K. defined benefit pension plans changed by 0.5%, representing either an increase or decrease in expected returns, the impact to 2014 consolidated pretax income would have been approximately $3.2 million. If our assumptions for the discount rates used to determine the present value of projected benefits payable under the plans changed by 0.25%, representing either an increase or decrease in interest rates used to value pension plan liabilities, the impact to 2014 consolidated pretax income would have been approximately $0.8 million.
Based in Atlanta, Georgia, Crawford & Company ("Crawford" or the "Company") is the world's largest (based on annual revenues) independent provider of claims management solutions to the risk management and insurance industry, as well as to self-insured entities, with an expansive global network serving clients in more than 70 countries. The Crawford SolutionSM offers comprehensive, integrated claims services, business process outsourcing and consulting services for major product lines including property and casualty claims management, workers’ compensation claims and medical management, and legal settlement administration.
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 duration of the claim. Deferred revenues are recognized into revenues 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, and assumptions based on average case closure rates and pricing for each claim type.
In the normal course of business, the Company incurs certain out-of-pocket expenses that are thereafter reimbursed by the Company’s clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are required to be included when reporting expenses and revenues, respectively, in the Company’s consolidated results of operations. The amounts of reimbursed expenses and related revenues from reimbursements offset each other in the Company’s consolidated statements of operations with no impact to its net income.
The Company extends credit based on an evaluation of a client’s financial condition and, generally, collateral is not required. Accounts receivable are typically due upon receipt of the invoice and are stated on the Company’s Consolidated Balance Sheets at amounts due from clients net of an estimated allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The fair value of accounts receivable approximates book value due to their short-term contractual stipulations.
For the years ended December 31, 2014, 2013, and 2012, the Company’s adjustments to revenues associated with client invoice adjustments totaled $1,786,000, $2,812,000, and $2,712,000, respectively.
Goodwill impairment testing is a two-step process performed on a reporting unit basis. For goodwill impairment testing purposes, in 2014 the Company separately identified the reporting units of the Americas segment as a) U.S. Contractor Connection and b) the Americas excluding U.S. Contractor Connection. The value of goodwill for each reporting unit was allocated based on the relative estimated fair values of these two reporting units determined by a discounted cash flow analysis. Prior to 2014, U.S. Contractor Connection was tested within the Americas reporting unit. The other reporting units tested were Broadspire, EMEA/AP, and Legal Settlement Administration. In step 1 of the testing process, the fair value of each reporting unit is determined and compared with its book value. If the fair value of the reporting unit exceeds its book value, goodwill is not deemed impaired. If the book value of the reporting unit exceeds its fair value, the testing proceeds to step 2. In step 2, the reporting unit’s fair value is allocated to its assets and liabilities following acquisition accounting procedures to determine the implied fair value of goodwill. This hypothetical acquisition accounting process is applied only for the purpose of determining whether goodwill must be reduced; it is not used to adjust the book values of other assets or liabilities. There is an impairment if (and to the extent) the book value of goodwill exceeds its implied fair value. An impairment loss reduces the recorded goodwill and cannot subsequently be reversed.
For impairment testing of indefinite-lived intangible assets, the book value is compared with the fair value, which represents the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the asset. The fair values of the trade names are established using the relief-from-royalty method. This method recognizes that, by virtue of owning the trade name as opposed to licensing it, a company or reporting unit is relieved from paying a royalty, usually expressed as a percentage of sales, for the asset's use. The present value of the after-tax costs savings (i.e., royalty relief) at an appropriate discount rate indicates the value of the trade name. The Company determined the discount rate based on its performance compared to similar market participants, factored by risk in forecasting using a modified capital asset pricing model.
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.
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 $21,000, $340,000, and $2,422,000 for 2014, 2013, and 2012, respectively.
Depreciation on property and equipment, including property under capital leases and amortization of leasehold improvements, was $16,606,000, $15,446,000, and $15,429,000 for the years ended December 31, 2014, 2013, and 2012, 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, 2014 and 2013, accrued liabilities for self-insured risks totaled $24,532,000 and $25,630,000, respectively, including current liabilities of $14,491,000 and $13,100,000, respectively.
Foreign currency transactions for the years ended December 31, 2014, 2013, and 2012 resulted in net losses of $274,000, $1,084,000, and $268,000 respectively.
Advertising costs are expensed in the period in which the costs are incurred. Advertising expenses were $2,981,000, $2,793,000, and $3,317,000, respectively, for the years ended December 31, 2014, 2013, and 2012.
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-15, "Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern." Under ASU 2014-15, management of public companies will be required to assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard will be effective for the Company on January 1, 2017. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect this ASU will have an impact on its financial statements or disclosures upon adoption.
On July 15, 2014, the Company acquired 100% of the capital stock of Buckley Scott Holdings Limited ("Buckley Scott"), a U.K.-based international construction and engineering adjusting firm, for $3,812,000. Net assets purchased totaled $1,532,000, including $488,000 cash acquired. A deferred tax liability of $473,000 was recognized on the acquired intangible assets. The agreement contains an earnout provision based on Buckley Scott achieving certain financial results during the two-year period following the completion of the acquisition, with a current estimated fair value of $1,153,000. The difference between the purchase price and the allocation of that price to the net assets acquired represents customer relationship intangibles of $2,195,000 with an estimated 15-year useful life, trade name intangibles of $169,000 with an estimated two-year useful life, and $1,542,000 of goodwill with an estimated indefinite life, representing the estimated value of the assembled workforce and expected synergies with existing businesses. The acquisition is expected to enable the Company to significantly expand its construction and engineering business in the U.K. and internationally. The results for Buckley Scott have been included in the EMEA/AP segment since the acquisition date and were not material to the operations of the Company for the year ended December 31, 2014.
The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013:
The 2014 "Other activity"relates to adjustments for deferred taxes acquired in connection with a prior period business combination.
The following is a summary of finite-lived intangible assets acquired through business acquisitions as of December 31, 2014 and 2013:
At December 31, 2014, annual estimated aggregate amortization expense for intangible assets subject to amortization was as follows:
Long-term debt consisted of the following at December 31, 2014 and 2013:
The Company, its subsidiaries Crawford & Company Risk Services Investments Limited (the “UK Borrower”), Crawford & Company (Canada) Inc. (the “Canadian Borrower”) and Crawford & Company (Australia) Pty. Ltd. (the “Australian Borrower”), (the Company, together with such subsidiaries, as borrowers (the “Borrowers”)), the Company’s guarantor subsidiaries party thereto, Wells Fargo Bank, National Association, as administrative agent and a lender (“Wells Fargo”), and the other lenders party thereto (together with Wells Fargo, the “Lenders”), are party to a Credit Agreement, dated as of December 8, 2011 (as amended, the “Credit Facility”). On November 28, 2014, the Credit Facility was amended to provide the Company the ability to complete its previously announced acquisition of GAB Robins Holdings UK Limited ("GAB Robins"), which was completed on December 1, 2014, and to make certain other technical amendments. See Note 17, "Subsequent Events," for further discussion of the GAB Robins acquisition.
The Credit Facility 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.
At December 31, 2014, the Company was in compliance with the financial covenants under the Credit Facility. If the Company does not meet the covenant requirements in the future, it would be in default under the Credit Facility. Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Credit Facility and ancillary loan documents.
Interest expense, including any impact from the Company’s cross currency basis swap and amortization of capitalized loan costs, on the Company’s short-term and long-term borrowings was $6,812,000, $7,191,000, and $9,574,000 for the years ended December 31, 2014, 2013, and 2012, respectively. Interest paid on the Company’s short-term and long-term borrowings was $5,880,000, $6,379,000, and $8,728,000 for the years ended December 31, 2014, 2013, and 2012, respectively.
In February 2011, the Company entered into a U.S. dollar and Canadian dollar ("CAD") cross currency basis swap with an initial notional amount of CAD34,749,000 as an economic hedge to an intercompany note payable to the U.S. parent by a Canadian subsidiary. The cross currency basis swap requires the Canadian subsidiary to deliver quarterly payments of CAD589,000 to the counterparty and entitles the U.S. parent to receive quarterly payments of U.S. $593,000. The Canadian subsidiary also makes interest payments to the counterparty based on 3-month Canada Bankers Acceptances plus a spread, and the U.S. parent receives payments based on U.S. 3-month LIBOR. The cross currency basis swap expires on September 30, 2025. The Company has elected to not designate this swap as a hedge of the intercompany note from the Canadian subsidiary. Accordingly, changes in the fair value of this swap, as well as changes in the value of the intercompany note, are recorded as gains or losses in "Selling, general and administrative expenses" in the Company’s Consolidated Statements of Income over the term of the swap and are expected to substantially offset one another. The changes in the fair value of the cross currency basis swap will not exactly offset changes in the value of the intercompany note, as the fair value of this swap is determined based on forward rates while the value of the intercompany note is determined based on end of period spot rates. The net gains and losses for the years ended December 31, 2014, 2013, and 2012 were not material. The Company believes there have been no material changes in the creditworthiness of the counterparty to this cross currency basis swap agreement and believes the risk of nonperformance by such party is minimal.
This swap agreement contains a provision providing that if the Company is in default under its Credit Facility , the Company may also be deemed to be in default under the swap agreement. If there were such a default, the Company could be required to contemporaneously settle some or all of the obligation under the swap agreement at values determined at the time of default. At December 31, 2014, no such default existed, and the Company had no assets posted as collateral under the swap agreement.
In November 2014, the Company entered into an amendment and extension of an existing lease, resulting in a 7 years, 5 months operating lease agreement for approximately 50,000 square feet of office space in Jacksonville, FL, for its U.S. Contractor Connection service line in its Americas segment. The lease on the expanded premises began January 1, 2015. Total lease payments over the term are approximately $5,328,000. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
On March 16, 2010, the Company entered into an 11-year operating lease for the lease of approximately 44,000 square feet of office space in Lake Success, New York, for use as its Legal Settlement Administration segment's corporate headquarters. The lease commenced on January 1, 2011 and was amended in January 2011 and again in January 2012 to include a total of approximately 67,000 square feet. Included in the future minimum lease payments noted above are total lease payments of $13,110,000 related to the amended lease. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
Effective February 9, 2010, the Company entered into a 10-year operating lease for approximately 64,000 square feet of office space in Sunrise, Florida, primarily for its Broadspire segment as a replacement for the subleased space in Plantation, Florida described below. Included in the future minimum lease payments noted above are total lease payments of $7,010,000 related to this lease. Additionally, the Company is responsible for certain related real estate taxes and other 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 $30,860,000 related to this Plantation, Florida lease. A majority of this office space was subleased at December 31, 2014. Under executed sublease arrangements at December 31, 2014, the sublessors are obligated to pay the Company minimum sublease payments as follows:
One of the sublease agreements is for three of the four floors of one of the leased buildings in Plantation, Florida; this lease expires in December 2021. The other sublease is for an entire building and expires in December 2021. This lease includes surrender options for the fourth floor between December 31, 2015 and June 30, 2017, and for the third floor as of June 30, 2017, each with twelve months prior notice. The Company recognized pretax losses of $4,285,000 in 2012 on these subleases, which are included in "Special charges and credits" in the Company's Consolidated Statements of Income for the year ended December 31, 2012. Should the sublessor elect to surrender one or both floors and the Company is unable to secure another sublessor, it may be required to recognize additional losses on this lease.
At December 31, 2014, the Company had deferred tax assets related to loss carryforwards of $21,038,000, before netting of unrecognized tax benefits of $944,000. An estimated $10,017,000 of the deferred tax assets will not expire, and $11,021,000 will expire over the next 20 years if not utilized by the Company.
The Company accrues interest and, if applicable, penalties related to unrecognized tax benefits in income taxes. Total accrued interest expense at December 31, 2014, 2013, and 2012, was $104,000, $134,000, and $619,000, respectively.
Employer contributions under the Company’s defined contribution plans are determined annually based on employee contributions, a percentage of each covered employee’s compensation, and years of service. The Company’s cost for defined contribution plans totaled $24,249,000, $21,507,000, and $23,749,000 in 2014, 2013, and 2012, respectively.
The Highway Transportation Funding Act of 2014 ("HAFTA") included pension funding reform which greatly reduced the contributions required to the U.S. Plan, and no contributions are required in fiscal 2015. Required contributions are anticipated in future years as the impact of the HATFA funding reform is phased out. As such, Crawford plans to contribute $9,000,000 per annum to the U.S. Plan for the next four fiscal years to improve the funded status of the plan and minimize future required contributions.The Company expects to make contributions of approximately $9,000,000 to its U.S. Qualified Plan and $6,750,000 to its U.K. Plans in 2015.
The majority of the Company's defined benefit pension plans have projected benefit obligations in excess of the fair value of plan assets. For these plans (excluding the nonqualified plans discussed separately below), the projected benefit obligations and the fair value of plan assets were as follows as of December 31, 2014 and 2013:
A reconciliation of the beginning and ending balances of the projected benefit obligations and the fair value of plans’ assets for the Company’s defined benefit pension plans as of the plans’ most recent measurement dates is as follows:
The following tables set forth the 2014 and 2013 changes in accumulated other comprehensive loss for the Company’s defined benefit retirement plans and post-retirement medical benefits plan on a combined basis.
Unrecognized losses reflect changes in the discount rates and differences between expected and actual asset returns, which are being amortized over future periods. These unrecognized losses may be recovered in future periods through actuarial gains. However, unless the minimum amount required to be amortized is below a corridor amount equal to 10.0% of the greater of the projected benefit obligation or the market-related value of plan assets, these unrecognized actuarial losses are required to be amortized and recognized in future periods. Net unrecognized actuarial losses included in accumulated other comprehensive loss and expected to be recognized in net periodic benefit costs during the year ending December 31, 2015 for the U.S. and U.K. defined benefit pension plans are $12,913,000 ($8,613,000 net of tax).
Asset allocations at the respective measurement dates, by asset category, for the Company’s U.S. and U.K. qualified defined benefit pension plans were as follows:
During the year ended December 31, 2014, the Company reacquired 409,192 shares of CRDA at an average cost of $8.28 under the 2014 Repurchase Authorization. No shares of CRDB were repurchased during the year ended December 31, 2014. At December 31, 2014, the Company has remaining authorization to repurchase 1,973,000 shares under the 2014 Repurchase Authorization.
The Company computes earnings per share of CRDA and CRDB using the two-class method, which allocates the undistributed earnings for each period to each class on a proportionate basis. The Company's Board of Directors has the right, but not the obligation, to declare higher dividends on the non-voting CRDA shares than on the voting CRDB shares, subject to certain limitations. In periods when the dividend is the same for CRDA and CRDB or when no dividends are declared or paid to either class, the two-class method generally will yield the same earnings per share for CRDA and CRDB. During 2014, 2013 and 2012, the Board of Directors declared a higher dividend on CRDA than on CRDB.
Listed below are the shares excluded from the denominator in the above computation of diluted earnings per share for CRDA because their inclusion would have been antidilutive:
Comprehensive income (loss) for the Company consists of the total of net income, foreign currency translation adjustments, and accrued pension and retiree medical liability adjustments. The changes in components of "Accumulated other comprehensive loss" ("AOCL"), net of taxes and noncontrolling interests, included in the Company’s Consolidated Balance Sheets were as follows:
The Company has various stock-based incentive compensation plans for its employees and members of its Board of Directors. Only shares of CRDA can be issued under these plans. The fair value of an equity award is estimated on the grant date without regard to service or performance conditions. The fair value is recognized as compensation expense over the requisite service period for all awards that vest. When recognizing compensation expense, estimates are made for the number of awards that are expected to vest, and subsequent adjustments are made to reflect both changes in the number of shares expected to vest and actual vesting. Compensation expense recognized at the end of any year equals at least the portion of the grant-date value of an award that has vested at that date.
The pretax compensation expense recognized for all stock-based compensation plans was $1,189,000, $3,835,000, and $3,660,000 for the years ended December 31, 2014, 2013, and 2012, respectively.
A summary of option activity as of December 31, 2014, 2013, and 2012, and changes during each year, is presented below:
No stock options were granted in 2014 or 2012. The weighted average grant date fair value of stock options granted during the year ended December 31, 2013 was $1.86. Options exercised in 2014 and 2013 had an intrinsic value of $1,622,000 and $49,000, respectively. No options were exercised in 2012. The fair value of options that vested in 2014 was $846,000. No options vested in 2013 or 2012.
At December 31, 2014, the unrecognized compensation cost related to unvested employee stock options was $236,000. 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/or 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 prior to the vesting of the award. Compensation expense for each award is recognized ratably from the grant date to the vesting date for each tranche.
Compensation expense recognized for all performance shares totaled a credit of $(518,000) for the year ended December 31, 2014, and expense of $2,223,000, and $2,645,000 for the years ended December 31, 2013 and 2012, respectively. Compensation cost for these awards is net of estimated or actual award forfeitures. The credit in compensation expense for the year ended December 31, 2014 resulted from reductions in expense related to cliff vesting shares granted in 2014, 2013, and 2012, as the Company determined that the performance conditions for these shares were not likely to be met. Each of these plans required cumulative earnings per share targets over a three-year period. Certain performance shares vest ratably over three years, without cumulative earnings per share targets. As of December 31, 2014, there was an estimated $778,000 of unearned compensation cost for nonvested performance shares. This unearned compensation cost is expected to be fully recognized by the end of 2015.
The Company’s Board of Directors may elect to issue restricted shares of CRDA in lieu of, or in addition to, cash payments to certain key employees. Employees receiving these shares are subject to restrictions on their ability to sell the shares. Such restrictions generally lapse ratably over vesting periods ranging from several months to five years. The grant-date fair value of a restricted share of CRDA is based on the market value of the stock on the date of grant. Compensation cost is recognized on a straight-line basis over the requisite service period since these awards only have service conditions once granted.
Compensation expense recognized for all restricted shares for the years ended December 31, 2014, 2013, and 2012 was $848,000, $664,000, and $607,000, respectively. As of December 31, 2014, there was $497,000 of total unearned compensation cost related to nonvested restricted shares which is expected to be recognized by June 30, 2017.
Under the U.S. Plan, the Company is authorized to issue up to 1,500,000 shares of CRDA to eligible employees. Participating employees can elect to have up to $21,000 of their eligible annual earnings withheld to purchase shares at the end of the one-year withholding period which starts each July 1 and ends the following June 30. The purchase price of the stock is 85% of the lesser of the closing price of 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.
At December 31, 2014, an estimated 531,000 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 per share of CRDA under the U.K. Plan ranges from $2.05 to $6.22. For the years ended December 31, 2014, 2013, and 2012, compensation expense of $126,000, $110,000, and $138,000, respectively, was recognized for the U.K. Plan. During 2014, 2013, and 2012, a total of 264,998 shares, 495,968, shares and 15,008 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 2014 and 2013, 11,900 and 10,794 shares were issued under the International Plan, respectively. Compensation expense was immaterial for this plan in both years. No shares were issued under the International Plan in 2012.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The fair value of the Company's cross currency basis swap was derived from a discounted cash flow analysis based on the terms of the swap and the forward curves for foreign currency rates and interest rates adjusted for the counterparty's credit risk. The fair value of this 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 value of the contingent earnout liability for the Buckley Scott acquisition was estimated using an internally-prepared probability-weighted discounted cash flow analysis. The fair value analysis relied upon both Level 2 data (publicly observable data such as market interest rates and capital structures of peer companies) and Level 3 data (internal data such as the Company's operating projections). As such, these are Level 3 fair value measurements. The valuation is sensitive to Level 3 data, with the maximum possible earnout of $1,153,000. As such, the fair value is not expected to vary materially from the balance recorded. The fair value of the contingent earnout liability is included in "Other noncurrent liabilities" on the Company’s Consolidated Balance Sheets, based upon the term of the contingent earnout agreement.
There were no transfers of assets between fair value levels during the years ended December 31, 2014 or 2013. The categorization of assets and liabilities within the fair value hierarchy and the measurement techniques are reviewed quarterly. Any transfers between levels are deemed to have occurred at the end of the quarter.
During the year ended December 31, 2014, the Company reduced the fair value of a contingent consideration liability for a previous acquisition from $2,000,000 to zero. In addition, the Company impaired and expensed $1,271,000 of intangible assets from the same acquisition. Both amounts were excluded from the Legal Settlement Administration segment operating earnings and were included in "Unallocated corporate and shared costs and credits." In the Consolidated Statements of Income, the amounts are included as a component of "Selling, general, and administrative expenses." Management concluded that expectations about future results indicated the contingent consideration will not be paid and, accordingly, the value of the intangible assets was impaired.
The fair values of both items were estimated using an internally-prepared probability-weighted discounted cash flow analysis. The fair value analysis relied upon both Level 2 data (publicly observable data such as market interest rates and capital structures of peer companies) and Level 3 data (internal data such as the Company's operating projections). As such, these were Level 3 fair value measurements.
In the normal course of its business, the Company sometimes pays for certain out-of-pocket expenses that are thereafter reimbursed by its clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are required to be included when reporting expenses and revenues, respectively, in the Company’s consolidated results of operations. However, in evaluating segment results, Company management excludes these reimbursements and related expenses from segment results, as they offset each other.
Financial information as of and for the years ended December 31, 2014, 2013, and 2012 related to the Company’s reportable segments is presented below.
Capital expenditures for the years ended December 31, 2014, 2013, and 2012 are shown in the following table:
The Company’s reportable segments’ total operating earnings reconciled to consolidated income before income taxes for the years ended December 31, 2014, 2013, and 2012 were as follows:
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, 2014, the aggregate committed amount of letters of credit outstanding under the facility was $17,511,000.
The Company is subject to numerous federal, state, and foreign employment laws, and from time to time the Company faces claims by its employees and former employees under such laws. Such claims or litigation involving the Company or any of the Company’s current or former employees could divert management’s time and attention from the Company’s business operations and could potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on the Company’s results of operations, financial position, and cash flows. In the opinion of Company management, adequate provisions have been made for items that are probable and reasonably estimable.
There were no special charges or credits during 2014 or 2013. During 2012, the Company recorded pretax special charges of $11,332,000, consisting of $1,163,000 for severance costs, $642,000 for retention bonuses, $849,000 for temporary labor costs, and $140,000 for other expenses for a project to outsource certain aspects of our U.S. technology infrastructure; $4,285,000 to adjust the estimated loss on a leased facility the Company no longer uses; and $3,404,000 for severance costs and $849,000 for lease termination costs, primarily related to restructuring activities in its North American operations.
As of December 31, 2014, the following liabilities remained on the Company's Consolidated Balance Sheets related to the special charges recorded in 2012. The rollforward of these costs for the years ended December 31, 2014 and 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, 2014 was an $836,000 gain realized from the sale of interest in the former corporate headquarters property sold in 2006 and a $418,000 gain from the contingent consideration provision of a 2013 agreement selling certain rights to a customer contract in Latin America. The Company has no further investment interest in the former corporate headquarters property. Included in "Other income" for the year ended December 31, 2013 was a $2,286,000 gain from the sale of the rights to the above-described customer contract. Except for the gain from the redevelopment of the former corporate headquarters property, these amounts are included in the Americas segment operating earnings.
On December 1, 2014, the Company acquired 100% of the capital stock of GAB Robins, a U.K.-based international loss adjusting and claims management provider, for $71,812,000. Because the financial results of certain of the Company's international subsidiaries, including those in the U.K. through which GAB Robins will report, are included in the Company's consolidated financial statements on a two-month delayed basis, the results of GAB Robins' business since the acquisition date have not been included in the Company's consolidated results of operations. In addition, $78,355,000 of borrowings by the UK Borrower under the Credit Facility used to complete the GAB Robins acquisition are not included in outstanding borrowings on the Company's Consolidated Balance Sheet at December 31, 2014, because the U.K.-based borrowing entity has an October 31 fiscal year end, and the balance sheet of that entity was consolidated as of October 31, 2014. GAB Robins has also not been included in the internal control structure of the Company for the year ended December 31, 2014. The impact of the GAB Robins acquisition will be included in the Company's balance sheet and results of operations and cash flows beginning February 1, 2015.
The acquisition is currently being reviewed by the United Kingdom Competition & Markets Authority ("CMA") as a part of its routine acquisition review process, and the Company cannot begin the integration process until this review is completed. Although the Company currently expects that this review will be concluded during the first half of 2015, no assurances of the timing, or any material conditions being placed on this approval can be provided. The success of the GAB Robins acquisition will depend, in part, on the Company's ability to realize the anticipated synergies and cost savings from integrating the GAB Robins business with its existing business on a timely basis.
This is a segment financial measure representing segment earnings 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 or loss attributable to noncontrolling interests. See Note 13, “Segment and Geographic Information,” in the audited consolidated financial statements contained in this Item 8.
The Company may pay a higher dividend on CRDA than on CRDB. This dividend differential can result in different earnings per share for each class of stock due to the two-class method of computing earnings per share as required by current accounting guidance. CRDB generally presents a more dilutive measure.
The provision for income taxes in the fourth quarter of 2014 included additional expenses due to the Company's inability to recognize the tax benefits from net operating losses in certain international operations, and the revaluation of the Company's net U.S. deferred tax assets resulting from a decrease in state income tax rates, an increase in partially disallowable meals and entertainment expenses, and certain other adjustments and changes in estimates.