Shareholders' Investment Attributable to Shareholders of Crawford & Company Per Diluted Share
This is a segment financial measure calculated in accordance with ASC Topic 280, "Segment Reporting," and representing segment earnings before certain unallocated corporate and shared costs and credits, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, goodwill and intangible asset impairment charges, restructuring and special charges, loss on disposition of business line, income taxes, and net income or loss attributable to noncontrolling interests and redeemable noncontrolling interests.
As discussed in more detail in subsequent sections of this MD&A, we have three operating segments: Crawford Claims Solutions, Crawford TPA Solutions: Broadspire, and Crawford Specialty Solutions. Our three operating segments represent components of the 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. Crawford Claims Solutions serves the global property and casualty insurance company markets. Crawford TPA Solutions: Broadspire serves the global casualty, disability and self-insurance marketplace worldwide. Crawford Specialty Solutions serves the global property and casualty insurance company markets, and prior to the sale of our Garden City Group business line in June 2018, the class action, regulatory, mass tort, bankruptcy, and other legal settlement markets.
We typically earn our revenues on an individual fee-per-claim basis for claims management services we provide to insurance companies and self-insured entities. Accordingly, the volume of claim referrals to us is a key driver of our revenues. Generally, fees are earned over time on cases as services are provided, which generally occurs in the period the case is assigned to us, although sometimes a portion or substantially all of the revenues generated by a specific case assignment will be earned in subsequent periods. We cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related cases and the occurrence of natural and man-made disasters, which are a significant source of cases for us and are not subject to accurate forecasting.
On June 15, 2018, the Company completed the sale of its Garden City Group business (the “GCG Business”) to EPIQ Class Action & Claims Solutions, Inc. ("EPIQ") for cash proceeds of $42.0 million, subject to post-closing working capital adjustments. Adjusted proceeds totaled $42.6 million including the working capital adjustment which was received in December 2018. At the time of the disposal, the GCG Business included total assets of $70.6 million and total liabilities of $10.1 million. The total asset balance was primarily comprised of accounts receivable, unbilled revenues and capitalized software costs. After including transaction and other costs related to the sale, the Company recognized a pretax loss on the disposal of $20.3 million. The loss on disposal is presented in the Consolidated Statements of Operations as a separate charge "Loss on disposition of business line".
On January 4, 2017, the Company acquired 85% of the outstanding membership interests of WeGoLook®, LLC, an Oklahoma limited liability company, and certain non-compete agreements, for consideration of $36.1 million on a debt free valuation basis. WeGoLook provides a variety of on-demand inspection, verification, and other field services for businesses and consumers through a mobile platform of independent contractors.
There were no goodwill impairment charges in 2018 or 2016. We incurred a non-cash goodwill impairment charge in 2017 of $19.6 million. See the "Critical Accounting Policies" in Item 7 and Note 4, "Goodwill and Intangible Assets" of our accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion about goodwill impairment charges. In 2018, the Company recognized an impairment of $1.1 million related to an indefinite-lived trade name due to a combination of achieving less than forecasted revenue compared to previous modeled results and further reduced forecasted revenue associated with the trade name.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act significantly changes U.S. Federal income tax law. The changes include, but are not limited to: a federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, creation of a new minimum tax on global intangible low taxed income (“GILTI”), and a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”) as a result of the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system. In connection with our initial analysis of the impact of the Tax Act, we recorded a provisional estimate in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) of net tax expense of $3.8 million in the period ended December 31, 2017. This expense consisted of provisional estimates of $7.6 million net expense for the Transition Tax, which we estimated would be fully offset by foreign tax credit carryforwards, and $3.8 million net benefit for remeasurement of our domestic deferred tax balances for the corporate rate reduction. In the period ended December 31, 2018, the Company completed its accounting for the Tax Act in accordance with SAB 118. As a result, the Company recorded additional income tax expense of $3.6 million. This expense consisted of substantially all of the $7.0 million valuation allowance established against foreign tax credits and $0.1 million for the revaluation of deferred taxes, net of $3.5 million of Transition Tax release of uncertain tax positions and adjustments. The Company has completed the accounting for the Tax Act within the one year measurement period, as allowed under SAB 118.
Revenues in the Crawford Specialty Solutions segment were also impacted due to a change in the operating model in the U.K. contractor repair business where we are now acting as an agent instead of principal in certain relationships with clients related to our Contractor Connection service line, which represents a $11.0 million revenue reduction for the 2018 period as compared to the prior year. This change had no impact to operating earnings. Excluding the Garden City Group business, the change in the operating model in the U.K. contractor repair business, and the change in foreign exchange rates, consolidated revenues before reimbursements increased $14.5 million, or 1.4% compared with 2017.
Segment operating earnings (a measure of segment operating performance used by our management that is defined and discussed in more detail below) decreased in each of our operating segments, due primarily to an increase in centralized administrative support costs during 2018 primarily due to investments in technology and expanding sales efforts.
Segment gross profit improved in our Crawford Claims Solutions and Crawford TPA Solutions: Broadspire segments, due to a reduction in direct expenses, however there was a decline in our Crawford Specialty Solutions segment due primarily to higher direct costs in the Garden City Group service line prior to its disposal.
In the Crawford TPA Solutions: Broadspire segment, operating earnings declined primarily due to an increase in centralized indirect administrative support costs during 2018. Excluding indirect support costs, gross profit improved from $106.1 million, or 27.2% of revenues before reimbursements in 2017, to $109.2 million, but declined as a percent of revenues before reimbursements in 2018 to 26.9%, as direct costs grew at a higher rate than revenues.
Cost of services provided, before reimbursements, decreased $28.3 million, or 3.6% for 2018 compared with 2017. The decrease was primarily due to the disposition of the Garden City Group referenced above, and lower compensation costs in our Crawford Claims Solutions segment due to the reduction in hurricane-related revenues.
Selling, general and administrative ("SG&A") expenses were $2.6 million higher, an increase of 1.1%, in 2018 compared to 2017. The increase in 2018 was due to an increase in professional fees, including costs related to the implementation of the Tax Act, software amortization and other administrative expenses, partially offset by a decrease in advertising expenses in our Contractor Connection service line and lower Garden City Group expenses following its disposition in June 2018.
Costs of administrative functions, including direct compensation, payroll taxes, and benefits, are managed centrally and considered indirect costs. The allocated centralized indirect administrative support costs of our shared-services infrastructure are allocated to each segment based on usage and reflected within "Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor" of each segment.
In addition to allocated corporate and shared costs, "Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor" includes travel and entertainment, office rent and occupancy costs, automobile expenses, office operating expenses, data processing costs, cost of risk, professional fees, and amortization and depreciation expense other than amortization of customer-relationship intangible assets.
In addition, we believe that a non-GAAP discussion and analysis of segment gross profit is helpful in understanding the results of our segment operations, excluding indirect centralized administrative support costs. Our discussion and analysis of segment gross profit includes the revenues and direct expenses of each segment.
The table below, read together with the reconciliation on the previous page, represents gross profit for our segments reconciled to net income attributable to shareholders of Crawford & Company.
* See table on the previous page for a reconciliation of segment operating earnings to Net income attributable to shareholders of Crawford & Company.
YEAR ENDED DECEMBER 31, 2018 COMPARED WITH YEAR ENDED DECEMBER 31, 2017
Operating earnings for our Crawford Claims Solutions segment decreased from $17.5 million in 2017 to $9.8 million in 2018, representing an operating margin of 2.7% in 2018 compared with 4.8% in 2017. Operating earnings decreased from 2017 to 2018 primarily due to lower revenues in the U.S. and from an increase in centralized administrative support costs as compared to 2017. Excluding centralized indirect support costs, gross profit improved from $75.7 million, or 20.7% of revenues before reimbursements in 2017, to $76.9 million, or 21.3% of revenues before reimbursements in 2018, due primarily to cost reductions in Canada and lower compensation costs in 2018 compared to 2017 related to the hurricane activity in the U.S. in the prior year.
Crawford Claims Solutions segment expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor increased from $102.7 million in 2017 to $111.1 million in 2018, and increased as a percent of segment revenues from 28.1% in 2017 to 30.8% in 2018. The increase in both the amount and the expense as a percent of revenues was due to an $8.9 million increase in indirect centralized administrative support costs in the 2018 period, primarily related to investments in technology and expanding sales efforts.
Revenues before reimbursements from our Crawford TPA Solutions: Broadspire totaled $405.3 million in 2018, compared to $390.6 million in 2017. Changes in foreign exchange rates increased our Crawford TPA Solutions: Broadspire segment revenues by $2.2 million, or approximately 0.6%, for 2018 compared with 2017. Absent foreign exchange rate fluctuations, Crawford TPA Solutions: Broadspire segment revenues would have been $403.1 million in 2018. Revenues were positively impacted by an increase in unit volumes, measured principally by cases received, which increased revenues 0.9% in 2018 compared with 2017. Changes in product mix and in the rates charged for those services accounted for a 2.3% revenue increase for 2018 compared with the 2017 period.
The increase in revenues in the U.S. for 2018 as compared with the 2017 period was primarily due to the increase in new Claims Management clients, partially offset by a decrease in high-frequency, low-complexity affinity cases. Based on constant foreign exchange rates, the decrease in revenues in the U.K. for 2018 was due to a change in the mix of services provided. Revenues in Canada increased due to a change in the mix of services provided and an increase in new clients. Revenues decreased in Europe and Rest of World due to a product mix shift to increased high-frequency, low-complexity cases in Scandinavia.
Crawford TPA Solutions: Broadspire unit volumes, as measured by cases received, by region for 2018 and 2017 were as follows:
The most significant expense in our Crawford TPA Solutions: Broadspire segment is the compensation of employees, including related payroll taxes and fringe benefits, and payments to outsourced service providers that augment the functions performed by our employees. Direct compensation expenses, fringe benefits, and non-employee labor, as percent of Crawford TPA Solutions: Broadspire segment revenues before reimbursements, increased from 56.5% in 2017 to 58.2% in 2018. The U.S. dollar amount of these expenses increased from $220.7 million in 2017 to $235.8 million in 2018. The increase in both the amounts and the percent of revenues for each of the periods was due to an increase in employees and an increase in compensation and related benefit rates in 2018.
Expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor increased in the Crawford TPA Solutions: Broadspire segment from $131.6 million in 2017 to $132.6 million in 2018, but decreased as a percent of sales from 33.7% in 2017 to 32.7% in the 2018 period. The increase in amount was due to the increased revenues, however the direct costs grew at a lower rate than revenues.
Unless otherwise noted, all amounts presented below for 2018 reflect activity of the Garden City Group service line through June 15, 2018 due to the disposal of that business as of that date. See Note 3, "Acquisitions and Disposition of Business Line" of our accompanying consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion about this transaction.
Crawford Specialty Solutions segment revenues are primarily derived from the global property and casualty insurance company markets in the U.S., U.K., Canada, Australia, Europe and Rest of World, and, prior to the disposition of the Garden City Group business line, the legal settlement administration market primarily in the U.S. and Canada. Revenues before reimbursements by major region, based on actual exchange rates and using a constant exchange rate, were as follows:
Crawford Specialty Solutions segment revenues before reimbursements decreased 13.0% to $304.5 million in 2018 compared with $350.2 million million in 2017. Changes in foreign exchange rates resulted in an increase of our Crawford Specialty Solutions segment revenues by approximately 0.7%, or $2.3 million for 2018, as compared with the 2017 period. Absent foreign exchange rate fluctuations, Crawford Specialty Solutions segment revenues would have been $302.2 million for 2018.
The most significant expense in our Crawford Specialty Solutions segment is the compensation of employees, including related payroll taxes and fringe benefits, and payments to outsourced service providers that augment the functions performed by our employees. Crawford Specialty Solutions direct compensation, fringe benefits, and non-employee labor expense, as a percent of the related revenues before reimbursements, increased from 48.4% in 2017 to 51.1% in 2018. The amount of these expenses decreased from $169.7 million in 2017 to $155.7 million in 2018. The decrease in the dollar amount in 2018 was primarily due to the Garden City Group disposal referenced above. Excluding the impact of the change in the operating model in the U.K. contractor repair business discussed above, direct compensation expenses, fringe benefits, and non-employee labor as a percent of Crawford Specialty Solutions segment revenues before reimbursements would have been 49.3% in 2018. The increase in expenses as a percent of revenues was due to lower employee utilization in the Garden City Group service line through the date of disposal. Average FTEs in this segment totaled 1,579 in 2018, compared to an average of 1,809 FTEs in 2017. The decrease in employees was due to the Garden City Group disposal referenced above, which had an average of 468 full-time equivalent employees in 2017 compared to 157 in 2018.
YEAR ENDED DECEMBER 31, 2017 COMPARED WITH YEAR ENDED DECEMBER 31, 2016
Revenues in our U.S. operations include revenues from an outsourcing project for a major U.S. insurance carrier, which resulted in $20.7 million and $34.9 million of revenues in the periods ended December 31, 2017 and 2016, respectively, representing a negative variance of 4.1% in Crawford Claim Solutions revenues. There was a 26.9% increase in cases received in 2017 compared with 2016. Excluding the impact of high-frequency, low-complexity cases received from the WeGoLook acquisition, there was a decrease in segment unit volume of 0.5%. The WeGoLook acquisition contributed 2.6% of the increase in Crawford Claims Solutions segment revenues. Changes in product mix and in the rates charged for those services accounted for a 10.0% revenue increase in 2017 compared with 2016.
The most significant expense in our Crawford Claims Solutions segment is the compensation of employees, including related payroll taxes and fringe benefits, and the payments to outsourced service providers that augment the functions performed by our employees. As a percentage of revenues before reimbursements, direct compensation, fringe benefits, and non-employee labor expenses were 67.1% in 2017 compared with 64.4% for the 2016 period. The increases in expenses as a percent of revenues was primarily due to higher cost of labor for staff working on weather related claims in the U.S. in the 2017 period. The total dollar amount of these expenses increased to $244.8 million in 2017 from $219.9 million for 2016. There was an average of 3,040 full-time equivalent employees in this segment in the 2017 period compared with an average of 2,997 in the 2016 period, including the impact of the WeGoLook acquisition which resulted in an increase of 115 employees in the 2017 period.
Crawford Claims Solutions segment expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased from $107.3 million in 2016 to $102.7 million in 2017. As a percent of segment revenues, segment expenses decreased from 31.4% in 2016 to 28.1% in 2017. The decrease in costs was primarily due to the impact of cost reduction initiatives in 2017.
Crawford TPA Solutions: Broadspire operating earnings increased to $38.2 million in 2017, an increase of 4.7% from 2016 operating earnings of $36.5 million. The operating margin increased from 9.5% in 2016 to 9.8% in 2017. Operating earnings improved from 2016 to 2017 due to higher revenues in our Claims Management service line in the U.S., operational efficiency gains, and a reduction in administrative support costs. Excluding centralized indirect support costs, gross profit improved from $104.9 million, or 27.4% of revenues before reimbursements in 2016, to $106.1 million, but decreasing slightly as a percentage of revenues before reimbursements in 2017 to 27.2%, as costs were kept in alignment with the growth in revenues.
The increase in revenues in the U.S. for 2017 as compared with 2016 was due to an increase in new Claims Management and disability clients. Based on constant foreign exchange rates, the increase in revenues in the U.K. for 2017 was due to client case volume increases and a change in the mix of services provided. Revenues in Canada increased due to a change in the mix of services provided and an increase in new clients. Revenues decreased in Europe and Rest of World in 2017 due to a product mix shift in Scandinavia to increased high-frequency, low-complexity cases, partially offset by an increase as we develop our business in other territories, primarily in Australia.
Crawford TPA Solutions: Broadspire unit volumes, as measured by cases received, by region for 2017 and 2016 were as follows:
Overall case volumes were 1.8% higher in 2017 compared with 2016. The increase in U.S. case volumes was due to an increase in Disability case referrals from new clients and an increase in Medical Management referrals, partially offset by a decline in Affinity claims. The U.K. case volumes were higher due primarily to an increase in cases received from existing clients. The decrease in Canada cases was due to a decline in high-frequency, low-complexity vehicle appraisal cases in 2017. Cases in Europe and Rest of World were consistent between the two periods.
Expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased as a percent of Crawford TPA Solutions: Broadspire segment revenues before reimbursements, from 34.3% in 2016 to 33.7% in 2017, although the U.S. dollar amount of these expenses increased only slightly by $0.3 million. The decrease in percentage is primarily due to cost reduction initiatives implemented in 2017 and higher revenues.
Crawford Specialty Solutions segment revenues before reimbursements decreased 9.1% to $350.2 million in 2017 compared with $385.1 million in 2016. Changes in foreign exchange rates resulted in a decrease in our Crawford Specialty Solutions segment revenues by approximately 1.2%, or $4.5 million for 2017, as compared with the 2016 period. Absent foreign exchange rate fluctuations, Crawford Specialty Solutions segment revenues before reimbursements would have been $354.7 million for 2017.
The decrease in revenues in the U.S. in 2017 compared with the 2016 period was primarily due to lower revenues in our Garden City Group service line discussed above, partially offset by increases in our Global Technical Services and Contractor Connection service lines due to an increase in hurricane activity. The revenue decrease in the U.K. in 2017 was primarily due to the change in U.K. Contractor Connection operating model discussed above, partially offset by an increase in Global Technical Services revenues compared to the 2016 period. Revenues in Canada increased in the 2017 period compared with 2016 due to an increase in high-frequency, low-complexity case volumes from existing clients, and the change in foreign exchange rates, partially offset by a reduction in weather-related case volumes from the Fort McMurray wildfires in 2016. Based on constant exchange rates, there was a slight decrease in revenues in Australia due to a reduction in weather-related activity in the current year. The increase in revenues in Europe was primarily due an increase in revenues in Germany, partially offset by a change in the mix of services provided in Scandinavia. The increase in revenues in Rest of World was primarily due to an increase in weather-related activity in Latin America.
Reimbursements for out-of-pocket expenses incurred in our Crawford Specialty Solutions segment can vary materially from period to period depending on the amount and types of projects and were $26.4 million in 2017, decreasing from $37.2 million in 2016 due primarily to a lower volume of case administration work in our Garden City Group service line and reduced use of third parties in Canada where the Fort McMurray wildfires occurred in 2016.
Crawford Specialty Solutions unit volumes by major underlying case category, as measured by cases received, for 2017 and 2016 were as follows:
Overall, there was a 5.3% increase in cases received in 2017 compared with 2016. The increase in U.S. case volumes was due to an increase in high-frequency, low-complexity cases in Contractor Connection, and an increase in Global Technical Services resulting from the hurricane activity. The U.K. case volumes were lower in 2017 due to the flooding that occurred in that region in 2016. The increase in Canada was due to an increase in high-frequency, low-complexity cases in Contractor Connection and an increase in Global Technical Services. The decrease in Australia cases was due to a reduction in weather related activity in the current year. The increase in cases in Europe was due to increases in Global Technical Services in Italy and Scandinavia. The decrease in cases in Rest of World was due to a reduction in high-frequency, low-complexity cases in Brazil and Singapore.
Garden City Group services are generally project based and not denominated by individual claims and therefore not included in the table above.
The most significant expense in our Crawford Specialty Solutions segment is the compensation of employees, including related payroll taxes and fringe benefits, and payments to outsourced service providers that augment the functions performed by our employees. Crawford Specialty Solutions direct compensation, fringe benefits, and non-employee labor expense, as a percent of the related revenues before reimbursements, increased slightly to 48.4% in 2017 compared with 48.1% in 2016. The amount of these expenses decreased from $185.4 million in 2016 to $169.1 million in 2017 due to the decline in revenues from the Deepwater Horizon special project discussed above. The increase as a percent of revenues was due to a decrease in employee utilization in the Garden City Group service line. Average FTEs in this segment totaled 1,809 in 2017, up from 1,776 FTEs in 2016.
Crawford Specialty Solutions segment expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor increased as a percent of segment revenues before reimbursements to 36.3% in 2017 from 34.8% in 2016. The dollar amount of these expenses decreased by $7.0 million. The decrease in the amount was due to the change in the operating model in the U.K. contractor repair business where we are acting in an agency role instead of the contract principal in certain relationships with clients in our Contractor Connection service line, partially offset by an increase in advertising costs in our Contractor Connection service line compared with 2016. The increase in the percent as a percent of revenues was due to the increase in advertising costs in Contractor Connection and an increase in our Garden City Group service line.
Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, changes in tax law, 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 $18.5 million, $15.0 million, and $25.6 million for 2018, 2017, and 2016, respectively. Our effective tax rate for financial reporting purposes was 42.0%, 35.6%, and 40.4% for 2018, 2017, and 2016, respectively. The Company's effective income tax rate in 2018 was impacted by a valuation allowance on certain Foreign Tax Credits, the Tax Cuts and Jobs Act in the U.S., and one-time income tax planning activities. The Company's effective income tax rate in 2017 was impacted by the Tax Cuts and Jobs Act in the U.S. and international restructuring activities. Based on our 2019 operating plans, we anticipate our effective tax rate for financial reporting purposes in 2019 to be in the 31% to 33% range before considering any discrete items and assuming no material changes to tax law and policy in the material jurisdictions in which we operate.
Net corporate interest expense consists of interest expense that we incur on our short- and long-term borrowings, partially offset by interest income we earn on available cash balances and short-term investments. These amounts vary based on interest rates, borrowings outstanding, and the amounts of invested cash. Corporate interest expense totaled $11.4 million, $9.9 million, and $9.9 million for 2018, 2017, and 2016, respectively. Corporate interest income totaled $1.3 million, $0.8 million, and $0.7 million in 2018, 2017, and 2016, respectively. We pay interest on borrowings under our Credit Facility based on variable rates. Our level of interest expense is dependent on the future direction of interest rates as well as the level of outstanding borrowings relative to prior periods. The weighted average interest rates under our Credit Facility were 3.7%, 2.8%, and 2.8% for the years ending December 31, 2018, 2017, and 2016, respectively.
The Company recognized an impairment of $1.1 million in 2018 related to an indefinite-lived trade name due to a combination of achieving less than forecasted revenue compared to previous modeled results and further reduced forecasted revenue associated with the trade name. There were no such charges in 2017 or 2016.
On June 15, 2018, the Company completed the sale of its Garden City Group business (the “GCG Business”) to EPIQ Class Action & Claims Solutions, Inc. ("EPIQ") for cash proceeds of $42.6 million including the working capital adjustment. After including transaction and other costs related to the sale, the Company recognized a pretax loss on the disposal of $20.3 million. The loss on disposal is presented in the Consolidated Statements of Operations as a separate charge "Loss on disposition of business line". See Note 3, "Acquisitions and Disposition of Business Line" of our accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion about the disposition.
We fund our working capital requirements, capital expenditures and acquisitions from net cash provided by operating activities and borrowings under bank credit facilities.
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 the Company's leverage ratio (as defined below), provided that borrowings in foreign currencies may bear interest based on LIBOR only. The interest margin for LIBOR loans ranges from 1.30% to 2.10% and for Base Rate loans ranges from 0.30% to 1.10%. 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 Wells Fargo Bank, National Association and (iii) LIBOR for a one month interest period plus 1.0%. The weighted average interest rates under our Credit Facility were 3.7%, 2.8%, and 2.8% for the years ending December 31, 2018, 2017, and 2016, respectively.
At December 31, 2018, a total of $190.3 million was outstanding and there was an undrawn amount of $11.7 million under the letters of credit subcommitment of the Credit Facility. These letter of credit commitments were for the Company's own obligations. Including the amounts committed under the letters of credit subcommitment, the available borrowing capacity under the Credit Facility totaled $248.0 million at December 31, 2018.
At December 31, 2018, the Company was in compliance with the financial covenants under the Credit Facility. Our leverage ratio was 1.48 and 1.80 as of December 31, 2018 and December 31, 2017, respectively, and our fixed charge coverage ratio was 2.50 and 2.23 as of December 31, 2018 and December 31, 2017, respectively. 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 documents.
We continue the ongoing monitoring of our customers' ability to pay us for the services that we provide to them. Based on historical results, we currently believe there is a low likelihood that write-offs of our existing accounts receivable will have a material impact on our financial results. However, if one or more of our key customers files bankruptcy or otherwise becomes unable to make required payments to us, or if overall economic conditions deteriorate, we may need to make material provisions in the future to increase our allowance for accounts receivable.
The operations of each of our reporting segments expose us to a number of risks, including 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, as well as the risk of changes in tax rates or tariffs on earnings or services provided outside the U.S. 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 2018, 2017, and 2016. We cannot predict the impact that foreign currency exchange rates may have on our future revenues or operating earnings.
At December 31, 2018, our working capital balance (current assets less current liabilities) was approximately $95.5 million, compared with $113.8 million at December 31, 2017. The decrease in working capital was primarily due to the Garden City Group disposal that occurred on June 15, 2018. Cash and cash equivalents at the end of 2018 totaled $53.1 million, compared with $54.0 million at the end of 2017.
Cash and cash equivalents as of December 31, 2018 consisted of $17.4 million held in the U.S. and $35.7 million held in our foreign subsidiaries. All of the cash and cash equivalents held by our foreign subsidiaries is available for general corporate purposes. The Company generally does not provide for additional U.S. and foreign income taxes on undistributed earnings of foreign subsidiaries because they are considered to be indefinitely reinvested. The Company's current expectation is that such earnings will be reinvested by the subsidiaries or will be repatriated only when it would be tax effective or otherwise strategically beneficial to the Company, such as if a very unusual event or project generated profits significantly in excess of ongoing business reinvestment needs. If such an event occurs, we would analyze the potential tax impact or our anticipated investment needs in that region and provide for taxes for earnings that are not expected to be permanently reinvested. Other historical earnings and future foreign earnings necessary for business reinvestment are expected to remain permanently reinvested and will be used to provide working capital for these operations, fund defined benefit pension plan obligations, repay non-U.S. debt, fund capital improvements, and fund future acquisitions. We currently believe that funds expected to be generated from our U.S. operations, along with potential borrowing capabilities in the U.S., will be sufficient to fund our U.S. operations and other obligations, including our funding obligations under our U.S. defined benefit pension plan, for the foreseeable future and, therefore, except in limited circumstances such as those described above, do not foresee a need to repatriate cash held by our foreign subsidiaries in a taxable transaction to fund our U.S. operations.
Cash used in financing activities was $58.7 million in 2018. In 2018, we borrowed $101.4 million in short-term borrowings for working capital needs and we repaid a total of $135.4 million in short-term borrowings and $0.5 million in debt and capital lease obligations. The decrease in borrowings in the 2018 period was primarily due to proceeds from the Garden City Group disposition which were used to reduce borrowings. The increase in borrowings in the 2017 period was primarily due to borrowings to fund the WeGoLook acquisition and increased working capital requirements. We used cash to pay cash dividends totaling $13.5 million. Also in 2018, we repurchased 1,144,410 shares of CRD-A and 94,378 shares of CRD-B stock totaling $10.4 million, and we received shares of CRD-A stock that were surrendered by employees to settle $1.1 million of withholding taxes owed on the issuance of restricted and performance shares.
(Note references in the following table refer to the note in the accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K).
Borrowings under our Credit Facility bear interest at a variable rate, based on LIBOR or a Base Rate, in either case plus an applicable margin. Long-term debt refers to the required principal repayment at maturity of the Credit Facility, and may differ significantly from estimates, due to, among other things, actual amounts outstanding at maturity or any refinancings prior to such date. Interest amounts are based on projected borrowings under our Credit Facility and interest rates in effect on December 31, 2018, and the actual interest payments may differ significantly from estimates due to, among other things, changes in outstanding borrowings and prevailing interest rates in the future.
At December 31, 2018, we had approximately $7.4 million of unrecognized income tax benefits related to uncertain tax positions. We cannot reasonably estimate when all of these unrecognized income tax benefits may be settled. We expect $3.4 million of reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties.
As a component of our Credit Facility, we maintain a letter of credit facility to satisfy certain contractual obligations. At December 31, 2018, the issued, but undrawn, letters of credit totaled approximately $11.7 million. These letters of credit are typically renewed annually, but unless renewed, will expire as follows:
At December 31, 2018, we were not party to any off-balance sheet arrangements, other than operating leases, which could materially impact our operations, financial condition, or cash flows. We have certain material obligations under operating lease agreements to which we are a party. In accordance with GAAP, these operating lease obligations and the related leased assets are not reported on our consolidated balance sheets.
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, 2018.
The following addresses changes in our financial condition not addressed elsewhere in this MD&A.
Accounts receivable decreased by $43.1 million, or $7.8 million excluding the $31.7 million reduction from the sale of the Garden City Group and foreign currency exchange impacts, in 2018 compared with 2017. The decrease was primarily due to decreased receivables within Crawford Claims Solutions and Crawford Specialty Solutions.
Our revenues are primarily comprised of claims processing or program administration fees. Fees for professional services are recognized as unbilled revenues at estimated collectible amounts at the time such services are rendered. Substantially all unbilled revenues are billed within one year. Out-of-pocket costs incurred in administering a claim are typically passed on to our clients and included in our revenues under GAAP. Deferred revenues represent the estimated unearned portion of fees related to future services to be performed under certain fixed-fee service arrangements. Deferred revenues are recognized into revenues based on the estimated rate at which the services are provided. These rates are primarily based on an evaluation of historical claim closing rates by major claim type. Additionally, recent claim closing rates are evaluated for a significant deterioration or improvement in the longer-term historical closing rates used.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments and for adjustments to invoiced amounts. Losses resulting from the inability of clients to make required payments are accounted for as bad debt expense, while adjustments to invoices are accounted for as reductions to revenues. These allowances are established by using historical write-off or adjustment information intended to determine future loss expectations and by considering the current credit worthiness of our clients, any known specific collection problems, and our assessment of current industry conditions. Actual experience may differ significantly from historical or expected loss results. Each quarter, we evaluate the adequacy of the assumptions used in determining these allowances and make adjustments as necessary. Changes in estimates are recognized in the period in which they are determined. Historically, our estimates have been materially accurate.
The Company currently has four reporting units for goodwill impairment purposes. These reporting units are the Crawford Claims Solutions and Crawford TPA Solutions: Broadspire operating segments and the Global Technical Services and Contractor Connection service lines. The Garden City Group was also a reporting unit before its disposal in the second quarter of 2018.
We have the option to perform a qualitative assessment of goodwill prior to completing the quantitative analysis described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If we conclude that this is the case, we perform the quantitative analysis discussed above.
The indefinite-lived intangible assets consisting of the Crawford TPA Solutions: Broadspire and SLS trade names, with carrying values of $29.1 million and $1.7 million, respectively, are also evaluated for potential impairment on an annual basis or when indicators of potential impairment are identified. SLS operates in the Crawford Claim Solutions segment within the U.K. Based on our 2018 analysis, we do not believe these trade names are impaired. The indefinite-lived intangible asset impairment test involves estimating the fair value using an internally prepared discounted cash flow analysis. The fair values of the Company's trade names are established using the relief-from-royalty method, a form of the income approach. 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 net sales, for the asset's use. The present value of the after-tax costs savings (i.e., royalty relief) at an appropriate discount rate including a tax amortization benefit indicates the value of the trade name. We determined the discount rate based on our performance compared to similar market participants, factored by risk in forecasting using a modified capital asset pricing model.
The Company recognized an impairment of $1.1 million related to an indefinite-lived trade name due to a combination of achieving less than forecasted revenue compared to previous modeled results and further reduced forecasted revenue associated with the trade name.
We sponsor various defined benefit pension plans in the U.S. and U.K. that cover a substantial number of current and former employees in each location. Certain other employees located in the Netherlands, Norway, Germany, and the Philippines have retirement benefits that are accounted for as defined benefit pension plans under GAAP. We utilize the services of independent actuaries to help us estimate our pension obligations and measure pension costs. Our U.S. Qualified Plan was frozen on December 31, 2002. Our U.K. Plans were closed to new employees as of October 31, 1997, but existing participants may still accrue additional limited benefits based on salary levels existing at the close date. Benefits payable under our U.S. Qualified Plan are generally based on career compensation; however, no additional benefits accrue on our frozen U.S. Qualified Plan after December 31, 2002. Benefits payable under the U.K. Plans are generally based on an employee's salary at the time the applicable plan was closed. Our funding policy is to make cash contributions in amounts sufficient to maintain the plans on an actuarially sound basis, but not in excess of amounts deductible under applicable income tax regulations. Note 9, "Retirement Plans," of our accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K provides details about the assumptions used in determining the funded status of the plans, the unrecognized actuarial gain/(loss), the components of net periodic benefit cost, benefit payments expected to be made in the future and plan asset allocations.
The principal 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, 2018, the discount rate used to compute the benefit obligations of the U.S. and U.K. defined benefit pension plans were 4.30% and 2.77%, respectively.
We review our employee demographic assumptions annually and update the assumptions as necessary. During 2018, we revised the mortality assumptions for the U.S. plans to incorporate the new mortality tables issued by the Society of Actuaries, adjusted to reflect Company-specific experience and future expectations. This resulted in a $1.3 million decrease in the projected benefit obligation 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, 2018, we recorded a decrease to equity through other comprehensive income ("OCI") of $18.0 million (net of tax at the applicable jurisdictional rate) to reflect unrealized actuarial losses during 2018. At December 31, 2017, we recorded an increase to equity through OCI of $0.7 million (net of tax at the applicable jurisdictional rate) to reflect unrealized actuarial gains during 2017. Those changes are subject to amortization over future years and may be reflected in future income statements.
The NOL carryforwards for which a valuation allowance is not recorded primarily consists of $10.8 million of U.K. NOL carryforwards and $5.8 million of state NOL carryforwards generated by our domestic companies. In the U.K., NOL carryforwards have an unlimited life. Based on our evaluation of sources of taxable income, we expect to fully utilize the U.K. NOL carryforwards. Accordingly, we concluded that it was more likely than not that we should be able to utilize our U.K. NOL carryforwards.
The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") and include the accounts of the Company, its majority-owned subsidiaries, and variable interest entities in which the Company is deemed to be the primary beneficiary. Significant intercompany transactions are eliminated in consolidation. 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 Accounting Standards Codification ("ASC") 810, "Consolidation," in order to provide sufficient time for accumulation of their results. Accordingly, the Company's December 31, 2018, 2017, and 2016 consolidated financial statements include the financial position of such operations as of October 31, 2018 and 2017, respectively, and the results of their operations and cash flows for the fiscal periods ended October 31, 2018, 2017, and 2016, respectively.
The Company consolidates the results of Lloyd Warwick International Limited ("LWI"), of which it owns 51% of the capital stock. LWI is a VIE primarily because it does not meet the business scope exception, as Crawford provides more than half of the financial support, and because LWI lacks sufficient equity at risk to permit LWI to carry on its activities without additional financial support. Crawford has agreed to provide financial support to LWI of approximately $10,000,000. Crawford is considered to be the primary beneficiary of LWI because of its controlling ownership interest and because Crawford has the obligation to absorb LWI's losses through the additional financial support that Crawford may be obligated to provide. Creditors of LWI have no recourse to Crawford's general credit. Total assets and liabilities of LWI as of December 31, 2018 were $12,232,000 and $10,423,000, respectively. Total assets and liabilities of LWI as of December 31, 2017 were $10,083,000 and $10,685,000, respectively. Included in LWI's total liabilities at December 31, 2018 and 2017 were loans from Crawford of $6,934,000 and $8,580,000, respectively.
The Company consolidates the liabilities of its deferred compensation plan and the related assets, which are held in a rabbi trust and also considered a VIE of the Company. The rabbi trust was created to fund the liabilities of the Company's deferred compensation plan. The Company is considered the primary beneficiary of the rabbi trust because the Company directs the activities of the trust and can use the assets of the trust to satisfy the liabilities of the Company's deferred compensation plan. At December 31, 2018 and 2017, the liabilities of this deferred compensation plan were $8,914,000 and $9,337,000, respectively, which represented obligations of the Company rather than of the rabbi trust, and the values of the assets held in the related rabbi trust were $16,402,000 and $16,538,000, respectively. These liabilities and assets are included in "Other noncurrent liabilities" and "Other noncurrent assets" on the Company's Consolidated Balance Sheets, respectively.
Revenues are recognized when control of the promised services are transferred to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues are recognized net of any sales, use or value added taxes collected from customers, which are subsequently remitted to governmental authorities. As the Company completes its performance obligations, it has an unconditional right to consideration as outlined in the Company's contracts.
The Company maintains an allowance for doubtful accounts for estimated losses resulting primarily from the inability of clients to make required payments. Such losses are accounted for as bad debt expense, while adjustments to invoices are accounted for as reductions to revenue. These allowances are established using historical write-off or adjustment information to project future experience and by considering the current creditworthiness of clients, any known specific collection problems, and an assessment of current industry and economic conditions. Actual experience may differ significantly from historical or expected loss results. The Company writes off accounts receivable when they become uncollectible, and any payments subsequently received are accounted for as recoveries. A summary of the activities in the allowance for doubtful accounts for the years ended December 31, 2018, 2017, and 2016 is as follows:
During 2018, the Company performed the goodwill impairment testing on all reporting units. The estimated fair value of the Company's Crawford TPA Solutions: Broadspire, Global Technical Services and Contractor Connection reporting units exceed their carrying value by a significant margin. The estimated fair value of its Crawford Claims Solutions reporting unit exceeds its carrying value but by a lesser margin. The Crawford Claims Solutions reporting unit has $35.1 million of goodwill allocated to the reporting unit. An increase in the discount rate of over 175 basis points could potentially trigger an impairment in our Crawford Claims Solutions reporting unit goodwill. The Company intends to continue to monitor the performance of its reporting units for potential indicators of impairment. If impairment indicators exist, the Company will perform an interim goodwill impairment analysis.
The key assumptions used in estimating the fair value of our reporting units utilizing the income approach include the discount rate and the terminal growth rate. The discount rates utilized in estimating the fair value of our reporting units in 2018 range between 13.0% and 16.0%, reflecting the Company's 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 assumptions used in estimating the fair values are based on currently available data and management's best estimates of revenues and cash flows and, accordingly, a change in market conditions or other factors could have a material effect on the estimated values. There are inherent uncertainties related to the assumptions used and to management's application of these assumptions.
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 $760,000 and $242,000 for 2017 and 2016, respectively. There were no such additions during 2018.
Capitalized software costs reflects costs related to internally developed or purchased software used by the Company that has expected future economic benefits. Certain internal and external costs incurred during the application development stage are capitalized. Costs incurred during the preliminary project and post implementation stages, including training and maintenance costs, are expensed as incurred. The majority of these capitalized software costs consist of internal payroll costs and external payments for software development, purchases and related services. These capitalized software costs are typically amortized over periods ranging from three to ten years, depending on the estimated life of each software application. Amortization expense for capitalized software was $20,066,000, $18,118,000, and $16,045,000 for the years ended December 31, 2018, 2017, and 2016, 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, including estimated legal fees, 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, 2018 and 2017, accrued liabilities for self-insured risks totaled $29,078,000 and $22,854,000, respectively, including current liabilities of $15,246,000 and $13,407,000, respectively. The noncurrent liabilities are included in "Other noncurrent liabilities" on the Company's Consolidated Balance Sheets.
In 2017, the Company estimated the impact of the Tax Cuts and Jobs Act (the "Tax Act") incorporating assumptions made based upon its current interpretation of the Tax Act and included them in its consolidated financial statements for the year ended December 31, 2017. The SEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company recognized provisional tax impacts related to Transition Tax and revaluation of domestic deferred tax balances, and included those amounts in its consolidated financial statements for the year ended December 31, 2017. In the period ended December 31, 2018, the Company completed its accounting for the Tax Act in accordance with SAB 118. As a result, the Company recorded additional income tax expense of $3.6 million. This expense consisted of substantially all of the $7.0 million valuation allowance established against foreign tax credits and $0.1 million for the revaluation of deferred taxes, net of $3.5 million of Transition Tax release of uncertain tax positions and adjustments. The Company has completed the accounting for the Tax Act within the one year measurement period, as allowed under SAB 118.
Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. At December 31, 2018, the Company has elected to account for GILTI in the year the tax is incurred.
Advertising costs are expensed in the period in which the costs are incurred. Advertising expenses were $3,572,000, $7,091,000, and $3,382,000, respectively, for the years ended December 31, 2018, 2017, and 2016. The increase in 2017 was due to costs associated with a branding campaign for the Contractor Connection service line within the Company's Crawford Specialty Solutions segment.
In March 2017, the FASB issued ASU 2017-7, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The Company adopted this guidance retrospectively for the period ended March 31, 2018 with a resulting reclassification with the service cost component of net periodic pension cost and net periodic postretirement benefit cost continuing to be reported within cost of services provided, before reimbursements and selling, general, and administrative expenses on the Consolidated Statements of Operations based on where the compensation costs of the pertinent employees are presented and the other components being reclassified within Other Income. This entry resulted in a reclassification of the non-service components of net periodic pension costs of $2,590,000 and $179,000 of income for years ended December 31, 2018 and 2017, and expense of $6,563,000 for the year ended December 31, 2016 to "Other Income".
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments." This ASU addresses diversity in cash flow reporting issues. The guidance specifically addresses issues concerning debt repayment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination, proceeds from insurance claims and corporate owned life insurance beneficial interests in securitization transactions, and distributions from equity method investees. The guidance also clarifies how the predominant principle should be applied when cash receipts and cash payments have more than one class of cash flows. The Company adopted this guidance for the period ended March 31, 2018, with no impact to the statement of cash flows.
In August 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." This ASU was issued to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. Additionally, the amendments in this update simplify the application of the hedge accounting guidance. The Company elected to early adopt this ASU for the period ended March 31, 2018, with no impact on its results of operations, financial condition and cash flows. The Company is not currently a party to any derivative contracts. In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815).” This update permits the Overnight Index Swap rate based on the Secured Overnight Financing rate as a U.S. benchmark interest rate. The update is effective for annual periods beginning after December 15, 2018 for public business entities that have already adopted the amendments in ASU 2017-12. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted ASU 2017-12. The Company elected to early adopt this ASU for the period ended December 31, 2018, with no impact on its results of operations, financial condition and cash flows.
comparative periods presented in the financial statements in the year of adoption. The update also provides a practical expedient to allow lessors the option to combine lease and non-lease components. In December 2018, the FASB issued ASU 2018-20, “Leases (Topic 842),” which provides narrow-scope improvements for lessors. These updates are effective for annual periods beginning after December 15, 2018, and interim periods thereafter. Early adoption is permitted. The Company plans to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification, lease term and initial direct costs as well as the practical expedient to choose not to separate nonlease components from lease components and instead account for each as a single lease component for all classes of its assets. The Company also plans to elect ASU 2018-11 and as a result will not adjust the comparative period financial information or make the new required lease disclosures for periods before the effective date. The Company has updated its inventory of real estate, equipment, and automobile leases for attributes required by these standards. While the Company is still assessing certain aspects of the adoption of these standards, including the determination of discount rates and tax accounting, the Company anticipates the adoption of these standards will result in operating lease-related assets and liabilities between $110 million and $130 million recorded on the Consolidated Balance Sheets as of January 1, 2019 and no material impact to the results of operations and cash flows.
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This update allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (the Tax Act), from accumulated other comprehensive income to retained earnings. This update is effective for annual periods beginning after December 15, 2018, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this ASU will have on its Consolidated Balance Sheets and related disclosures.
The Company's Crawford Claims Solutions segment generates revenue for claims management services provided to insurance companies and self-insured entities related to property, casualty and catastrophe losses caused by physical damage to commercial and residential real property and certain types of personal property. The Company charges on a fee-per-claim basis for each optional purchase of the claims management services exercised by its customer. Revenue is recognized over time as the performance obligations are satisfied through the effort expended to research, investigate, evaluate, document and report the claim and control of these services are transferred to the customer. Revenue is recognized based on historical claim closure rates and claim type for fixed fee claims applied utilizing a portfolio approach based on time elapsed for these claims. For claims billed on a time and expense incurred basis, which are considered variable consideration, the Company recognizes revenue at the amount in which it has the right to invoice for services performed. These methods of revenue recognition are the most accurate depiction of the transfer of the claims management services to the customer. The Company also generates
The Company's Crawford TPA Solutions: Broadspire segment is a third party administrator that generates revenue through its Claims Management and Medical Management service lines.
The Claims Management service line includes Workers' Compensation, Liability, Property and Disability Claims Management. This service line also performs additional services such as Accident & Health claims programs, including affinity type claims, and disability and leave management services. Each claim referred by the customer is considered an additional optional purchase of claims management services under the agreement with the customer. The transaction price is readily available from the contract and is fixed for each service. Revenue is recognized over time as services are provided as the performance obligations are satisfied through the effort expended to research, investigate, evaluate, document, and report the claim and control of these services are transferred to the customer. Revenue is recognized based on historical claim closure rates and claim type applied utilizing a portfolio approach based on time elapsed for these claims as the Company believes this is the most accurate depiction of the transfer of the claims management services to its customer. This service line also provides Risk Management Information Services. For non-claim services, revenue is recognized over time as services are provided and control of these services are transferred to the customer. Revenue is recognized as time elapses as this is the most accurate depiction of the transfer of the service to the customer.
The Medical Management service line offers case managers who provide administration services by proactively managing medical treatment for claimants while facilitating an understanding of and participation in their rehabilitation process. Revenue for Medical Management services is recognized over time as the performance obligations are satisfied through the effort expended to manage the medical treatment for claimants and control of these services are transferred to the customer. Medical Management services are generally billed based on time incurred, are considered variable consideration, and revenue is recognized at the amount in which the Company has the right to invoice for services performed. This method of revenue recognition is the most accurate depiction of the transfer of the Medical Management service to the customer. Medical bill review services provide an analysis of medical charges for clients’ claims to identify opportunities for savings. Medical bill review services revenues are recognized over time as control of the service is transferred to the customer. Revenue is recognized based upon the transfer of the results of the medical bill review service to the customer as this is the most accurate depiction of the transfer of the service to the customer.
The Company's Crawford Specialty Solutions segment principally generates revenues through its Global Technical Services, Contractor Connection and Garden City Group service lines. The Garden City Group business was disposed of as of June 15, 2018. See Note 3, "Acquisitions and Disposition of Business Line" for further discussion about this transaction.
The following table presents Crawford Specialty Solutions revenues before reimbursements disaggregated by service line and geography for the year ended December 31, 2018.
As of December 31, 2018, the Company had $93.4 million of remaining performance obligations related to claims and non-claims services in which the price is fixed. Remaining performance obligations consist of deferred revenues as well as certain unbilled receivables that are considered contract assets. The Company expects to recognize approximately 70% of our remaining performance obligations as revenues within one year and the remaining balance thereafter. See the discussion below regarding the practical expedients elected for the disclosure of remaining performance obligations.
The table below presents a computation of the loss on the disposition:
Beginning on January 1, 2018 through the time of the sale, the GCG Business was a component of the Crawford Specialty Services segment. Included in the Consolidated Statements of Operations for the twelve months ended December 31, 2018 and 2017 are pretax losses, inclusive of retained corporate overhead, of $3,932,000 and $4,582,000, respectively, related to the GCG Business.
The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017:
The following is a summary of finite-lived intangible assets acquired through business acquisitions as of December 31, 2018 and 2017:
Amortization of finite-lived intangible assets was $11,152,000, $10,982,000, and $9,969,000 for the years ended December 31, 2018, 2017, and 2016, respectively. For the years ended December 31, 2018, 2017, and 2016, amortization expense for finite-lived customer relationships and trade name intangible assets in the amounts of $11,152,000, $10,982,000, and $9,592,000, respectively, were excluded from segment operating earnings (see Note 14, "Segment and Geographic Information"). The amortization expense for the technology-based intangible assets is included in segment operating earnings. Intangible assets subject to amortization are amortized on a straight-line basis over lives ranging from 2 to 15 years.
At December 31, 2018, annual estimated aggregate amortization expense for intangible assets subject to amortization for the next five years is as follows:
The following is a summary of indefinite-lived intangible assets at December 31, 2018 and 2017:
At December 31, 2018, 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 amortization of capitalized loan costs, on the Company's short-term and long-term borrowings was $11,399,000, $9,909,000, and $9,934,000 for the years ended December 31, 2018, 2017, and 2016, respectively. Interest paid on the Company's short-term and long-term borrowings was $10,381,000, $8,394,000, and $8,451,000 for the years ended December 31, 2018, 2017, and 2016, respectively.
At December 31, 2018, future minimum payments under non-cancelable operating leases with terms of more than 12 months were as follows:
Effective October 8, 2018, the Company entered into an amendment and extension of an existing lease, resulting in a 8 years, 9 months operating lease for approximately 64,000 square feet of office space in Sunrise Florida, primarily for its Crawford TPA Solutions: Broadspire segment as a replacement for the subleased space in Plantation, Florida described below. Total lease payments over the remaining lease term are approximately $11,900,000. Additionally, the Company is responsible for certain related real estate taxes and other expenses, which are excluded from the table above.
Effective October 10, 2016, the Company entered into a 13-year operating lease for approximately 109,000 square feet of office space in Atlanta, Georgia, as a replacement and consolidation for its Atlanta Support Center beginning late 2017. The Company has future total lease payments associated with this lease of approximately $31,273,000. Additionally, the Company is responsible for certain related property operating expenses above 2018 base year costs, which are excluded from the table above.
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 Crawford Claims Solutions segment. The amended lease on the expanded premises began January 1, 2015. Total lease payments over the remaining lease term are approximately $2,640,000. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
Included in the acquired commitments of Broadspire Management Services, Inc. was a long-term operating lease for a two-building office complex in Plantation, Florida. The term of this lease ends in December 2021. Total lease payments over the remaining lease term are approximately $13,581,000. All of the office space was subleased at December 31, 2018.
Net cash payments for income taxes were $8,168,000, $15,574,000, and $16,170,000 in 2018, 2017, and 2016, respectively.
Deferred income taxes consisted of the following at December 31, 2018 and 2017:
Changes in the Company's deferred tax valuation allowance are recorded as adjustments to the provision for income taxes. An analysis of the Company's deferred tax asset valuation allowances is as follows for the years ended December 31, 2018, 2017, and 2016.
Changes to the valuation allowance for the year ended December 31, 2018 were primarily due to anticipated expiration of foreign tax credits after consideration of the Tax Act and the four sources of taxable income and losses in certain of the Company’s international and domestic operations. For the year ended December 31, 2017 the change was primarily due to losses in certain of the Company’s international operations and domestic operations impacting state NOLs.
The Company accrues interest and, if applicable, penalties related to unrecognized tax benefits in income taxes. Total accrued interest expense at December 31, 2018, 2017, and 2016, was $256,000, $275,000, and $155,000, respectively.
Included in the total unrecognized tax benefits at December 31, 2018, 2017, and 2016 were $5,493,000, $9,389,000, and $3,332,000, respectively, of tax benefits that, if recognized, would affect the effective income tax rate.
The Company expects $3,400,000 in reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties.
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 $23,417,000, $24,036,000, and $23,985,000 in 2018, 2017, and 2016, respectively.
The Bipartisan Budget Act of 2015 ("BBA2015") included pension funding reform which greatly reduced the contributions required to the U.S. Qualified Plan. Required contributions are anticipated in future years as the impact of the BBA2015 pension funding reform is phased out. Currently, the Company plans to make no contribution in 2019 and contribute $9,000,000 per annum to the U.S. Qualified Plan for the following four fiscal years to improve the funded status of the plan and minimize future required contributions. The Company is not making a discretionary contribution in 2019 because it made an additional voluntary contribution of $10,000,000 in 2018 which generated a one time U.S. tax benefit. The Company expects to make no discretionary contributions to its U.K. Plans during the next five years.
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, 2019 for the U.S. and U.K. defined benefit pension plans are $10,880,000 ($8,122,000 net of tax).
Pension expense is affected by the accounting policy used to determine the value of plan assets at the measurement date. The Company applies the 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 pension expense than the calculated value method. The amounts recognized in the Consolidated Balance Sheets reflect the fair value of the Company's long-term pension liabilities at the plan measurement date and the fair value of plan assets as of the balance sheet date. Net periodic benefit cost related to all of the Company's defined benefit pension plans recognized in the Company's Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 2016 included the following components:
The Company reviews its employee demographic assumptions annually and updates the assumptions as necessary. The Company updates the mortality assumptions for the U.S. plans to incorporate the current mortality tables issued by the Society of Actuaries, adjusted to reflect the Company's specific experience and future expectations. This resulted in a $1,300,000 decrease in the projected benefit obligation for the U.S. plans for the year ended December 31, 2018. Certain assumptions used in computing the benefit obligations and net periodic benefit cost for the U.S. and U.K. defined benefit pension plans were as follows:
The discount rate assumptions reflect the rates at which the Company believes the benefit obligations could be effectively settled. The discount rates were determined based on the yield for a portfolio of investment grade corporate bonds with maturity dates matched to the estimated future payments of the plans' benefit obligations.
The Company estimates the service and interest components of net periodic benefit cost for its U.S. and international pension and other postretirement benefits. This estimation approach discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used to discount the cash flows used to measure the benefit obligation. For the pension plans, the weighted average spot rates used to determine interest costs were 3.92% for the U.S. Qualified plan and 2.44% for the U.K. plans.
The expected long-term rates of return on plan assets were based on the plans' asset mix, historical returns on equity securities and fixed income investments, and an assessment of expected future returns. The expected long-term rates of return on plan assets assumption used to determine 2019 net periodic pension cost are estimated to be 6.10% and 3.28% for the U.S.Qualified Plan and U.K. plans, respectively. If actual long-term rates of return differ from those assumed or if the Company used materially different assumptions, actual funding obligations could differ materially from these estimates. Due to the frozen status of the U.S. plan and closed status of the U.K. plans, increases in compensation rates are not material to the computations of benefit obligations or net periodic benefit cost.
Shares of the Company's two classes of common stock are traded on the NYSE under the symbols CRD-A and CRD-B, respectively. The Company's two classes of stock are substantially identical, except with respect to voting rights and the Company's ability to pay greater cash dividends on the non-voting Class A Common Stock than on the voting Class B Common Stock, subject to certain limitations. In addition, with respect to mergers or similar transactions, holders of Class A Common Stock must receive the same type and amount of consideration as holders of Class B Common Stock, unless different consideration is approved by the holders of 75% of the Class A Common Stock, voting as a class. As described in Note 12, "Stock-Based Compensation," certain shares of CRD-A are issued with restrictions under incentive compensation plans.
Through December 31, 2017, the Company had repurchased 699,847 shares of CRD-A and 188,180 shares of CRD-B under the 2014 and 2017 Repurchase Authorizations at an average cost of $8.21 and $8.88, respectively. At December 31, 2017, the Company had remaining authorization to repurchase 1,666,671 shares under the 2017 Repurchase Authorization.
Net Income Attributable to Shareholders of Crawford & Company per Common Share
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. Foreign currency translation adjustments include net unrealized gains (losses) from intra-entity loans that are long-term in nature of $(1,838,000), $(836,000), and $2,547,000 for the years ended December 31, 2018, 2017, and 2016, respectively. The changes in components of "Accumulated other comprehensive loss" ("AOCL"), net of taxes and noncontrolling interests, included in the Company's audited Consolidated Balance Sheets were as follows:
Retirement liabilities reclassified to net income are related to the amortization of actuarial losses and are included in "Selling, general, and administrative expenses" in the Company's Consolidated Statements of Operations. See Note 9, "Retirement Plans" for additional details.
At December 31, 2018, the unrecognized compensation cost related to unvested employee stock options was $872,000. Directors' stock options had no unrecognized compensation cost since directors' options vest upon grant, and the grant-date fair values were fully expensed on the grant date.
A summary of the status of the Company's nonvested performance shares as of December 31, 2018, 2017, and 2016, and changes during each year, is presented below:
The total fair value of the performance shares that vested in 2018, 2017, and 2016 was $2,662,000, $3,597,000, and $2,638,000, respectively.
A summary of the status of the Company's restricted shares of CRD-A as of December 31, 2018, 2017, and 2016 and changes during each year, is presented below:
Compensation expense recognized for all restricted shares for the years ended December 31, 2018, 2017, and 2016 was $1,176,000, $1,205,000, and $1,567,000, respectively. As of December 31, 2018, there was $219,000 of total unearned compensation cost related to nonvested restricted shares which is expected to be recognized by June 30, 2020.
During the years ended December 31, 2018, 2017 and 2016, a total of 143,769, 101,708, and 99,750 shares, respectively, of CRD-A were issued under the prior U.S. employee stock purchase plan to the Company's employees at purchase prices of $7.32, $6.61, and $6.49 in 2018, 2017, and 2016, respectively. At December 31, 2018, an estimated 142,000 shares will be issued and purchased under the U.S. Plan in 2019. During the years ended December 31, 2018, 2017, and 2016, compensation expense of $321,000, $278,000, and $261,000, respectively, was recognized for the prior U.S. employee stock purchase plan.
At December 31, 2018, an estimated 151,000 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 CRD-A, and future employee participation rates. The purchase price per share of CRD-A under the U.K. Plan ranges from $3.69 to $6.66. For the years ended December 31, 2018, 2017, and 2016, compensation expense of $140,000, $151,000, and $80,000, respectively, was recognized for the U.K. Plan. During 2018, 2017, and 2016, a total of 63,033 shares, 73,986 shares, and 159,256 shares, respectively, of CRD-A were issued under the U.K. Plan.
The contingent earnout liability relates to a business acquired during 2018 by the Crawford Specialty Solutions operating segment. See Note 3, "Acquisitions and Disposition of Business Line" for further details. The fair value of the contingent earnout liability was estimated using internally-prepared revenue projections which is Level 3 data, with the maximum possible earnout of $665,000. As such, the fair value is not expected to vary materially from the balance recorded. The fair value of the contingent earnout liabililty is included in "Other accrued 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, 2018 or 2017. 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.
The fair values of accounts receivable, unbilled revenues, accounts payable and short-term borrowings approximate their respective carrying values due to the short-term maturities of the instruments. The interest rate on the Company's variable rate long-term debt resets at least every 90 days; therefore, the recorded value approximates fair value. These assets and liabilities are measured within Level 2 of the fair value hierarchy.
The following table summarizes the level within the fair value hierarchy used to determine the fair value of the Company's pension plan assets for its U.K. plans at December 31, 2018 and 2017:
The following table provides a reconciliation of the beginning and ending balance of Level 3 assets within the Company's U.K. pension plan during the years ended December 31, 2018 and 2017:
The Company's three reportable segments represent components of the business for which separate financial information is available, and which is evaluated regularly by the CODM. The segments, organized based upon the nature of services, are: Crawford Claims Solutions, which primarily serves the global property and casualty insurance company markets; Crawford TPA Solutions: Broadspire, which serves the global casualty, disability and self-insurance marketplace; and Crawford Specialty Solutions which serves the global property and casualty insurance company markets, and prior to the Garden City Group disposal on June 15, 2018, the class action, regulatory, mass tort, bankruptcy, and other legal settlement markets, primarily in the U.S. and Canada. Intersegment sales are recorded at cost and are not material.
Consists of accounts receivable, less allowance for doubtful accounts, unbilled revenues, at estimated billable amounts, goodwill and intangible assets arising from business acquisitions, net.
Revenues by geographic region and major service line for the Crawford Claims Solutions, Crawford TPA Solutions: Broadspire and Crawford Specialty Solutions segments are shown in Note 2, "Revenue Recognition."
The Company's reportable segments' total operating earnings reconciled to consolidated income before income taxes for the years ended December 31, 2018, 2017, and 2016 were as follows:
Revenues and long-lived assets for the U.S., U.K. and Canada are set out below as these countries are material for geographical area disclosure. For the purposes of these geographic area disclosures, long-lived assets consists of the net property and equipment and capitalized software costs, net line items on the Company's Consolidated Balance Sheets and excludes intangible assets, including goodwill.
From time to time, the Company enters into certain agreements for the purchase or sale of assets or businesses that contain provisions that may require the Company to make additional payments in the future depending upon the achievement of specified operating results of the acquired company, or provide the Company with an option or similar right to purchase additional assets. As a result of the acquisition of WeGoLook, the Company has an option, beginning on January 1, 2022 and expiring on December 31, 2023, to acquire the remaining 15% outstanding membership interest of WeGoLook. In the event the Company does not exercise the option, beginning on January 1, 2024, the minority members shall have the right to require the Company to acquire the minority members’ interest on or before December 31, 2024. In addition, at the time of the exercise of the option or the put, the minority members may be entitled to additional consideration depending on whether certain financial targets of WeGoLook are achieved between closing and December 31, 2021.
The Company is subject to numerous federal, state, and foreign labor, employment, worker health and safety, antitrust and competition, environmental and consumer protection, import/export, anti-corruption, and other laws. From time to time the Company faces claims and investigations by employees, former employees, and governmental entities under such laws or employment contracts with such employees or former employees. Such claims, investigations, and any litigation involving the Company 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 any items that are probable and reasonably estimable.
As of December 31, 2018, the following liabilities remained on the Company's Consolidated Balance Sheets related to restructuring charges recorded in 2016 and 2017. The rollforwards of these costs to December 31, 2018 were as follows:
The Company recorded no special charges for the years ended December 31, 2018 and 2017. For the year ended December 31, 2016, the Company recorded special charges of $925,000 which consisted of legal and professional fees. As of December 31, 2018, all special charges had been paid.
To the Shareholders and the Board of Directors of Crawford & Company
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2019 expressed an unqualified opinion thereon.
The Company may pay a higher dividend on CRD-A than on CRD-B. This dividend differential can result in different earnings (loss) per share for each class of stock due to the two-class method of computing earnings (loss) per share as required by current accounting guidance. CRD-B generally presents a more dilutive measure.
The Company recognized a pretax loss on the disposal of the Garden City Group business of $20.3 million in 2018. See Note 3, "Acquisitions and Disposition of Business Line" in the audited consolidated financial statements included in this Item 8. The Company recognized non-cash goodwill impairment in the amount of $19.6 million related to its Garden City Group reporting unit in the fourth quarter of 2017. See Note 4, "Goodwill and Intangible Assets" in the audited consolidated financial statements included in this Item 8. The provision for income taxes in 2018 and 2017 included the impact of these transactions and the impact of U.S. tax reform.