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 our operations outside of the U.S., Canada, the Caribbean, and certain subsidiaries in the Philippines, are reported and consolidated on a two-month delayed basis in accordance with the provisions of ASC 810, "Consolidation," in order to provide sufficient time for accumulation of their results. Accordingly, the Company's December 31, 2016, 2015, and 2014 consolidated financial statements include the financial position of such operations as of October 31, 2016 and 2015, respectively, and the results of their operations and cash flows for the fiscal periods ended October 31, 2016, 2015 and 2014, respectively.
On December 1, 2014, we acquired 100% of the capital stock of GAB Robins, a loss adjusting and claims management provider headquartered in the U.K. which reports through our International segment. We believe the GAB Robins acquisition has enabled Crawford to significantly expand its claims handling business across a wide range of product lines in the U.K. and bolster its global specialty lines claims business.
In 2014, we established a wholly-owned global business services center in Manila, Philippines. We have subsequently expanded our offshore operations to include Information Technology services performed in Pune, India. The Centers provide us venues for global consolidation of certain business functions, shared services, and currently outsourced processes. The Centers, which are expected to be phased in through 2018, are expected to allow us to continue to strengthen our client service, realize additional operational efficiencies, and invest in new capabilities for growth. No assurances can be provided of our ability to timely or cost effectively complete and ramp up operations at the Centers, or to achieve expected cost savings on a timely basis, or at all. Costs associated with the establishment and phase-in of the Centers were $3.7 million in 2016 and $4.4 million in 2015, and another $3.0 million of costs are expected in 2017.
The Company recorded non-cash goodwill impairment charges in 2015 of $49.3 million. There were no goodwill impairment charges in 2016 or 2014. See Note 1, "Significant Accounting and Reporting Policies" and Note 3, "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 the 2015 goodwill impairment charges.
Consolidated revenues before reimbursements were $1.109 billion in 2016, a decrease of 5.2% compared with $1.170 billion in 2015. Net income attributable to Crawford & Company was $36.0 million in 2016, compared with a net loss of $(45.5) million in 2015. During 2016, the Company recorded restructuring and special charges of $9.5 million compared to $34.4 million in 2015. The Company recorded non-cash goodwill impairment charges of $49.3 million in 2015. There were no similar goodwill impairment charges in 2016.
Selling, general and administrative ("SG&A") expenses were 0.7% lower in 2016 than in 2015. The decrease in 2016 was due to a decrease in administrative compensation expense resulting from cost reduction initiatives during 2015, partially offset by an increase in professional fees.
For most of our international operations and for Garden City Group, many administrative functions, such as finance, human resources, information technology, quality and compliance, are embedded in those locations and are considered direct costs of those operations. For our domestic operations (primarily Broadspire and the U.S. Services segments), we have a centralized shared-services arrangement for most of these administrative functions, and we allocate the costs of those services to the segments as indirect costs based on usage. Although some of the administrative services in our shared-services center benefit, and are allocated to, more than one of our operating segments, the majority of these shared services are allocated to the Broadspire and U.S. Services segments.
Restructuring and special charges arise from time to time from events (such as internal restructurings, losses on subleases, establishment of new operations, and asset impairments) that are not allocated to any particular segment since they historically have not regularly impacted our performance and are not expected to impact our future performance on a regular basis.
"Direct Compensation, Fringe Benefits & Non-Employee Labor" includes direct compensation, payroll taxes, and benefits provided to the employees of each segment, as well as payments to outsourced service providers that augment our staff in each segment. As a service company, these costs represent our most significant and variable operating expenses. In our International and Garden City Group segments, these costs include direct compensation, payroll taxes, and benefits of certain administrative functions that are embedded in those locations and are considered direct operating costs of those locations. In our U.S. Services and Broadspire operations, certain administrative functions are performed by centralized headquarters staff. These costs are considered indirect and are not included in "Direct Compensation, Fringe Benefits & Non-Employee Labor". Accordingly, the "Direct Compensation, Fringe Benefits & Non-Employee Labor" and "Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor" components are not comparable across segments, but are comparable within each segment across periods.
YEAR ENDED DECEMBER 31, 2016 COMPARED WITH YEAR ENDED DECEMBER 31, 2015
The 2016 increase in U.S. Contractor Connection cases was due to the ongoing expansion of our contractor network, the continued trend of insurance carriers moving high-frequency, low-complexity property cases directly to our contractor managed repair networks, which we expect to continue, and expansion into adjacent services including consumer segments.
U.S. Services segment expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased from $60.0 million in 2015 to $59.4 million in 2016, although as a percent of segment revenues, increased from 24.7% in 2015 to 25.7% in 2016. The slight decrease in costs was primarily due to the impact of a reduction of office locations in the U.S. and related administrative cost reductions. The increase in expense as a percent of revenues was due to the reduction in variable expenses being less than the reduction in revenues in 2016.
Revenues before reimbursements from our International segment totaled $479.9 million in 2016, compared to $506.7 million in 2015. Changes in foreign exchange rates decreased our International segment revenues by $29.6 million, or approximately 5.8%, for 2016 compared with 2015. Absent foreign exchange rate fluctuations, International segment revenues would have been $509.4 million in 2016. Overall case volumes in the International segment decreased 12.4% in 2016 compared with 2015. Changes in product mix and in the rates charged for those services accounted for a 13.0% revenue increase for 2016 compared with 2015, due primarily to a reduction in high-frequency, low-complexity motor cases discussed below.
Revenues in Canada declined as a result of foreign exchange rate fluctuations. On a constant-dollar basis, revenues in Canada would have been $110.5 million in 2016, a slight increase from 2015 due primarily to a change in the mix of services provided.
The lower revenues in Europe and Rest of World were due to a reduction in case volumes and changes in the mix of services provided in Scandinavia, the change in foreign exchange rates, and a reduction in high-frequency, low-complexity motor cases in Brazil where we have exited that product line in that country.
Overall case volumes were 12.4% lower in 2016 compared with 2015. The U.K. case volumes were higher due primarily to flooding-related cases received in the 2016 first quarter, partially offset by a reduction in high-frequency, low complexity cases. The decrease in Canada cases was due to a decline in high-frequency, low-complexity vehicle appraisal cases in 2016. The decrease in Asia-Pacific cases was due to a decline in high-frequency, low-complexity motor cases in Singapore and China described above. The reduction in case volumes in Europe and Rest of World was primarily due to a reduction in high-frequency, low-complexity motor cases in Brazil, described above.
Expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased as a percent of International segment revenues before reimbursements, from 29.8% in 2015 to 27.5% in 2016, and the dollar amount of these expenses also decreased by $18.7 million. The decrease in both amount and percentage is primarily due to cost reduction initiatives implemented in 2015.
Overall, there was a 0.5% decrease in cases received in 2016 compared with 2015. This was primarily due to a decrease in Medical Management case referrals, partially offset by an increase in workers' compensation and casualty cases resulting from new clients.
Our Garden City Group segment reported 2016 operating earnings of $7.8 million, decreasing 31.8% from $11.5 million in 2015, with the related operating margin decreasing from 9.0% in 2015 to 8.2% in 2016. The change in the operating margin was primarily the result of changes in the mix of services provided and the winding down of a major gulf-related special project, partially offset by cost reduction initiatives implemented in 2016.
Reimbursements for out-of-pocket expenses incurred in our Garden City Group segment which are included in total Company revenues may vary materially from year to year depending on the amount and types of projects and were $20.1 million in 2016, decreasing from $28.4 million in 2015. This decrease was due to a lower volume of case administration work in 2016.
Garden City Group services are generally project-based and not denominated by individual claims. Depending upon the nature of projects and their respective stages of completion, the volume of transactions or tasks performed by us in any period can vary, sometimes significantly.
Garden City Group expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased 6.2% to $24.7 million in 2016 from $26.3 million in 2015, but increased as a percent of related segment revenues before reimbursements to 25.7% in 2016 from 20.5% in 2015. The dollar amount of these expenses decreased due to reduced activity associated with the reduction in revenues in 2016. The increase in expenses as a percent of revenues before reimbursements was due to the reduction in variable expenses being less than the reduction in revenues in 2016.
U.S. Contractor Connection revenues increased 17.4% in 2015 compared with 2014, primarily due to the ongoing expansion of this service as an alternative property claims service solution as insurance carriers continued the trend of moving high-frequency, low-complexity property cases directly to managed repair networks. There was also an increase in the average fee per claim in 2015 compared to 2014.
The 2015 decrease in U.S. Claims Services cases was primarily due to the transfer of affinity claims to our Broadspire segment, and fewer cases in our U.S. Claims Field Operations service line due to a reduction in weather-related activity and a reduction in high-frequency, low-complexity vehicle appraisals. Approximately 39,000 affinity cases were included in U.S. Claims Field Operations cases received in 2014. The increase in U.S. Technical Services was due to cases received from new clients in 2015. The previously described outsourcing project involved the Company providing adjusters to work on the client's premises; accordingly, there were no associated case volumes referred to the Company in 2015 or 2014 for these revenues. Excluding the affinity cases from the 2014 case volumes, the decreases in U.S. Services cases received would have been 2.8% for 2015 compared with 2014.
Revenues before reimbursements from our International segment totaled $506.7 million in 2015, compared to $488.3 million in 2014. Overall case volumes in the International segment increased 2.2% in 2015 compared with 2014. Changes in foreign exchange rates decreased our International segment revenues by $62.1 million, or approximately 12.7%, for 2015 compared with 2014. Changes in product mix and in the rates charged for those services accounted for a 5.0% revenue decrease in 2015 compared with 2014, before the impact of the increase from GAB Robins revenues and cases.
Revenues decreased in Asia-Pacific due to the negative impact from exchange rates and a reduction in high volume, low-complexity cases in Singapore and China, partially offset by an increase in weather-related activity in Australia in 2015. On a constant-dollar basis, revenues in Asia-Pacific would have been $122.0 million in 2015, a 9.2% increase over 2014, due primarily to an increase in weather-related cases in Australia.
International unit volumes by region for 2015 and 2014 were as follows:
Direct compensation expenses, fringe benefits, and non-employee labor, as a percent of International segment revenues before reimbursements, decreased from 69.6% in 2014 to 66.5% in 2015. The percentage decrease primarily reflected changes in the mix of services provided. Excluding the impact of the GAB Robins contractor repair revenue, direct compensation, fringe benefits, and non-employee labor expenses would have been 71.0% of segment revenues in 2015. This increase was due to reduced utilization of our U.K. staff in 2015 and the impact of the GAB Robins integration. The dollar amount of these expenses decreased in 2015 by $2.9 million due to cost reduction initiatives implemented in 2015, partially offset by increased costs from the GAB Robins acquisition. There was an average of 4,690 International FTEs in 2015, an increase from 4,294 FTEs in 2014 due to an increase in the U.K. from the GAB Robins acquisition, partially offset by a decrease in FTEs in Canada, Asia-Pacific, and Europe and Rest of World.
Garden City Group revenues in 2015 declined compared with prior year levels primarily because of lower revenues from the Deepwater Horizon class action settlement special project and another non-gulf related project.
Garden City Group direct compensation expense, fringe benefits, and non-employee labor expenses, as a percent of segment revenues before reimbursements, increased to 70.5% in 2015, compared with 69.1% in 2014. The increase as a percent of revenues was due to lower employee utilization in 2015 as a result of the reduced revenues. The dollar amount of related expenses declined to $90.4 million in 2015 compared with $117.6 million in 2014. The decrease was primarily due to reduced activity associated with the further reduction in revenues from the special projects discussed above. There was an average of 709 FTEs in 2015, compared with an average of 805 in 2014, decreasing due to the decreased revenues.
Garden City Group expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor decreased 11.6% to $26.3 million in 2015 from $29.8 million in 2014, but increased as a percent of related segment revenues before reimbursements to 20.5% in 2015 from 17.5% in 2014. The dollar amount of these expenses decreased due to reduced activity associated with the reduction in revenues in 2015. The increase in expenses as a percent of revenues before reimbursements was due to the reduction in variable expenses being less than the reduction in revenues in 2015. During 2014, we reduced a contingent consideration liability from a previous acquisition by $2.0 million after concluding the consideration would not be paid. We also impaired and expensed the $1.3 million net book value of a customer list obtained in that acquisition in 2014.
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 $25.6 million, $13.8 million, and $28.8 million for 2016, 2015, and 2014, respectively. Our effective tax rate for financial reporting purposes was 40.4%, (43.5)%, and 48.1% for 2016, 2015, and 2014, respectively. The Company's 2015 effective income tax rate was distortive, primarily due to the largely nondeductible goodwill impairment charge, our inability to recognize tax benefits for certain international net operating losses, and fluctuations in the mix of income earned. Additionally, 2015 losses in certain operations, including losses due to restructuring and special charges, were in jurisdictions with lower tax rates or where the losses are unable to be benefited. Based on our 2017 operating plans, we anticipate our effective tax rate for financial reporting purposes in 2017 to be in the 36% to 38% range before considering any discrete items and assuming no changes to U.S. tax law and policy.
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 $9.9 million, $9.0 million, and $6.8 million for 2016, 2015, and 2014, respectively. The increase in interest expense in 2016 was due to the increased borrowings during the first part of 2016 and higher interest rates. Corporate interest income was relatively consistent in each year, totaling $0.7 million, $0.6 million, and $0.8 million in 2016, 2015, and 2014, respectively. We pay interest on borrowings under our Credit Facility 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.
Amortization of customer-relationship intangible assets represents the non-cash amortization expense for finite-lived customer-relationship and trade name intangible assets. Amortization expense associated with these intangible assets totaled $9.6 million, $9.7 million, and $6.3 million in 2016, 2015, and 2014, respectively. The increase in 2015 compared to 2014 was due to amortization of intangible assets acquired in the GAB Robins acquisition. This amortization is included in "Selling, general and administrative expenses" in our Consolidated Statements of Operations.
Unallocated corporate and shared costs and credits were $24.0 million, $16.6 million, and $8.6 million in 2016, 2015, and 2014, respectively. The increase in 2016 compared with 2015 was due to an increase in U.S. defined benefit plan expense, unallocated professional fees, and incentive compensation, partially offset by a decrease in acquisition-related costs and self-insured expenses. These costs increased in 2015 compared with 2014 due primarily to an increase in unallocated professional fees, higher self-insured expenses, increased U.S. defined benefit pension plan expense, and the settlement of a legal claim.
The Company, its subsidiaries Crawford & Company Risk Services Investments Limited (the "UK Borrower"), Crawford & Company (Canada) Inc. (the "Canadian Borrower") and Crawford & Company (Australia) Pty. Ltd. (the "Australian Borrower") (the Company, together with such subsidiaries, as borrowers, the "Borrowers"), the Company's guarantor subsidiaries party thereto, Wells Fargo Bank, National Association, as administrative agent and a lender ("Wells Fargo"), and the other lenders party thereto (together with Wells Fargo, the "Lenders"), are party to a Credit Agreement, dated as of December 8, 2011 (as amended, the "Credit Facility"). On November 28, 2014, the Credit Facility was amended to provide the Company the ability to complete the December 1, 2014 acquisition of GAB Robins, and to make certain other technical amendments.
At December 31, 2016 and 2015, a total of $186.2 million and $243.7 million, respectively, was outstanding under the Credit Facility. In addition, undrawn commitments under letters of credit totaling $14.8 million and $17.2 million were outstanding at December 31, 2016 and 2015, 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 borrowing capacity under the Credit Facility totaled $198.5 million and $142.4 million at December 31, 2016 and 2015.
The leverage ratio, as of the last day of any fiscal quarter, defined as the ratio of (i) consolidated total funded debt minus unrestricted cash to (ii) consolidated EBITDA, must not be greater than 3.50 to 1.00 for fiscal quarters ending through September 30, 2017, and 3.25 to 1.00 for fiscal quarters thereafter.
At December 31, 2016, our working capital balance (current assets less current liabilities) was approximately $134.4 million, compared with $111.8 million at December 31, 2015. The increase in working capital was due to decreases in short-term borrowings and deferred revenues. Cash and cash equivalents at the end of 2016 totaled $81.6 million, compared with $76.1 million at the end of 2015.
Cash provided by operating activities increased by $37.2 million in 2016, from $61.7 million in 2015 to $98.9 million in 2016. This increase was due to higher net income and a decrease in working capital requirements in 2016 compared with 2015. Interest payments on our debt were $8.5 million in 2016, and tax payments, net of refunds, were $16.2 million in 2016.
Cash provided by operating activities increased by $55.0 million in 2015, from $6.6 million in 2014 to $61.7 million in 2015. This increase was largely due to improved collections of accounts receivable and lower prepaid expenses in 2015 compared to 2014. Interest payments on our debt were $8.0 million in 2015, and tax payments, net of refunds, were $9.7 million in 2015.
Cash used in investing activities increased by $69.4 million in 2015, from $31.8 million in 2014 to $101.2 million in 2015. This increase was primarily due to the GAB Robins acquisition. Cash used to acquire property and equipment and capitalized software, including capitalization of costs for internally developed software, was $32.9 million in 2015 compared with $29.2 million in 2014.
Cash provided by financing activities was $67.9 million in 2015. We borrowed $147.5 million in short-term borrowings during the year for working capital needs and to fund the GAB Robins acquisition, and we repaid a total of $62.0 million in short-term borrowings and $2.0 million in long-term debt and capital lease obligations. We paid cash dividends totaling $13.5 million and repurchased $1.2 million of CRD-A stock. Also in 2015, we received shares of our CRD-A stock that were surrendered by employees to settle $0.5 million of withholding taxes owed on the issuance of restricted and performance shares.
As described above, we have two principal financial covenants in our Credit Facility. The leverage ratio covenant requires us to comply with a maximum leverage ratio, defined in our Credit Facility as the ratio of (i) consolidated total funded debt minus unrestricted cash to (ii) consolidated earnings before interest expense, income taxes, depreciation, amortization, stock-based compensation expense, and certain other charges and expenses ("EBITDA"). This ratio must not exceed 3.50 to 1.00 as of the last day of fiscal quarters ending through September 30, 2017, and 3.25 to 1.00 as of the last day of fiscal quarters thereafter. The fixed charge coverage ratio covenant requires us to comply with a minimum fixed charge coverage ratio, defined as the ratio of (i)(A) consolidated EBITDA minus (B) aggregate income taxes to the extent paid in cash minus (C) unfinanced capital expenditures to (ii) the sum of: (A) consolidated interest expense to the extent paid (or required to be paid) in cash, plus (B) the aggregate of all scheduled payments of principal on funded debt (including the principal component of payments made in respect of capital lease obligations) required to have been made (whether or not such payments are actually made), plus (C) the aggregate of all restricted payments (as defined) paid, plus (D) the aggregate of all earnouts paid or required to be paid, must not be less than 1.25 to 1.00 for the four-quarter period ending at the end of each fiscal quarter. At December 31, 2016, we were in compliance with all required ratios under our Credit Facility. Based on our financial plans, we expect to be able to remain in compliance with all required covenants throughout 2017. Our compliance with the leverage ratio and fixed charge coverage ratio is particularly sensitive to changes in our EBITDA, and if our financial plans for 2017 or other future periods do not meet our current projections, we could fail to remain in compliance with these financial covenants in our Credit Facility.
As of December 31, 2016, 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 $21.1 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.
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, 2016, 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, 2016, we had approximately $5.5 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 $1.2 million in reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties.
Gross deferred income tax liabilities as of December 31, 2016 were approximately $79.3 million. This amount is not included in the contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their respective book basis, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, we believe scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not relate to liquidity needs.
We sponsor a qualified defined benefit pension plan in the U.S., (the "U.S. Qualified Plan") three defined benefit plans in the U.K. (the "U.K. Plans"), and defined benefit pension plans in the Netherlands, Norway, Germany, and the Philippines (the "other international plans"). Future cash funding of our defined benefit pension plans will depend largely on future investment performance, interest rates, changes to mortality tables, and regulatory requirements. Effective December 31, 2002, we froze our U.S. Qualified Plan. The aggregate deficit in the funded status of the U.S. Plan, U.K. Plans and other international plans totaled $105.2 million and $121.7 million at the end of 2016 and 2015, respectively. The 2016 decrease in the unfunded deficit of our defined benefit pension plans primarily resulted from an increase in discount rates and the adoption of updated mortality tables used to determine U.S. Qualified Plan liabilities. During 2016, we made contributions of $9.0 million and $5.1 million to our U.S. Qualified Plan and U.K. Plans, respectively. In 2015, we made contributions of $9.0 million and $6.6 million to our U.S. Qualified Plan and U.K. Plans, respectively.
Our frozen U.S. Qualified Plan was underfunded by $103.5 million at December 31, 2016 based on an accumulated benefit obligation of $479.2 million. Crawford expects contributions of $9.0 million per annum to the U.S. Qualified Plan for the next three fiscal years to improve the funded status of the plan and minimize future required contributions. We estimate that we will make the following annual minimum contributions over the next five years to our frozen U.S. Qualified Plan:
Funding requirements are no longer as 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 U.S. Qualified plan as they were prior to 2008. The Bipartisan Budget Act of 2015 ("BBA2015") included pension funding reform which greatly reduced the contributions required to the U.S. Qualified Plan. In addition to BBA2015 legislation, pension funding has been governed by rules under the Pension Protection Act of 2006, as amended by the Worker, Retiree and Employer Recovery Act of 2008, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, and the Moving Ahead for Progress in the 21st Century Act, and the Highway Transportation Funding Act of 2014. Volatility in the capital markets and future legislation may have a negative impact on our U.S. and U.K. pension plans, which may further increase the underfunded portion of our pension plans and our attendant funding obligations. Expected and required contributions to our underfunded defined benefit pension plans will reduce our liquidity, restrict available cash for our operating, financing, and investing needs and may materially adversely affect our financial condition and our ability to deploy capital to other opportunities.
Significant changes on our consolidated balance sheet as of December 31, 2016, compared with our consolidated balance sheet as of December 31, 2015, were as follows:
Accounts receivable decreased by $11.0 million, or $2.8 million excluding the effect of foreign currency exchange impacts and other adjustments, in 2016 compared with 2015. The decrease was primarily due to decreases from the Garden City Group segment.
Accrued compensation and related costs increased by $5.6 million in 2016 compared with 2015, primarily due to increased incentive compensation payments accrued at year end due to improved operating results in 2016.
This MD&A addresses our consolidated financial statements, which are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates and judgments based upon historical experience and various other factors that we believe are reasonable under then-existing circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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 lines of coverage. Additionally, recent claim closing rates are evaluated to ensure that current claim closing history does not indicate a significant deterioration or improvement in the longer-term historical closing rates used.
Based upon our historical averages, we close approximately 98% of all cases referred to us under lifetime claim service arrangements within five years from the date of referral. Also, within that five-year period, the percentage of cases remaining open in any one particular year has remained relatively consistent from period to period. Each quarter we evaluate our historical case closing rates by type of claim and make adjustments as necessary. Any changes in estimates are recognized in the period in which they are determined.
As of December 31, 2016, deferred revenues related to lifetime claim handling arrangements approximated $43.5 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 3.6% to an increase of 4.8%, and has averaged a decrease of 0.1%. 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 would have resulted in the deferral of additional revenues of approximately $1.5 million for the year ended December 31, 2016, and $1.4 million for each of the years ended December 31, 2015 and 2014. If our average claim closing rates for lifetime claims increased by 1.0%, we would have recognized additional revenues of approximately $1.1 million for the year ended December 31, 2016 and $1.3 million for the years ended December 31, 2015 and 2014.
As of December 31, 2016 and 2015, our allowance for doubtful accounts totaled $14.5 million and $13.1 million, or approximately 8.6% and 7.4% of gross billed receivables at December 31, 2016 and 2015, respectively. If the financial condition of our clients deteriorates, resulting in an inability to make required payments to us, or if economic conditions deteriorate, additional allowances may be deemed to be appropriate or required. If the allowance for doubtful accounts changed by 1.0% of gross billed receivables, reflecting either an increase or decrease in expected future write-offs, the impact to consolidated pretax income would have been approximately $1.7 million in 2016, $1.8 million in 2015, and $1.9 million in 2014.
We have the option to perform a qualitative assessment of goodwill prior to completing the two-step process 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 and other intangible assets. If we conclude that this is the case, we must perform the step 1 analysis discussed above. Otherwise, we may forego the two-step process and are not required to perform any further testing. During 2016, we performed these qualitative assessments on each of the U.S. Contractor Connection operations on a stand-alone basis and Garden City Group, which represents approximately 50 percent of our consolidated goodwill balance, and determined, based on the results thereof, that the two-step process described above was not necessary.
The values of the Broadspire and SLS trade names are each sensitive to changes in the assumptions used above. A decline in the U.S. royalty rate to 1.0% in combination with an increase in the discount rate by 1.75%, assuming no changes in the other key inputs, could potentially trigger an impairment of the Broadspire trade name. A decline in the royalty rate by 1.5% in combination with an increase in the discount rate by 1.0% could potentially trigger an impairment of the SLS trade name. We will continue to monitor the value of these trade names for potential indicators of impairment.
We review the expected long-term rate of return on an annual basis and revise it as appropriate. To support our conclusions, we periodically commission asset/liability studies performed by third-party professional investment advisors and actuaries to assist us in our reviews. These studies project our estimated future pension payments and evaluate the efficiency of the allocation of our pension plan assets into various investment categories. These studies also generate probability-adjusted expected future returns on those assets. As a result of the transition to a liability-driven investment strategy described previously, the expected long-term rates of return on plan assets assumption used to determine 2017 net periodic pension cost were estimated to be 6.30% and 5.85% for the U.S. and U.K. plans, respectively.
Pension expense is also affected by the accounting policy used to determine the value of plan assets at the measurement date. We apply our expected return on plan assets using fair market value as of the annual measurement date. The fair market value method results in greater volatility to our pension expense than the calculated value method. The amounts recognized in the balance sheet reflect a snapshot of the state of our long-term pension liabilities at the plan measurement date and the effect of mark-to-market accounting on plan assets. At December 31, 2016, we recorded an increase to equity through other comprehensive income ("OCI") of $11.3 million (net of tax) to reflect unrealized actuarial gains during 2016. At December 31, 2015, we recorded an increase to equity through OCI of $8.2 million (net of tax) to reflect unrealized actuarial gains during 2015. Those changes are subject to amortization over future years and may be reflected in future income statements.
Net periodic pension expense for our defined benefit pension plans is sensitive to changes in the underlying assumptions for the expected rates of return on plan assets and the discount rates used to determine the present value of projected benefits payable under the plans. If our assumptions for the expected returns on plan assets of our U.S. and U.K. defined benefit pension plans changed by 0.5%, representing either an increase or decrease in expected returns, the impact to 2016 consolidated pretax income would have been approximately $2.9 million. If our assumptions for the discount rates used to determine the present value of projected benefits payable under the plans changed by 0.25%, representing either an increase or decrease in interest rates used to value pension plan liabilities, the impact to 2016 consolidated pretax income would have been approximately $0.8 million.
We have made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. We have accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly have accounted for it prospectively. While the benefit obligation measured under this approach is unchanged, the more granular application of the spot rates will reduce the service and interest cost for the pension plans for fiscal 2017 by an estimated $4.2 million. We do not expect this change will have a material effect in periods beyond 2017. For the pension plans, the weighted average spot rates used to determine service and interest costs were 3.48% for the Company’s U.S. plans and 2.71% for the U.K. plans.
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 $14.5 million valuation allowance on certain net operating loss and tax credit carryforwards in our international and domestic operations. For our remaining deferred tax assets, we believe that it is more likely than not that we will realize these 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.
As of December 31, 2016 and 2015, our estimated liabilities for self-insured risks totaled $26.3 million and $23.5 million, respectively. The estimated liability is most sensitive to changes in the ultimate liability for a claim and, if applicable, the interest rate used to discount the liability. We believe our provisions for self-insured losses are adequate to cover the expected cost of losses incurred, net of insurance recoveries. However, these provisions are estimates and amounts ultimately settled may be significantly greater or less than the provisions established. We used a discount rate of 1.60% to determine the present value of our self-insured workers' compensation liabilities as of December 31, 2016. If the average discount rate was reduced by 1.0% or increased by 1.0%, reflecting either an increase or decrease in underlying interest rates, our estimated liabilities for these self-insured risks at December 31, 2016 would have been impacted by approximately $568,000, resulting in an increase or decrease to 2016 consolidated net income of approximately $339,000.
Based in Atlanta, Georgia, Crawford & Company ("Crawford" or the "Company") is the world's largest publicly traded independent provider of claims management solutions to insurance companies and self-insured entities, with an expansive global network serving clients in more than 70 countries. The Crawford Solution® 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 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, 2016, 2015, and 2014 consolidated financial statements include the financial position of such operations as of October 31, 2016 and 2015, respectively, and the results of their operations and cash flows for the fiscal periods ended October 31, 2016, 2015, and 2014, 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, 2016 were $9,300,000 and $10,554,000, respectively. Total assets and liabilities of LWI as of December 31, 2015 were $8,831,000 and $11,841,000, respectively. Included in LWI's total liabilities at December 31, 2016 and 2015 were loans from Crawford of $8,704,000 and $10,214,000, 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, 2016 and 2015, the liabilities of this deferred compensation plan were $9,385,000 and $9,861,000, 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 $16,227,000 and $15,881,000, respectively. These liabilities and assets are included in "Other noncurrent liabilities" and "Other noncurrent assets" on the Company's Consolidated Balance Sheets, respectively.
Deferred revenues represent the estimated unearned portion of fees derived from certain fixed-rate claim service agreements. The Company's fixed-fee service arrangements typically require the Company to handle claims on either a one- or two-year basis, or for the lifetime of the claim. In cases where the claim is handled on a non-lifetime basis, an additional fee is typically received on each anniversary date that the claim remains open. For service arrangements where the Company provides services for the life of the claim, the Company receives only one fee for the life of the claim, regardless of the duration of the claim. Deferred revenues are recognized into revenues based on the estimated rate at which the services are provided. These rates are primarily based on a historical evaluation of actual claim durations by major line of coverage, and assumptions based on average case closure rates and pricing for each claim type.
The Company has contracts with multi-element arrangements. The Company often sells multiple lines of claims processing and different levels of processing depending on the complexity of the claims within a contract. The Company typically provides a menu of offerings from which the customer chooses to purchase or not at their discretion. The price of each service is separate and distinct and provides a separate and distinct value to the customer. Pricing is consistent for each service irrespective of the other service(s) or quantities requested by the customer. For example, if the Company provides claims processing for auto and general liability, those services are priced and delivered independently.
For the years ended December 31, 2016, 2015, and 2014, the Company's adjustments to revenues associated with client invoice adjustments totaled $2,704,000, $2,704,000, and $1,786,000, respectively.
The Company currently has five reporting units for goodwill impairment purposes. These reporting units are the Company's U.S. Services segment excluding U.S. Contractor Connection operations, U.S. Contractor Connection operations on a stand-alone basis, and the Company's other reporting segments - International, Broadspire, and Garden City Group.
For step 1 of goodwill impairment testing, the carrying value of the reporting unit is compared with the estimated fair value of the reporting unit as determined utilizing a combination of the income and market approaches. The income approach, which is a level 3 fair value measurement, is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of the cash flows. The market approach is based on the Guideline Public Company Method, which uses market pricing metrics to select multiples to value the Company's reporting units. The resulting estimated fair values of the combined reporting units are reconciled to the Company's market capitalization including an estimated implied control premium. The Company believes that the combination of these approaches is appropriate because it provides a fair value estimate based upon the combination of the reporting unit's expected long-term operating cash flow performance and multiples with which similar publicly traded companies are valued. The Company weights the income and market approaches equally.
The key assumptions used in estimating the fair value of its reporting units utilizing the income approach include the discount rate and the terminal growth rate. The discount rate utilized in estimating the fair value of the International reporting unit in 2016 was 16.5%, 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.
For impairment testing of indefinite-lived intangible assets, the book value is compared with the estimated fair value, which is estimated based on the present value of the after-tax cash flows attributable solely to the asset. If book value exceeds the estimated fair value, an impairment is recognized based on the excess. The fair values of the 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. The Company determined the discount rate based on its performance compared to similar market participants, factored by risk in forecasting using a modified capital asset pricing model.
Property and equipment, including assets under capital leases, consisted of the following at December 31, 2016 and 2015:
Depreciation on property and equipment, including property under capital leases and amortization of leasehold improvements, was $14,729,000, $17,715,000, and $16,606,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
Advertising costs are expensed in the period in which the costs are incurred. Advertising expenses were $3,382,000, $3,803,000, and $2,981,000, respectively, for the years ended December 31, 2016, 2015, and 2014.
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-15, "Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern." Under ASU 2014-15, management of a company is required to assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective for the Company on December 31, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company adopted this standard for the period ended December 31, 2016 and made the required assessment. As a result of management's assessment, it was determined that there were no indicators of substantial doubt about the Company's ability to continue as a going concern as of December 31, 2016.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This update replaces the incurred loss methodology to record credit losses with a methodology that reflects the expected credit losses for financial assets not accounted for at fair value with gains and losses recognized through income. The ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted beginning with fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the effect this amendment may have on its results of operations, financial condition and cash flows.
The Company is currently evaluating its arrangements with customers and its revenue streams against the requirements of this standard and related updates to determine the expected effect this standard may have on its results of operations, financial condition and cash flows. The Company expects to adopt this new standard as of January 1, 2018 using the modified retrospective method that may result in a cumulative effect adjustment as of the date of adoption.
The Company has reviewed a sample of contracts with its customers that represent approximately 50% of its 2016 consolidated revenues before reimbursements that the Company believes is representative of its significant revenue streams identified to date. The assessment of the impact on revenue and expenses based on these reviews to determine the impact to the Company’s results of operations, financial position and cash flows as a result of this guidance is ongoing. The Company will be reviewing additional contracts with its customers during 2017, including any additional revenue streams identified. The ASU requires increased disclosure which in turn is expected to require certain new processes and system changes. For example, the Company’s initial evaluation indicates process and system changes will be required to capture certain amounts related to unfulfilled performance obligations during and as of each reporting period. The Company's initial assessment of the expected impact of the new standard on the Company's results of operations, financial position and cash flows may change as the Company continues its assessment process.
On December 1, 2014, the Company acquired 100% of the capital stock of GAB Robins, a U.K. based international loss adjusting and claims management provider, for cash consideration of $71,812,000. During 2015, the Company paid an additional $2,182,000 related to net debt and net working capital adjustments under the terms of the acquisition agreement which increased the purchase price to $73,994,000. The purchase was accounted for under the guidance of ASC 805-10, "Business Combinations," as a business combination under the acquisition method. The acquisition was funded primarily through borrowings in the U.K. under the Company's credit facility.
Intangible assets acquired include customer relationships, trademarks, internally developed software and non-compete agreements. The intangibles acquired are made up largely of customer relationships of $38,210,000 being amortized over an estimated life of 14 years, and the remaining assets listed above are being amortized over periods ranging from two to five years. For the year ended December 31, 2016, the Company recognized amortization expense of $3,375,000 in its consolidated financial statements related to these intangibles. Goodwill attributable to the acquisition will not be deductible for tax purposes.
On July 15, 2014, the Company acquired 100% of the capital stock of Buckley Scott Holdings Limited ("Buckley Scott"), a U.K.-based international construction and engineering adjusting firm, for $3,812,000. Net assets purchased totaled $1,532,000, including $488,000 cash acquired. A deferred income tax liability of $473,000 was recognized on the acquired intangible assets. The agreement contains an earnout provision based on Buckley Scott achieving certain financial results during the two-year period following the completion of the acquisition, with a current estimated fair value of $1,407,000.
The Company owns 51% of the capital stock of LWI, a specialist loss consulting company based in London which offers onshore and offshore energy expertise. The Company has the right to purchase the 49% noncontrolling interest of LWI for a period of six months beginning in June 2018 for a price to be determined using a seven times multiple of LWI's average earnings before interest, taxes, depreciation and amortization for the 36 months preceding the date the right is exercised. The Company also has the right of first refusal within 30 days to match any offer to acquire the 49% noncontrolling interest.
The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015:
(1) "Other activity" primarily relates to adjustments for deferred taxes acquired in connection with prior period business combinations.
The Company recognized goodwill impairments in the U.S. Services and International reporting units of $5,465,000 and $43,849,000, respectively during the year ended December 31, 2015.
The following is a summary of finite-lived intangible assets acquired through business acquisitions as of December 31, 2016 and 2015:
Long-term debt consisted of the following at December 31, 2016 and 2015:
The Company, its subsidiaries Crawford & Company Risk Services Investments Limited (the "UK Borrower"), Crawford & Company (Canada) Inc. (the "Canadian Borrower") and Crawford & Company (Australia) Pty. Ltd. (the "Australian Borrower") (the Company, together with such subsidiaries, as borrowers, the "Borrowers"), the Company's guarantor subsidiaries party thereto, Wells Fargo Bank, National Association, as administrative agent and a lender ("Wells Fargo"), and the other lenders party thereto (together with Wells Fargo, the "Lenders"), are party to a Credit Agreement, dated as of December 8, 2011 (as amended, the "Credit Facility"). On November 28, 2014, the Credit Facility was amended to provide the Company the ability to complete the December 1, 2014 acquisition of GAB Robins and to make certain other technical amendments.
On November 5, 2015, Crawford, certain of its subsidiaries, Wells Fargo and the other signatories thereto entered into the Fifth Amendment to the Credit Agreement (the "2015 Amendment"). Pursuant to the 2015 Amendment, among other things, the definition of Consolidated EBITDA was revised to exclude certain restructuring charges, not to exceed $27,000,000 in 2015 and $13,000,000 in 2016, and $38,000,000 in the aggregate. Additionally, the maximum leverage ratio and minimum fixed charge ratio with which the Company must comply were amended as described below. The 2015 Amendment also allowed for the disposition of immaterial foreign subsidiaries with a book value not to exceed $15,000,000 in the aggregate.
The Company's capital leases are primarily comprised of equipment leases with terms ranging from 24 to 60 months.
Principal repayments of long-term debt, including current portions and capital leases, as of December 31, 2016 are expected to be as follows, assuming no prepayments or extensions beyond the stated maturity:
The Company and its subsidiaries lease certain office space, computer equipment, and automobiles under operating leases. For office leases that contain scheduled rent increases or rent concessions, the Company recognizes monthly rent expense based on a calculated average monthly rent amount that considers the rent increases and rent concessions over the life of the lease term. Leasehold improvements of a capital nature that are made to leased office space under operating leases are amortized over the shorter of the term of the lease or the estimated useful life of the improvement. License and maintenance costs related to leased vehicles are paid by the Company and are expensed as incurred.
Effective May 1, 2012, the Company entered into a 10-year operating lease for the lease of approximately 45,000 square feet of office space in Seattle, Washington for its Garden City Group segment. Total lease payments over the remaining lease term are approximately $7,484,000. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
Effective February 9, 2010, the Company entered into a 10-year operating lease for approximately 64,000 square feet of office space in Sunrise, Florida, primarily for its Broadspire segment as a replacement for the subleased space in Plantation, Florida described below. Total lease payments over the remaining lease term are approximately $4,465,000. Additionally, the Company is responsible for certain related real estate taxes and other expenses, which are excluded from the table above.
The provision for income taxes is reconciled to the federal statutory income tax rate of 35% as follows:
The Company's consolidated effective income tax rate may change periodically due to changes in enacted statutory tax rates, changes in tax law or policy, changes in the composition of taxable income from the countries in which it operates, the Company's ability to utilize net operating loss and tax credit carryforwards, and changes in unrecognized tax benefits. The Company's 2015 effective income tax rate was distortive, primarily due to the largely nondeductible non-cash goodwill impairment charge, the Company's inability to recognize tax benefits for certain international net operating losses, and fluctuations in the mix of income earned. Additionally, 2015 losses in certain operations, including losses due to restructuring and special charges, were in jurisdictions with lower tax rates or where the losses are unable to be benefited.
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 would analyze its anticipated investment needs in that region and provide for U.S. taxes for earnings that are not expected to be permanently reinvested. 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, 2016, undistributed earnings approximated $170,000,000. 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.
Deferred income taxes consisted of the following at December 31, 2016 and 2015:
At December 31, 2016, the Company had deferred tax assets related to loss carryforwards of $24,928,000, before netting of unrecognized tax benefits of $739,000 and stock-based compensation attributes of $671,000. An estimated $15,743,000 of the deferred tax assets will not expire, and $9,185,000 will expire over the next 20 years if not utilized by the Company.
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, 2016, 2015, and 2014.
A reconciliation of the beginning and ending balance of unrecognized income tax benefits follows:
The Company accrues interest and, if applicable, penalties related to unrecognized tax benefits in income taxes. Total accrued interest expense at December 31, 2016, 2015, and 2014, was $155,000, $31,000, and $104,000, respectively.
Included in the total unrecognized tax benefits at December 31, 2016, 2015, and 2014 were $3,332,000, $3,899,000, and $2,475,000, respectively, of tax benefits that, if recognized, would affect the effective income tax rate.
The Company conducts business in a number of countries and, as a result, files U.S. federal and various state and foreign jurisdiction income tax returns. In the normal course of business, the Company is subject to examination by various taxing jurisdictions throughout the world, including Canada, the U.K., and the U.S. With few exceptions, the Company is no longer subject to income tax examinations for years before 2004.
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 $23,952,000, $23,652,000, and $24,249,000 in 2016, 2015, and 2014, 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, Crawford plans to contribute $9,000,000 per annum to the U.S. Qualified Plan for the next three fiscal years to improve the funded status of the plan and minimize future required contributions. The Company expects to make contributions of approximately $9,000,000 to its U.S. Qualified Plan and $5,100,000 to its U.K. Plans in 2017.
Certain other employees located in the Netherlands, Norway, Germany, and the Philippines (referred to herein as the "other international plans") have retirement benefits that are accounted for as defined benefit pension plans under GAAP. During 2015, a majority of the employees covered under the defined benefit pension plan in the Netherlands elected to convert to a newly created defined contribution plan effective January 1, 2015. This was accounted for in 2015 as a curtailment of the defined benefit pension plan which resulted in the reduction of the projected benefit obligation in the amount of $5,500,000, a reduction of the deferred tax asset of $1,400,000, and a reduction in accumulated other comprehensive loss of $4,100,000. This change resulted in a reduction in Net Periodic Pension Costs of $673,000 in 2015. This reduction was substantially offset by an increase in defined contribution expense.
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, 2017 for the U.S. and U.K. defined benefit pension plans are $10,798,000 ($6,904,000 net of tax).
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 earnings per share until the performance measurements are actually achieved.
The Company has granted nonqualified and incentive stock options to key employees and directors. All stock options are for shares of CRD-A. Option awards are granted with an exercise price equal to the fair market value of the Company's stock on the date of grant. The Company's stock option plans have been approved by shareholders, and the Company's Board of Directors is authorized to make specific grants of stock options under active plans. Employee stock options typically are subject to graded vesting over three years (33% each year) and have a typical life of ten years. Compensation cost for stock options is recognized on an accelerated basis over the requisite service period for the entire award. For the years ended December 31, 2016, 2015, and 2014, compensation expense of $280,000, $25,000, and $474,000, respectively, was recognized for employee stock option awards.
The weighted average grant date fair value of stock options granted during the year ended December 31, 2016 was $4.11. No stock options were granted in 2015 or 2014. Options exercised in 2016, 2015, and 2014 had an intrinsic value of $752,000, $199,000, and $1,622,000, respectively. The fair value of options that vested in 2016 was $467,000. The fair value of options that vested in 2015 was $0. The fair value of options that vested in 2014 was $846,000.
A summary of the status of the Company's nonvested performance shares as of December 31, 2016, 2015, and 2014, and changes during each year, is presented below:
Compensation expense recognized for all restricted shares for the years ended December 31, 2016, 2015, and 2014 was $1,567,000, $886,000, and $848,000, respectively. As of December 31, 2016, there was $106,000 of total unearned compensation cost related to nonvested restricted shares which is expected to be recognized by December 31, 2017.
Under the U.K. Plan, the Company is authorized to issue up to 2,000,000 shares of CRD-A. Under the U.K. Plan, eligible employees can elect to have up to £250 withheld from payroll each month to purchase shares after the end of a three-year savings period. The purchase price of a share of stock is 85% of the market price of the stock at a date prior to the grant date as determined under the U.K. Plan. Participating employees may cease payroll withholdings and/or request a refund of all amounts withheld before any shares are purchased.
For purposes of calculating the compensation expense for shares issuable under the U.K. Plan, the fair value of a share is equal to 15% (the employee discount) of the market price of a share of CRD-A at the beginning of the withholding period.
Under the International Plan, up to 1,000,000 shares of CRD-A may be issued. Participating employees can elect to have up to $21,250 of their eligible annual earnings withheld to purchase up to 5,000 shares of CRD-A at the end of the one-year withholding period which starts each July 1 and ends the following June 30. The purchase price of the stock is 85% of the lesser of the closing price for a share of such stock on the first day or the last day of the withholding period. Participating employees may cease payroll withholdings during the withholding period and/or request a refund of all amounts withheld before any shares are purchased. During 2016, 2015, and 2014, 6,660, 6,916, and 11,900 shares, respectively, were issued under the International Plan. Compensation expense was immaterial for this plan in all three years.
At December 31, 2015, the Company had a cross currency basis swap. The fair value of the Company's cross currency basis swap was derived from a discounted cash flow analysis based on the terms of the swap and the forward curves for foreign currency rates and interest rates adjusted for the counterparty's credit risk. The fair value of this cross currency basis swap was included in "Other noncurrent assets" on the Company's Consolidated Balance Sheets, based upon the term of the cross currency basis swap. This swap was settled in 2016.
The fair value of the contingent earnout liability for the Buckley Scott acquisition was estimated using an internally-prepared probability-weighted discounted cash flow analysis. The fair value analysis relied upon both Level 2 data (publicly observable data such as market interest rates and capital structures of peer companies) and Level 3 data (internal data such as the Company's operating projections). As such, these are Level 3 fair value measurements. The valuation is sensitive to Level 3 data, but is currently payable. As such, the fair value is not expected to vary materially from the balance recorded. The difference in the liability during the year is primarily due to the change in foreign exchange rates. The fair value of the contingent earnout liability is included in "Other accrued liabilities" on the Company's Consolidated Balance Sheets, based upon the term of the contingent earnout agreement.
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, 2016 and 2015:
Equity securities consist primarily of common and preferred stocks of publicly traded U.S. companies and international companies and common collective funds. Publicly traded equities are valued at the closing prices reported in the principal market in which the individual securities are traded. Preferred securities are stated at quoted market prices for the identical security in an inactive market (Level 2). Common collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date.
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 them 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 before certain unallocated corporate and shared costs and credits, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, goodwill impairment charges, restructuring and special charges, income taxes, and net income or loss attributable to noncontrolling interests.
Capital expenditures for the years ended December 31, 2016, 2015, and 2014 are shown in the following table:
The total of the Company's reportable segments' revenues before reimbursements reconciled to total consolidated revenues for the years ended December 31, 2016, 2015, and 2014 was as follows:
The Company's reportable segments' total assets reconciled to consolidated total assets of the Company at December 31, 2016 and 2015 are presented in the following table. All foreign-denominated cash and cash equivalents are reported within the International segment, while all U.S. cash and cash equivalents are reported as corporate assets in the following table:
The Company maintains funds in custodial accounts at financial institutions to administer claims for certain clients. These funds are not available for the Company's general operating activities and, as such, have not been recorded in the accompanying Consolidated Balance Sheets. The amount of these funds totaled $447,239,000 and $662,797,000 at December 31, 2016 and 2015, respectively. In addition, the Garden City Group segment administers funds in noncustodial accounts at financial institutions that totaled $1,020,443,000 and $457,344,000 at December 31, 2016 and 2015, respectively.
As part of the Company's Credit Facility, the Company maintains a letter of credit facility to satisfy certain of its own contractual requirements. At December 31, 2016, the aggregate committed amount of letters of credit outstanding under the facility was $14,809,000.
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. The 2014 acquisition of Buckley Scott included an earnout provision based on achieving certain financial results during the two-year period following the completion of the acquisition, with a current estimated fair value of $1,407,000 which is currently payable. For additional information on these obligations and rights, see Note 2, "Acquisitions and Dispositions of Businesses."
Total restructuring and special charges were $9,490,000 and $34,395,000 during the years ended December 31, 2016 and 2015. There were no restructuring or special charges during the year ended December 31, 2014.
As of December 31, 2016, the following liabilities remained on the Company's Consolidated Balance Sheets related to restructuring charges recorded in 2012, 2015 and 2016. The rollforwards of these costs to December 31, 2016 were as follows:
On January 4, 2017, the Company acquired 85% of the outstanding membership interests of WeGoLook®, LLC, an Oklahoma limited liability company, for the purchase price of $36,125,000 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.
Based on our preliminary acquisition accounting, net assets acquired totaled $1,643,000, including $100,000 of cash. The difference between the purchase price and the net assets acquired represents indefinite and definite-lived intangible assets, goodwill and non-controlling interests. The acquisition was funded primarily through additional borrowings under the Credit Facility.
The purchase agreement also provides that: (a) $250,000 of the purchase price will be held in escrow to secure the net working capital post-closing adjustment; (b) $800,000 of the purchase price will be held in escrow for a period of 15 months after the closing date to secure any valid indemnification claims that the Company may assert for specified breaches of representations, warranties or covenants under the purchase agreement; and (c) $1,000,000 of the purchase price will be held in escrow for a period of 24 months after the closing date to secure any valid indemnification claims that the Company may assert for specified breaches of representations, warranties or covenants under the agreement.
The acquisition was accounted for under the guidance of ASC 805-10, as a business combination under the acquisition method. The preliminary application of acquisition accounting to the assets acquired, and liabilities and noncontrolling interests assumed, as well as the results of operations of WeGoLook including noncontrolling interests, will first be reflected in the Company's unaudited condensed consolidated financial statements as of and for the period ending March 31, 2017 and will be reported in the Company’s U.S. Services segment.
Based upon the timing of the acquisition, the allocation of the purchase price is preliminary and subject to change, as the Company gathers additional information related to the assets acquired and liabilities and noncontrolling interests assumed, including intangible assets, other assets, accrued liabilities, deferred taxes, and uncertain tax positions. The Company is in the process of obtaining final third-party valuations of certain intangible assets; thus, the provisional measurements of intangible assets, goodwill, and deferred income taxes are subject to change.
We have audited the accompanying consolidated balance sheets of Crawford & Company as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and shareholders' investment for each of the three years in the period ended December 31, 2016. 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.
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, 2016, 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 27, 2017 expressed an unqualified opinion thereon.
This is a segment financial measure representing segment earnings before certain unallocated corporate and shared costs and credits, goodwill impairment charges, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, restructuring and special charges, income taxes, and net income or loss attributable to noncontrolling interests. See Note 13, "Segment and Geographic Information," in the audited consolidated financial statements contained in this Item 8.