This is a segment financial measure calculated in accordance with ASC Topic 280, and representing segment earnings (loss) before certain unallocated corporate and shared costs and credits, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, special charges and credits, goodwill and intangible asset impairment charges, income tax expense, and net income attributable to noncontrolling interests.
Earnings (loss) per share for CRDA and CRDB were the same for years 2009 - 2010. Beginning in 2011, a higher per share dividend was declared on nonvoting CRDA shares than on voting CRDB shares, impacting the earnings per share calculation according to generally accepted accounting principles. As a result, unless otherwise indicated, references to earnings per share refer to CRDB, which is a more dilutive presentation.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Crawford & Company, our operations, and our business environment. This MD&A is provided as a supplement to - and should be read in conjunction with - our audited consolidated financial statements and the accompanying notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. As described in Note 1, “Significant Accounting and Reporting Policies,” of those accompanying audited consolidated financial statements, financial results from the Company's international subsidiaries, other than those in Canada and the Caribbean, are included in our consolidated financial statements on a two-month delayed basis in accordance with the provisions of Accounting Standards Codification 810, “Consolidation,” in order to provide sufficient time for accumulation of their results. Accordingly, the Company's December 31, 2013, 2012, and 2011 consolidated financial statements include the financial position of such subsidiaries as of October 31, 2013 and 2012, respectively, and the results of those subsidiaries’ operations and cash flows for the fiscal periods ended October 31, 2013, 2012 and 2011, respectively.
As discussed in more detail in subsequent sections of this MD&A, we have four operating segments: Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. Our four operating segments represent components of our Company for which separate financial information is available, and which is evaluated regularly by the chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing operating performance. Americas serves the property and casualty insurance company markets in the U.S., Canada, Latin America, and the Caribbean. Europe, Middle East, Africa, Asia-Pacific (“EMEA/AP”) serves the property and casualty insurance company and self-insurance markets in Europe, including the U.K., the Middle East, Africa, and Asia-Pacific (which includes Australia and New Zealand). Broadspire serves the U.S. self-insurance marketplace. Legal Settlement Administration serves the securities, bankruptcy, and other legal settlements markets, primarily in the U.S.
The global claims management services market is highly competitive and comprised of a large number of companies of varying size and that offer a varied scope of services. The demand from insurance companies and self-insured entities for services provided by independent claims service firms like us is largely dependent on industry-wide claims volumes, which are affected by, among other things, the insurance underwriting cycle, weather-related events, general economic activity, overall employment levels, and workplace injury rates. Such demand is also impacted by decisions insurance companies and self-insured entities may make with respect to the level of claims outsourced to independent claim service firms as opposed to those handled by their own in-house claims adjusters. Accordingly, we are limited in our ability to predict case volumes in any period. In addition, our ability to retain clients and maintain or increase case referrals is also dependent in part on our ability to continue to provide high-quality, competitively priced services and effective sales efforts.
During 2011, the Company recorded a net pretax special credit of $2.4 million, consisting of a gain of $7.0 million related to the final settlement of a legal arbitration, partially offset by a $3.4 million write-off of deferred financing costs related to the repayment of its then-outstanding Term Loan B, and $1.2 million in severance expense related to the Broadspire segment.
Segment operating earnings (a measure of segment operating performance used by our management that is defined and discussed in more detail below) improved in our Americas and Broadspire segments from 2012 to 2013, while we experienced expected declines in our EMEA/AP and Legal Settlement Administration segments. Segment operating earnings improved for all of our segments except the Americas from 2011 to 2012. In the Americas segment, operating earnings improved 56.0% from 2012 to 2013 as results from the Canadian operations showed marked improvement, primarily due to claims resulting from flood losses. Americas operating earnings for 2013 were also positively impacted by additional claims handling resulting from superstorm Sandy, continued growth in our Contractor Connection managed repair network, cost reductions in the U.S. and Canada, and a $2.3 million gain from the sale of the rights to a customer contract in Latin America. Americas operating earnings in 2012 were 40.6% less than 2011 due to a lack of weather-related claims in the U.S. and Canada.
Compared with 2012, our consolidated revenues before reimbursements were 1.1% lower in 2013 due primarily to lower revenues from the special projects in EMEA/AP and Legal Settlement Administration, partially offset by improvements in our Canadian operations in our Americas segment and in our Broadspire segment. The Deepwater Horizon special project in Legal Settlement Administration continues to wind down. Although we currently expect to earn revenues from the Deepwater Horizon project through 2014, we expect revenues and the related segment operating earnings to be at a reduced rate as compared to 2013 levels. No assurances of timing of the project end date and, therefore, the amount or timing of continued revenues, can be provided. In the event we are unable to replace revenues from the Deepwater Horizon project upon the termination or other expiration thereof, or at a time or times when revenues therefrom are materially reduced and not replaced, with revenues from new projects and customers within this or other segments, there could be a material adverse effect on our results of operations.
Additional discussion and analysis of our income tax expense, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, unallocated corporate and shared costs and credits, goodwill and intangible asset impairment charges, and special charges and credits follows the discussion and analysis of the results of operations of our four operating segments.
Our discussion and analysis of segment operating expenses is comprised of two components. “Direct Compensation and Fringe Benefits” includes all compensation, payroll taxes, and benefits provided to our employees, which, as a service company, represents our most significant and variable operating expense. “Expenses Other Than Direct Compensation and Fringe Benefits” includes outsourced services, office rent and occupancy costs, office operating expenses, cost of risk, amortization and depreciation expense other than amortization of customer-relationship intangible assets, and allocated corporate and shared costs. Expense amounts in the following discussion and analysis exclude reimbursed out-of-pocket expenses.
Allocated corporate and shared costs are allocated to our four operating segments based primarily on usage. These allocated costs are included in the determination of segment operating earnings (loss).
Operating earnings for our Americas segment increased from $11.9 million in 2012 to $18.5 million in 2013, representing an operating margin of 5.4% in 2013 compared with 3.6% in 2012. Operating earnings improved 56.0% from 2012 to 2013 as a result of our Canadian operations showing marked improvement, primarily due to claims resulting from flood losses. Operating earnings for 2013 were also positively impacted by additional claims handling resulting from superstorm Sandy, continued growth in our Contractor Connection managed repair network, cost reductions in the U.S. and Canada, and a $2.3 million gain from the sale of the rights to a customer contract in Latin America.
For the year ended December 31, 2013 compared with the year ended December 31, 2012, the U.S. dollar strengthened against most foreign currencies in Canada, Latin America and the Caribbean, decreasing revenues before reimbursements by 1.6%. Revenues were positively impacted by segment unit volume, measured principally by cases received, which increased by 4.9% during this period. In addition, an overall unfavorable change in the mix of services provided and in the rates charged for those services also decreased revenues by approximately 1.0% in 2013 compared with 2012.
Reimbursements for out-of-pocket expenses incurred in our Americas segment which are included in total Company revenues were $19.8 million in 2013, increasing from $18.0 million in 2012. The increase in 2013 was due primarily to increased expenses resulting from the increased claims related to the flood losses in Canada.
The 2013 increase in cases in Canada, Latin America, and the Caribbean was due to increases in high-frequency, low-complexity automotive and affinity claims and the aforementioned flood losses in Canada.
The most significant expense in our Americas segment is the compensation of employees, including related payroll taxes and fringe benefits. Americas direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, was 61.6% for 2013 and 63.5% for 2012. There was an average of 2,675 FTEs (including 197 catastrophe adjusters) in 2013 compared with an average of 2,680 (including 181 catastrophe adjusters) in 2012.
Americas salaries and wages decreased 0.9%, to $178.4 million in 2013 from $179.9 million in 2012. Salaries and wages decreased $3.4 million due to a combination of the decline in the average number of FTEs and related lower overall average salaries and wages. This decrease was partially offset by a $1.9 million increase in incentive compensation expense due to the improved results. The lower average salaries resulted from changes in product mix that provided the segment the opportunity to use lower cost personnel as well as the segment's focus on creating a more variable labor force. Payroll taxes and fringe benefits for Americas totaled $32.5 million in 2013, decreasing 0.3% from 2012 expenses of $32.4 million. The overall decrease in 2013 compared with 2012 aligned with the decreased salaries and wages.
EMEA/AP revenues are primarily derived from the property and casualty insurance company market, with additional revenues from the self-insured market. Revenues before reimbursements by major region were as follows:
Revenues before reimbursements from our EMEA/AP segment totaled $350.2 million in 2013, a 4.5% decrease from $366.7 million in 2012. Compared with 2012, the U.S. dollar was stronger in 2013 against most major EMEA/AP currencies, resulting in a negative impact from exchange rate movements of $5.7 million, or 1.5%, of segment revenues from 2012 to 2013. Excluding the negative impact of exchange rate fluctuations, EMEA/AP revenues would have been $355.8 million in 2013, reflecting a decline in revenues on a constant dollar basis of 3.0%.
U.K. revenues declined due to a reduction in claims in the market, largely attributable to benign weather, lower reported fire and crime incidents and insourcing by some insurers when compared with the prior year. The increase in revenue in CEMEA for 2013 compared with 2012 was primarily due to an increase in high-frequency, low-complexity motor and residential claims from new and existing clients in Scandinavia, flooding in Germany and a $900,000 performance bonus from a client.
The lower revenues in Asia-Pacific were associated with an expected decline in fees for the ongoing handling of claims resulting from the 2011 Thailand flooding event. Revenues from Thailand were $16.3 million for 2013 compared with $37.0 million for 2012. Claims handling associated with the Thailand flooding event was substantially completed at the end of 2013.
EMEA/AP unit volume, measured by cases received, increased 2.7% in 2013 compared with 2012. Average revenue per claim decreased 5.7% from changes in the mix of services provided and in the rates charged for those services, primarily due to the decline in Thailand revenues, changes in the U.K. market and the additional high-frequency, low-complexity claim volumes in CEMEA.
Expenses other than reimbursements, direct compensation and fringe benefits increased as a percent of segment revenues before reimbursements from 26.6% in 2012 to 27.2% in 2013, but the dollar amount of these expenses decreased by $2.2 million, primarily resulting from lower professional fees and a reduction in bad debt expense due to improved collections.
Broadspire recorded operating earnings of $8.2 million in 2013, or 3.3% of revenues, compared with breakeven operating earnings in 2012. The improvement over the prior year was due to higher revenues and improved control over operating expenses. The results for 2013 included a one-time increase in revenues and operating earnings of approximately $3.0 million due to Broadspire being relieved of the obligation to continue to service certain clients' claims under lifetime pricing contracts and the associated release of the remaining deferred revenue for those claims. Operating earnings were also positively impacted by higher medical management revenues.
Broadspire segment revenues before reimbursements increased 5.6% to $252.2 million in 2013 compared with $239.0 million in 2012. Unit volumes for the Broadspire segment, measured principally by cases received, increased 13.5% from 2012 to 2013. Approximately 2.1% of the volume increase for 2013 compared with the same period in 2012 was due to the addition of approximately 5,000 incident reports from a major client in 2013, discussed below. The increase in revenues for 2013 compared with 2012 was primarily due to market share gains, increased client retention and increased medical management services referrals. The year was also positively impacted by the one-time increase in workers' compensation and liability claims management revenues of approximately $3.0 million previously discussed, or 1.3% of revenues. After adjusting for the incident-only cases and the one-time benefit, the overall mix of services provided and the rates charged for those services accounted for a decrease of 7.1% for 2013 compared with 2012. Revenues for a special project for one of our clients are charged at a lower rate than some of our other service lines and our medical management cases have a shorter duration and therefore less revenues associated with them.
The 2013 increase in workers’ compensation cases was a result of a higher number of claims and referral levels in field case and medical management. The increase in casualty cases in 2013 compared with 2012 was due in part to a new client adding a significant number of claims for the year. Casualty cases in 2013 were also positively impacted by the receipt in the first quarter of 2013 of approximately 5,000 incident reports from a major client for which we receive little or no revenue and incur little or no associated costs. The 2013 increases in other cases were primarily due to additional referrals in utilization management.
Legal Settlement Administration salaries and wages, including incentive compensation, increased 0.2% to $76.0 million in 2013 from $75.9 million in 2012. Incentive compensation expense declined by $2.4 million, which almost offset the increase in compensation from the increased number of FTEs. Payroll taxes and fringe benefits for Legal Settlement Administration totaled $9.8 million in 2013, increasing 12.6% from 2012 costs of $8.7 million. This 2013 increase was primarily due to the increase in the number of FTEs in 2013.
One of our most significant expenses in Legal Settlement Administration is outsourced services due to the variable, project-based nature of our work. Legal Settlement Administration expenses other than reimbursements, direct compensation and fringe benefits decreased 5.9% to $86.3 million in 2013 from $91.7 million in 2012, but increased as a percent of related segment revenues before reimbursements to 39.4% in 2013 from 38.7% in 2012. The dollar amount of these expenses decreased as a result of lower outsourced services expenses because of a shift in the mix of projects and the increased hiring discussed above. The increase as a percent of revenues before reimbursement was because expenses such as rent and deprecation, included in this category, are more fixed in nature and did not decline as revenues declined.
The overall decline in revenues in U.S. Claims Services was primarily due to declines in U.S. Claims Field Operations and U.S. Technical Services revenues resulting from a lack of non-catastrophic weather-related events. These declines were partially offset by an increase in revenues from U.S. Catastrophe Services. U.S. Catastrophe Services revenues increased in the fourth quarter of 2012 as a result of superstorm Sandy to finish the year 2.3% higher than 2011. Contractor Connection revenues increased due to the ongoing expansion of this service as an alternative property claims service solution as insurance carriers continued the trend of moving high-frequency, low-complexity property cases directly to repair networks.
Reimbursements for out-of-pocket expenses incurred in our Americas segment which are included in total Company revenues were $18.0 million in 2012, increasing from $16.6 million in 2011. The increase in 2012 was due primarily to increases in billable expenses related to cases resulting from superstorm Sandy.
Revenues before reimbursements from our EMEA/AP segment totaled $366.7 million in 2012, a 7.8% increase from $340.1 million in 2011. This 2012 revenue increase was due to the ongoing handling of claims resulting from the 2011 Thailand flooding event and weather-related activity in Australia. Revenues from Thailand were $37.0 million for 2012 compared with $4.9 million for 2011.
Compared with 2011, the U.S. dollar was stronger in 2012 against most major foreign currencies, resulting in a negative impact from exchange rate movements of $10.4 million, or 3.0%, on this segment’s revenues from 2011 to 2012. Excluding the negative impact of exchange rate fluctuations, EMEA/AP revenues would have been $377.1 million in 2012, reflecting growth in revenues on a constant dollar basis of 10.8%. U.K. revenues declined due to a reduction in weather-related activity compared with the prior year. The slight increase in revenue in CEMEA for 2012 compared with 2011 was primarily due to growth in high-frequency, low-complexity claims in Germany, Spain, Scandinavia, and the Netherlands resulting from market share gains and a new volume-claims product.
EMEA/AP unit volume, measured by cases received, decreased 3.5% in 2012 compared with 2011. This decrease primarily reflected decreased case referrals during 2012 as discussed below. Average revenue per claim increased 14.3% from changes in the mix of services provided and in the rates charged for those services, primarily due to the increase in revenues from the Thailand flooding event.
EMEA/AP unit volumes by region for 2012 and 2011 were as follows:
Legal Settlement Administration revenues before reimbursements increased 22.8% to $236.6 million in 2012, compared with $192.6 million in 2011. The growth in Legal Settlement Administration revenues was due primarily to the Gulf Coast Claims Facility and Deepwater Horizon special projects.
Reimbursements for out-of-pocket expenses incurred in our Legal Settlement Administration segment which are included in total Company revenues were $27.3 million in 2012, decreasing from $30.5 million in 2011.
Legal Settlement Administration direct compensation expense, including related payroll taxes and fringe benefits, as a percent of segment revenues before reimbursements, decreased to 35.8% in 2012, compared with 37.4% in 2011. There was an average of 602 FTEs in 2012, compared with an average of 542 in 2011.
Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our various domestic and international operations, which are subject to income taxes at different rates, our ability to utilize loss and tax credit carryforwards, and amounts related to uncertain income tax positions. Income tax provisions totaled $29.8 million, $33.7 million, and $12.7 million for 2013, 2012, and 2011, respectively. Our effective tax rate for financial reporting purposes was 36.7%, 40.4%, and 21.8% for 2013, 2012, and 2011, respectively. Fluctuations in the mix of income earned in the jurisdictions in which the Company operates decreased the overall effective rate in 2013 as compared with 2012. In 2011, we determined that we no longer needed a $5.5 million valuation allowance on certain U.S. foreign tax credits, and we reduced our tax expense accordingly. Based on our 2014 operating plans, we anticipate our effective tax rate for financial reporting purposes in 2014 to be in the 33% to 35% range before considering any discrete items.
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, the effect of any interest rate swaps, and the amounts of invested cash. Corporate interest expense totaled $7.2 million, $9.6 million, and $16.9 million for 2013, 2012, and 2011, respectively. The decrease in interest expense over the three year period was due primarily to the reduction in interest rates and the amount of borrowings outstanding. Corporate interest income totaled $0.8 million, $1.0 million, and $1.0 million in 2013, 2012, and 2011, respectively. Corporate interest income decreased in 2013 compared with 2011 and 2012 due to a decrease in available cash balances in 2013. We pay interest based on variable rates. Whether we can expect to see future reductions in interest expense compared with prior periods is dependent on the future direction of interest rates as well as the level of outstanding borrowings relative to prior periods.
Stock option expense, a component of stock-based compensation, is comprised of non-cash expenses related to stock options granted under our various stock option and employee stock purchase plans. Stock option expense is not allocated to our operating segments. Stock option expense of $0.9 million, $0.4 million and $0.5 million was recognized during 2013, 2012, and 2011, respectively. Other stock-based compensation expense related to our Executive Stock Bonus Plan (pursuant to which we have authority to grant performance shares and restricted shares) is charged to our operating segments and included in the determination of segment operating earnings or loss.
On November 25, 2013, we entered into a Third Amendment to Credit Agreement, Amendment to Pledge and Security Agreement and Limited Waiver (the “Amendment”), which amended, among other things, that certain Credit Agreement, dated as of December 8, 2011 (as amended, the “Credit Facility”). The Credit Facility included as borrowing parties Crawford & Company Risk Services Investments Limited, Crawford & Company (Canada) Inc. and Crawford & Company (Australia) Pty. Ltd., each a subsidiary of the Company. In connection with the discussions of the Credit Facility, the Company and these subsidiaries are individually referred to as a “Borrower” and collectively referred to as the “Borrowers.” Additionally, these subsidiaries are sometimes individually referred to as a “Foreign Borrower” and collectively referred to as the “Foreign Borrowers.” The Amendment: (1) increased the aggregate commitments under the Credit Facility from $325.0 million to $400.0 million, without impacting our ability, subject to the satisfaction of certain conditions and the receipt of additional commitments, to exercise our option to further increase the revolving loan commitments under the Credit Facility by up to $100.0 million; (ii) extended the maturity date of the Credit Facility from December 8, 2016 to November 25, 2018; (iii) reduced by 25 basis points the applicable margin used to determine interest rates on borrowings under the Credit Facility; (iv) reduced by 5 basis points the unused commitment fee under the Credit Facility; (v) provides us with the ability to undertake a one-time repurchase of shares of our common stock in an amount of up to $25.0 million prior to December 31, 2015, subject to compliance with certain conditions; and (vi) increased the leverage ratio (as defined in the Credit Facility) with which we must comply from 3.0:1.0 to 3.25:1.0, among other things.
At December 31, 2013 and 2012, a total of $135.0 million and $163.3 million, respectively, was outstanding under the Credit Facility. In addition, undrawn commitments under letters of credit totaling $17.8 million and $18.2 million were outstanding at December 31, 2013 and 2012, respectively, under the letters of credit subfacility of the Credit Facility. These letter of credit commitments were for our own obligations. Including the amounts committed under the letters of credit subfacility, the available balance of the revolving credit portion of the Credit Facility totaled $247.2 million and $145.6 million at December 31, 2013 and 2012, respectively.
The obligations of the Borrowers under the Credit Facility are guaranteed by each of our existing domestic subsidiaries and certain existing material foreign subsidiaries that are disregarded entities for U.S. income tax purposes (each a "Disregarded Foreign Entity"), and such obligations are required to be guaranteed by each subsequently acquired or formed material domestic subsidiary and Disregarded Foreign Entity (each, a "Guarantor"), and the obligations of the Foreign Borrowers are also guaranteed. In addition, the Borrowers' obligations under the Credit Facility are secured by a first priority lien on substantially all of the personal property of us and the Guarantors, including, without limitation, intellectual property, 100% of our capital stock in the Guarantors' present and future domestic subsidiaries and 65% of the voting stock and 100% of the non-voting stock issued by any present and future first-tier material foreign subsidiary of us or any Guarantor. In addition, the obligations of the Foreign Borrowers are secured by a first priority lien on 100% of the capital stock of the Foreign Borrowers.
Cash and cash equivalents as of December 31, 2013 consisted of $7.9 million held in the U.S. and $68.1 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 intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. An exception to this general policy could occur if a very unusual event or project generated profits significantly in excess of ongoing business reinvestment needs. If such an event occurs, we analyze our anticipated investment needs in that region and provide for U.S. taxes for earnings that are not expected to be permanently reinvested. Such an event occurred during 2012 and continued into 2013, and we have provided for additional U.S. and foreign income taxes on such profits. 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. However, if at a future date or time these funds are necessary for our operations in the U.S. or we otherwise believe it is in our best interests to repatriate all or a portion of such funds, we may be required to accrue and pay U.S. taxes to repatriate these funds. No assurances can be provided as to the amount or timing thereof, the tax consequences related thereto, or the ultimate impact any such action may have on our results of operations or financial condition.
Cash provided by operating activities increased by $56.2 million in 2012, from $36.7 million in 2011 to $92.9 million in 2012. This increase was largely due to an increase in operating earnings, lower cash payments for accounts payable, accrued liabilities and accrued compensation in 2012 compared with 2011 and reductions in defined benefit pension contributions and taxes paid. Interest payments on our debt were $8.7 million in 2012, and tax payments, net of refunds, were $14.4 million in 2012.
We maintain a committed $400.0 million revolving Credit Facility in order to meet seasonal working capital requirements and other financing needs that may arise. The Credit Facility expires on November 25, 2018. Long-term borrowings outstanding, including current installments and capital lease obligations, totaled $102.6 million as of December 31, 2013, compared with $153.1 million at December 31, 2012. The outstanding balance of our short-term borrowings, excluding outstanding but undrawn letters of credit under our Credit Facility, was $35.0 million and $13.3 million at December 31, 2013 and 2012, respectively. The balance in short-term borrowings at December 31, 2013 represents amounts under our revolving Credit Facility that we expect, but are not required, to repay in the next twelve months. As a component of our Credit Facility we maintain a letter of credit facility to satisfy certain contractual obligations. Including $17.8 million and $18.2 million of undrawn letters of credit issued under the letter of credit facility, the balance of our unused line of credit totaled $247.2 million and $145.6 million at December 31, 2013 and 2012, respectively. Our short-term debt obligations typically peak during the first quarter of each year due to the payment of incentive compensation awards, contributions to retirement plans, and certain other recurring payments, and generally decline during the balance of the year. Our maximum month-end short-term debt obligations were $52.2 million and $26.3 million in 2013 and 2012, respectively. Our average month-end short-term debt obligations were $31.6 million and $17.9 million in 2013 and 2012, respectively. We have historically used the proceeds from our long-term borrowings to finance, among other things, business acquisitions.
As of December 31, 2013, the impact that our contractual obligations, including estimated interest payments, are expected to have on our liquidity and cash flow in future periods is as follows:
Approximately $27.1 million of operating lease obligations included in the table above are expected to be funded by sublessors under existing sublease agreements. See Note 6, “Commitments under Operating Leases” to the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Long-term debt, including current portions shown as due in one year or less in the table above consists of $35.0 million of outstanding borrowings under the Credit Facility that we expect, but are not required, to repay in 2014.
At December 31, 2013, we had approximately $7.9 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 no significant reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties.
Our frozen U.S. Qualified Plan was underfunded by $77.5 million at December 31, 2013 based on an accumulated benefit obligation of $485.7 million. Based on current assumptions for the interest rate to discount plan liabilities of 4.86% for 2014 and gradually rising to 5.8% by 2018, and a cap of 6.75% for the expected long-term rate of return on the plan’s assets, we estimate that we will have to make the following annual minimum contributions over the next five years to our frozen U.S. Qualified Plan:
The estimated annual minimum contributions in the above table are sensitive to changes in the expected rate of return on plan assets and the discount rate used to determine the present value of projected benefits payable under the plan. If our assumption for the expected return on plan assets of our U.S. Qualified Plan increased by 1.0%, representing an increase in the expected return, our estimated cumulative minimum funding requirements for 2014 through 2018 would decrease by approximately $9.0 million. If our assumption for the expected return on plan assets of our U.S. Qualified Plan decreased by 1.0%, representing a decrease in the expected return, our estimated cumulative minimum funding requirements for 2014 through 2018 would increase by approximately $8.8 million. If our assumption for the discount rate used to determine the present value of projected benefits payable under the U.S. Qualified Plan increased by 1.0%, representing an increase in the interest rate used to value pension plan liabilities, our estimated cumulative minimum funding requirements for 2014 through 2018 would decrease by approximately $23.7 million. If our assumption for the discount rate used to determine the present value of projected benefits payable under the plan decreased by 1.0%, representing a decrease in the interest rate used to value pension plan liabilities, our estimated cumulative minimum funding requirements for 2014 through 2018 would increase by approximately $20.9 million.
As a component of our Credit Agreement, we maintain a letter of credit facility to satisfy certain contractual obligations. At December 31, 2013, the total issued, but undrawn, letters of credit totaled approximately $17.8 million. These letters of credit are typically renewed annually, but unless renewed, will expire as follows:
At December 31, 2013, 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 sheet.
Unbilled revenues decreased by $19.1 million in 2013 compared with 2012, due to the signficant special project revenues in our Legal Settlement Administration segment at the end of 2012 that were not outstanding at the end of 2013.
As of December 31, 2013, deferred revenues related to lifetime claim handling arrangements approximated $45.4 million. If the rate at which we close cases changes, the amount of revenues recognized within a period could be affected. In addition, given the competitive environment in which we operate, we may be unable to raise our prices to offset the additional expense associated with handling longer-lived claims should such case closing rates change. The change in our first-year case closing rates over the last ten years has ranged from a decrease of 3.4% to an increase of 4.3%, and has averaged a decrease of 0.7%. A 1.0% change is a reasonably likely change in our estimate based on historical data. Absent an increase in per-claim fees from our clients, a 1.0% decrease in claim closing rates for lifetime claims could result in the deferral of additional revenues of approximately $1.4 million for the year ended December 31, 2013, and $1.6 million for the years ended December 31, 2012 and 2011. If our average claim closing rates for lifetime claims increased by 1.0%, we could recognize additional revenues of approximately $1.4 million for the year ended December 31, 2013, $1.5 million for the year ended December 31, 2012, and $1.6 million for the year ended December 31, 2011.
The indefinite-lived intangible asset consisting of the Broadspire and SLS trade names, with carrying values of $29.1 million and $2.0 million, respectively, are also evaluated for potential impairment on an annual basis or when indicators of potential impairment are identified. The indefinite-lived intangible asset impairment test is similar to the goodwill impairment test as both involve estimating the fair value using an internally prepared discounted cash flow analysis. The fair values of the trade names were established using the relief-from-royalty method. This method recognizes that, by virtue of owning the trade name as opposed to licensing it, a company or reporting unit is relieved from paying a royalty, usually expressed as a percentage of sales, for the asset's use. The present value of the after-tax costs savings (i.e., royalty relief) at an appropriate discount rate indicates the value of the trade name.
The key variables in estimating the value of the trade names include the discount rate, the royalty rate and the terminal growth rate. The discount rate utilized in estimating the fair value of the trade names in 2013 was 12.0%, reflecting our assessment of a market participant’s view of the risks associated with the projected cash flows. The royalty rates were estimated to be 1.5% for use of the Broadspire name within the U.S. and 2.0% for use outside of the U.S. The terminal growth rate used in the analysis was 2.0%. The royalty rate for the SLS trade name was estimated to be 2.0% with a flat growth rate.
The value of either the Broadspire or SLS trade name is sensitive to changes in the assumptions used above. A decline in the U.S. royalty rate to 1.0%, in conjunction with an increase in the discount rate to 15.0%, could potentially trigger an impairment. In addition, an increase to the discount rate above 18.0%, assuming no changes in the other key inputs, could potentially trigger an impairment. For the SLS trade name, any negative change in any of the assumptions could potentially trigger an impairment. We will continue to monitor the value of these trade names for potential indicators of impairment.
In addition to expense volatility, we are required to record mark-to-market adjustments to our balance sheet on an annual basis for the net funded status of our pension plans. These adjustments have fluctuated significantly over the past several years and, like our pension expense, are a result of the discount rate and value of our plan assets at each measurement date. The funded status of our plans also impacts our liquidity, as current funding laws in the U.S. require higher funding levels for our pension plans.
Cumulative unrecognized actuarial losses for all plans were $278.0 million through December 31, 2013, compared with $320.7 million through December 31, 2012. These 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. For example, projected pension plan expense for 2014 includes $11.4 million of amortization of these actuarial losses versus $13.3 million in 2013, $9.8 million in 2012 and $11.3 million in 2011.
Net periodic pension expense for our defined benefit pension plans is sensitive to changes in the underlying assumptions for the expected rates of return on plan assets and the discount rates used to determine the present value of projected benefits payable under the plans. If our assumptions for the expected returns on plan assets of our U.S. and U.K. defined benefit pension plans changed by 1.0%, representing either an increase or decrease in expected returns, the impact to 2013 consolidated pretax income would have been approximately $6.1 million. If our assumptions for the discount rates used to determine the present value of projected benefits payable under the plans changed by 1.0%, representing either an increase or decrease in interest rates used to value pension plan liabilities, the impact to 2013 consolidated pretax income would have been approximately $3.1 million.
Our effective tax rate, defined as our provision for income taxes divided by income before income taxes, for financial reporting purposes in 2013, 2012, and 2011 was 36.7%, 40.4%, and 21.8%, respectively. If our effective tax rate used for financial reporting purposes changed by 1.0%, we would have recognized an increase or decrease to income taxes of approximately $811,000, $834,000, and $584,000 for the years ended December 31, 2013, 2012, and 2011, respectively. Our effective tax rate for financial reporting purposes is expected to range between 33% and 35% in 2014 before considering any discrete items.
The tax credit carryforwards primarily consists of $49.5 million of foreign tax credit (“FTC”) carryforwards. Companies that cannot credit all the foreign taxes paid or deemed paid in a particular tax year because their foreign taxes exceed their FTC limitation are allowed to carry their excess taxes back to the preceding tax year and then forward to the ten succeeding years. Utilization of the Company’s FTCs is dependent upon sufficient U.S. regular taxable income and foreign source income which is impacted by the interaction of overall domestic and overall foreign loss rules. Based on Company projections of income through 2022, the Company should be able to fully utilize its FTC carryforwards before expiration. Accordingly, management concluded that it was more likely than not that the Company should be able to utilize its FTC carryforwards.
The net operating loss carryforwards primarily consists of $11.1 million of state NOL carryforwards generated by our domestic companies. In order to fully utilize these state NOL carryforwards, our domestic companies must generate taxable income prior to the expiration of the carryforwards. We have identified tax planning strategies that are both prudent and feasible, involving the internal sale of various assets that, if implemented, would generate sufficient taxable income at a state
In accordance with GAAP, we have considered the four possible sources of taxable income that may be available to realize a tax benefit for deductible temporary differences and carryforwards and have a $12.5 million valuation allowance on certain net operating loss and tax credit carryforwards in our domestic and international operations. We believe that it is more likely than not that we will realize our remaining net deferred tax assets based on our forecast of future taxable income and tax planning strategies that are available to the Company. Future changes in the valuation allowance, if required, should not affect our liquidity or our compliance with any existing debt covenants.
Based in Atlanta, Georgia, Crawford & Company (the "Company") is the world's largest (based on annual revenues) independent provider of claims management solutions to the risk management and insurance industry, as well as to self-insured entities, with an expansive global network serving clients in more than 70 countries. The Crawford System of Claims Solutions® offers comprehensive, integrated claims services, business process outsourcing and consulting services for major product lines including property and casualty claims management; workers’ compensation claims and medical management; and legal settlement administration.
The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted 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, and the Caribbean 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, 2013, 2012, and 2011 consolidated financial statements include the financial position of such operations as of October 31, 2013 and 2012, respectively, and the results of those subsidiaries’ operations and cash flows for the fiscal periods ended October 31, 2013, 2012, and 2011, respectively.
Goodwill impairment testing is a two-step process performed on a reporting unit basis. In step 1 of the testing process, the fair value of each reporting unit is determined and compared with its book value. If the fair value of the reporting unit exceeds its book value, goodwill is not deemed impaired. If the book value of the reporting unit exceeds its fair value, the testing proceeds to step 2. In step 2, the reporting unit’s fair value is allocated to its assets and liabilities following acquisition accounting procedures to determine the implied fair value of goodwill. This hypothetical acquisition accounting process is applied only for the purpose of determining whether goodwill must be reduced; it is not used to adjust the book values of other assets or liabilities. There is an impairment if (and to the extent) the carrying value of goodwill exceeds its implied fair value. An impairment loss reduces the recorded goodwill and cannot subsequently be reversed.
For impairment testing of indefinite-lived intangible assets, the carrying value is compared with the fair value, which represents the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the asset. The fair values of the trade names are established using the relief-from-royalty method. This method recognizes that, by virtue of owning the trade name as opposed to licensing it, a company or reporting unit is relieved from paying a royalty, usually expressed as a percentage of sales, for the asset's use. The present value of the after-tax costs savings (i.e., royalty relief) at an appropriate discount rate indicates the value of the trade name. Long-lived assets are tested at the asset or asset group level that is determined to be the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
Depreciation on property and equipment, including property under capital leases and amortization of leasehold improvements, was $15,446,000, $15,429,000, and $15,233,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
Capitalized software 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 purchases and related services. These capitalized software costs are amortized over periods ranging from three to ten years, depending on the estimated life of each software application. Amortization expense for capitalized software was $11,330,000, $10,226,000, and $9,667,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
In certain jurisdictions, both in the U.S. and internationally, various governments and taxing authorities require the Company to assess and collect sales and other taxes, such as value added taxes, on certain services that the Company renders and bills to its customers. The majority of the Company’s revenues are not currently subject to these types of taxes. These taxes are not recorded as additional revenues or expenses in the Company's Statements of Income.
For operations outside the U.S. that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated into U.S. dollars at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. The resulting translation adjustments, on a net basis, are included in comprehensive income (loss) in the Company’s Consolidated Statements of Comprehensive Income, and the accumulated translation adjustment is reported as a component of "Accumulated other comprehensive loss" in the Company’s Consolidated Balance Sheets.
Advertising costs are expensed in the period in which the costs are incurred. Advertising expenses were $2,793,000, $3,317,000, and $2,636,000, respectively, for the years ended December 31, 2013, 2012, and 2011.
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI")" ("ASU 2013-02"). Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 did not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 was effective for the Company on January 1, 2013. Since ASU 2013-02 is a disclosure-only standard, its adoption did not affect the Company's results of operations, financial condition, or cash flows.
In March 2013, Crawford & Company acquired 51% of the capital stock of Lloyd Warwick International Limited (“LWI”). LWI is a specialist loss consulting company based in London which offers onshore and offshore energy expertise. This acquisition increases Crawford's ability to handle offshore claims and reiterates our focus on offering market leading expertise in specialist and technical services. Crawford intends to leverage this acquisition to further grow its market share in the Oil and Energy sector, expanding LWI's capabilities in this highly complex market.
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 is contractually obligated to provide maximum financial support to LWI of approximately $6,000,000. Crawford is 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 LWI may require. Creditors of LWI have no recourse to Crawford's general credit.
Crawford has the right to purchase the 49% noncontrolling interest of LWI for a period of six months beginning five years and three months after the acquisition date for a price to be determined using a 7 times multiple of the average earnings before interest, taxes, depreciation and amortization for the preceding thirty six months prior to the date the right is exercised. Crawford also has the right of first refusal to match any offer to acquire the 49% noncontrolling interest.
The following is a summary of finite-lived intangible assets at December 31, 2013 and 2012:
At December 31, 2013, annual estimated aggregate amortization expense for intangible assets subject to amortization was as follows:
The following is a summary of indefinite-lived intangible assets at December 31, 2013 and 2012:
On November 25, 2013, the Company entered into a Third Amendment to Credit Agreement, Amendment to Pledge and Security Agreement and Limited Waiver (the “Amendment”), which amended, among other things, that certain Credit Agreement, dated as of December 8, 2011 (as amended, the “Credit Facility”). The Credit Facility included as borrowing parties Crawford & Company Risk Services Investments Limited, Crawford & Company (Canada) Inc. and Crawford & Company (Australia) Pty. Ltd., each a subsidiary of the Company. In connection with the discussions of the Credit Facility, the Company and these subsidiaries are individually referred to as a “Borrower” and collectively referred to as the “Borrowers.” Additionally, these subsidiaries are sometimes individually referred to as a “Foreign Borrower” and collectively referred to as the “Foreign Borrowers.” The Amendment: (1) increased the aggregate commitments under the Credit Facility from $325.0 million to $400.0 million, without impacting the Company’s ability, subject to the satisfaction of certain conditions and its receipt of additional commitments, to exercise its option to further increase the revolving loan commitments under the Credit Facility by up to $100.0 million; (ii) extended the maturity date of the Credit Facility from December 8, 2016 to November 25, 2018; (iii) reduced by 25 basis points the applicable margin used to determine interest rates on borrowings under the Credit Facility; (iv) reduced by 5 basis points the unused commitment fee under the Credit Facility; (v) provides the Company the ability to undertake a one-time repurchase of shares of the Company’s stock in an amount of up to $25.0 million prior to December 31, 2015, subject to compliance with certain conditions; and (vi) increased the leverage ratio (as defined in the Credit Facility) with which the Company must comply from 3.0:1.0 to 3.25:1.0, among other things.
At December 31, 2013 and 2012, a total of $135,000,000 and $163,275,000, respectively, was outstanding under the Credit Facility. In addition, undrawn commitments under letters of credit totaling $17,837,000 and $18,171,000 were outstanding at December 31, 2013 and 2012, respectively, under the letters of credit subfacility 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 subfacility, the available balance of the revolving credit portion of the Credit Facility totaled $247,163,000 and $145,611,000 at December 31, 2013 and 2012, respectively.
The representations, covenants and events of default in the Credit Facility are customary for financing transactions of this nature, including required compliance with a maximum leverage ratio and a minimum fixed charge coverage ratio (each as defined below).
Under the Credit Facility, the fixed charge coverage ratio, defined as the ratio of (i)(A) consolidated earnings before interest expense, income taxes, depreciation, amortization, stock-based compensation expense, and certain other charges and expenses (“EBITDA”) minus (B) aggregate income taxes to the extent paid in cash minus (C) unfinanced capital expenditures to (ii) the sum of: (A) consolidated interest expense to the extent paid (or required to be paid) in cash, plus (B) the aggregate of all scheduled payments of principal on funded debt (including the principal component of payments made in respect of capital lease obligations) required to have been made (whether or not such payments are actually made), plus (C) the aggregate of all restricted payments (as defined) paid, plus (D) the aggregate of all earnouts paid or required to be paid, must not be less than 1.50 to 1.00 for the four-quarter period ending at the end of each fiscal quarter.
At December 31, 2013, 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.
In February 2011, the Company entered into a U.S. dollar and Canadian dollar ("CAD") cross currency basis swap with an initial notional amount of CAD34,749,000 as an economic hedge to an intercompany note payable to the U.S. parent by a Canadian subsidiary. The cross currency basis swap requires the Canadian subsidiary to deliver quarterly payments of CAD589,000 to the counterparty and entitles the U.S. parent to receive quarterly payments of U.S. $593,000. The Canadian subsidiary also makes interest payments to the counterparty based on 3-month Canada Bankers Acceptances plus a spread, and the U.S. parent receives payments based on U.S. 3-month LIBOR. The cross currency basis swap expires on September 30, 2025. The Company has elected to not designate this swap as a hedge of the intercompany note from the Canadian subsidiary. Accordingly, changes in the fair value of this swap, as well as changes in the value of the intercompany note, are recorded as gains or losses inn"Selling, general and administrative expenses" in the Company’s Consolidated Statements of Income over the term of the swap and are expected to substantially offset one another. The changes in the fair value of the cross currency basis swap will not exactly offset changes in the value of the intercompany note, as the fair value of this swap is determined based on forward rates while the value of the intercompany note is determined based on end of period spot rates. The Company believes there have been no material changes in the creditworthiness of the counterparty to this cross currency basis swap agreement and believes the risk of nonperformance by such party is minimal.
The Company’s swap agreement contains a provision providing that if the Company is in default under its Credit Facility (see Note 4, "Short-Term and Long-Term Debt, Including Capital Leases"), the Company may also be deemed to be in default under its swap agreement. If there were such a default, the Company could be required to contemporaneously settle some or all of the obligation under the swap agreement at values determined at the time of default. At December 31, 2013, no such default existed, and the Company had no assets posted as collateral under its swap agreement.
Effective May 1, 2012, the Company entered into a 10-year operating lease on behalf of the Legal Settlement Administration segment for the lease of approximately 45,000 square feet of office space in Seattle, Washington. Included in the future minimum lease payments noted above are total lease payments of $10,873,000 related to this lease. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
On March 16, 2010, the Company entered into an 11-year operating lease on behalf of the Legal Settlement Administration segment for the lease of approximately 44,000 square feet of office space in Lake Success, New York, for use as its corporate headquarters. The lease commenced on January 1, 2011 and was amended in January 2011 and again in January 2012 to include a total of approximately 60,000 square feet. Included in the future minimum lease payments noted above are total lease payments of $14,737,000 related to the amended lease. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
Effective February 9, 2010, the Company entered into a 10-year operating lease agreement for approximately 64,000 square feet of office space in Sunrise, Florida, primarily for its Broadspire segment as a replacement for the subleased space in Plantation, Florida described below. Included in the future minimum lease payments noted above are total lease payments of $8,227,000 related to this lease. Additionally, the Company is responsible for certain related real estate taxes and other expenses, which are excluded from the table above.
One of the sublease agreements is for three of the four floors of one of the leased buildings in Plantation, Florida; this lease expires in December 2021. The other sublease is for an entire building and expires in December 2021. This lease includes surrender options for the fourth floor between December 31, 2015 and June 30, 2017, with twelve months prior notice, and for the third floor as of June 30, 2017, with twelve months prior notice. The Company recognized pretax losses of $4,285,000 in 2012 on these subleases, which are included in "Special charges and credits" in the Company's Consolidated Statements of Income for the year ended December 31, 2012. Should the sublessor elect to surrender one or both floors and the Company is unable to secure another sublessor, it may be required to recognize additional losses on this lease.
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 intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. An exception to this general policy could occur if a very unusual event or project generated profits significantly in excess of ongoing business reinvestment needs. If such an event occurs, the Company analyzes its anticipated investment needs in that region and provide for U.S. taxes for earnings that are not expected to be permanently reinvested. Such an event occurred during 2012 and continued into 2013, and the Company has provided for additional U.S. and foreign income taxes on such profits. All historical earnings and future foreign earnings needed for business reinvestment needs will 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. At December 31, 2013, undistributed earnings totaled $84,230,000. Determination of the deferred income tax liability on these undistributed earnings is not practicable since such liability, if any, is dependent on circumstances existing when remittance occurs.
At December 31, 2013, the Company had deferred tax assets related to loss carryforwards of $20,776,000 before netting of unrecognized tax benefits of $1,329,000. An estimated $8,384,000 of the deferred tax assets will not expire, and $12,392,000 will expire over the next 20 years if not utilized by the Company. A valuation allowance is provided when it is deemed more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Changes in our deferred tax valuation allowance are recorded as adjustments to the provision for income taxes. An analysis of our deferred tax asset valuation allowances is as follows for the years ended December 31, 2013, 2012, and 2011.
In 2011, the Company's projections of U.S. taxable income indicated that all foreign tax credit carryforwards should be utilized prior to their expiration period. Accordingly, the Company recorded a tax benefit of $5,462,000 for the reduction in the valuation allowance on such foreign tax credit carryforwards. Other changes to the valuation allowance for the years ended December 31, 2013, 2012, and 2011 were primarily due to losses in certain of our international operations as well as state tax credits.
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 $21,507,000, $23,749,000, and $22,132,000 in 2013, 2012, and 2011, respectively.
Benefits payable under the U.K. Plans are generally based on an employee’s final salary at the time the plan was closed. Benefits paid from the U.K. Plans are also subject to adjustments for the effects of inflation. The actuarial present value of the projected benefit payments under the U.K. Plans are based on the employees' expected dates of separation by retirement. The Company expects to make contributions of approximately $17,908,000 to its U.S. Qualified Plan and $7,000,000 to its U.K. Plans in 2014.
The majority of the Company's defined benefit pension plans have projected benefit obligations in excess of the fair value of plan assets. For these plans (excluding the nonqualified plans discussed separately below), the projected benefit obligations and the fair value of plan assets were as follows as of December 31, 2013 and 2012:
Certain of the Company's U.K. Plans and other international plans have fair values of plan assets that exceed the projected benefit obligations. For these plans, the projected benefit obligations and the fair value of plan assets were as follows as of December 31, 2013 and 2012:
Due to the frozen status of the U.S. plans and the closed status of the U.K. plans, the accumulated benefit obligations and the projected benefit obligations are not materially different.
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, 2014 for the U.S. and U.K. defined benefit pension plans are $11,429,000 ($7,767,000 net of tax).
The plans’ asset allocations at the respective measurement dates, by asset category, for the Company’s U.S. and U.K. qualified defined benefit pension plans, were as follows:
Shares of the Company's two classes of common stock are traded on the NYSE under the symbols CRDA and CRDB, respectively. The Company's two classes of stock are substantially identical, except with respect to voting rights and the Company's ability to pay greater cash dividends on the 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 11, "Stock-Based Compensation," certain shares of CRDA are issued with restrictions under incentive compensation plans.
The Company computes earnings per share ("EPS") of CRDA and CRDB using the two-class method, which allocates the undistributed earnings for each period to each class on a proportionate basis. The Company's Board of Directors has the right, but not the obligation, to declare higher dividends on the non-voting CRDA shares than on the voting CRDB shares, subject to certain limitations. In periods when the dividend is the same for CRDA and CRDB or when no dividends are declared or paid to either class, the two-class method generally will yield the same earnings per share for CRDA and CRDB. During 2013, 2012, and 2011, the Board of Directors declared a higher dividend on CRDA than on CRDB.
Compensation cost is recognized for these performance stock grants based on expected achievement rates; however no consideration is given for these performance stock grants when calculating EPS until the performance measurements have actually been achieved. The performance measurements for 471,000 of these shares as of December 31, 2013 are expected to be achieved by December 31, 2014.
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 Income. See Note 8, "Retirement Plans" for additional details.
The other comprehensive income (loss) amounts attributable to noncontrolling interests shown in the Company's Consolidated Statements of Shareholders' Investment are foreign currency translation adjustments.
The Company has various stock-based incentive compensation plans for its employees and members of its Board of Directors. Only shares of CRDA can be issued under these plans. The fair value of an equity award is estimated on the grant date without regard to service or performance conditions. The fair value is recognized as compensation expense over the requisite service period for all awards that vest. When recognizing compensation costs, estimates are made for the number of awards that are expected to vest, and subsequent adjustments are made to reflect both changes in the number of shares expected to vest and actual vesting. Compensation cost recognized at the end of any year equals at least the portion of the grant-date value of an award that is vested at that date.
The pretax compensation expense recognized for all stock-based compensation plans was $3,835,000, $3,660,000, and $3,756,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
The weighted average grant date fair value of stock options granted during the year ended December 31, 2013 was $1.86. No stock options were granted in 2012 or 2011. The intrinsic value of all outstanding stock options at December 31, 2011 was zero since the per share market price of CRDA was less than the exercise price of all outstanding stock options. The options exercised in 2013 and 2011 had an intrinsic value of $49,000 and less than $1,000, respectively. No options were exercised in 2012. No options vested in 2013 or 2012. The total fair value of stock options that vested during the year ended December 31, 2011 was $221,000.
A summary of the status of the Company’s nonvested performance shares as of December 31, 2013, 2012, and 2011, and changes during each year, is presented below:
During the years ended December 31, 2013 and 2012, a total of 146,891 and 148,365 shares, respectively, of CRDA were issued under the U.S. Plan to the Company’s employees at purchase prices of $3.29 in each year. At December 31, 2013, an estimated 111,000 shares will be issued and purchased under the U.S. Plan in 2014. During the years ended December 31, 2013, 2012, and 2011, compensation expense of $198,000, $270,000, and $225,000, respectively, was recognized for the U.S. Plan.
Level 1- Quoted prices in active markets for identical assets or liabilities.
The fair value of the cross currency basis swap was derived from a discounted cash flow analysis based on the terms of the swap and the forward curves for interest rates adjusted for the Company's credit risk. $432,000 of the fair value of the cross currency basis swap is included in "Other accrued liabilities" and $320,000 of the fair value of the cross currency basis swap is included in "Other noncurrent liabilities" on the Company’s Consolidated Balance Sheets, based upon the term of the cross currency basis swap.
The fair value hierarchy is also applied to certain other assets that indirectly impact the Company's consolidated financial statements. Assets contributed by the Company to its defined benefit pension plans become the property of the individual plans. Even though the Company no longer has control over these assets, it is indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts the Company's future net periodic benefit cost, as well as amounts recognized in its consolidated balance sheets. The Company uses the fair value hierarchy to measure the fair value of assets held by its U.S. and U.K. defined benefit pension plans.
Operating earnings is the primary financial performance measure used by the Company’s senior management and the CODM to evaluate the financial performance of the Company’s four operating segments and make resource allocation decisions. The Company believes this measure is useful to investors in that it allows investors to evaluate segment operating performance using the same criteria used by the Company’s senior management and CODM. Operating earnings will differ from net income computed in accordance with GAAP since operating earnings represent segment earnings (loss) before certain unallocated corporate and shared costs and credits, goodwill and intangible asset impairment charges, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, special charges and credits, income taxes, and net income attributable to noncontrolling interests.
Financial information as of and for the years ended December 31, 2013, 2012, and 2011 related to the Company’s reportable segments is presented below. Certain marketing functions that were previously included in each segment are now included in the Company's corporate administrative costs and allocated back to the segments. The results of prior periods have been revised to conform to the current presentation.
Excludes amortization expense of finite-lived customer-relationship and trade name intangible assets.
Revenues by major service line in the U.S. and by area for other regions in the Americas segment and by service line for the Broadspire segment are shown in the following table. It is not practicable to provide revenues by service line for the EMEA/AP segment.
The total of the Company’s reportable segments’ revenues reconciled to total consolidated revenues for the years ended December 31, 2013, 2012, and 2011 was as follows:
The Company’s reportable segments’ total operating earnings reconciled to consolidated income before income taxes for the years ended December 31, 2013, 2012, and 2011 were as follows:
The Company’s reportable segments’ total assets reconciled to consolidated total assets of the Company at December 31, 2013 and 2012 are presented in the following table. All foreign-denominated cash and cash equivalents are reported within the Americas and EMEA/AP segments, while all U.S. cash and cash equivalents are reported as corporate assets in the following table:
During 2011, the Company recorded a net pretax special credit of $2,379,000, consisting of a gain of $6,992,000 related to the final settlement of a legal arbitration, net of a $3,415,000 write-off of deferred financing costs related to the repayment of its then-outstanding Term Loan B, and $1,198,000 in severance expense related to the Broadspire segment.
The Company maintains a system of internal accounting policies, procedures, and controls designed to provide reasonable, but not absolute, assurance that assets are safeguarded and transactions are executed and recorded in accordance with management’s authorization. The internal accounting control system is augmented by a program of internal audits and reviews by management, written policies and guidelines, and the careful selection and training of qualified personnel.
We have audited the accompanying consolidated balance sheets of Crawford & Company as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, cash flows, and shareholders' investment for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crawford & Company at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Crawford & Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 26, 2014 expressed an unqualified opinion thereon.
During the fourth quarter of 2012, the Company recorded $8.5 million in special pretax charges, consisting of $4.3 million to adjust the estimated loss on a leased facility the Company no longer uses and $3.4 million for severance costs and $0.8 million for lease termination costs, primarily related to restructuring activities in our North American operations. See Note 16, “Special Charges and Credits and Other Income," to the audited consolidated financial statements contained in this Item 8.
The Company may pay a higher dividend on its CRDA common stock than on its CRDB shares. This dividend differential can result in different earnings per share for each class of stock due to the two-class method of computing EPS as required by current accounting guidance. CRDB generally presents a more dilutive measure.