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 taxes, and net income attributable to noncontrolling interests.
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.
Insurance companies, which represent the major source of our global revenues, customarily manage their own claims administration function but often rely on third parties for certain services which we provide, primarily field investigation and the evaluation of property and casualty insurance claims. We are also experiencing increased utilization by insurance companies of the managed repair network provided by our Contractor Connection division.
Net income attributable to Crawford & Company was $30.6 million in 2014, compared with net income of $51.0 million in 2013 and $48.9 million in 2012.
As expected, both EMEA A/P and Legal Settlement Administration's operating earnings declined in 2014 compared to 2013, reflecting the expected decline in revenues from certain special projects. EMEA A/P's handling of cases resulting from the 2011 Thailand flooding was substantially completed during 2013, while Legal Settlement Administration had lower revenues in 2014 from the Deepwater Horizon class action settlement project and another non-Gulf related special project, compared with 2013. Operating earnings were higher in both 2013 and 2012, compared with 2014, in both segments due to these special projects.
Compared with 2013, our consolidated revenues before reimbursements were 1.8% lower in 2014 due primarily to lower revenues from the special projects in EMEA/AP and Legal Settlement Administration, partially offset by improvements in our U.S. Contractor Connection managed repair network, the Canadian operations in our Americas segment, and in our Broadspire segment. The special projects in Legal Settlement Administration continued to wind down and we expect these revenues, and related operating earnings, to be at a reduced rate in all future periods as compared to 2014.
Selling, general and administrative ("SG&A") expenses were 2.4% higher in 2014 than in 2013 and 1.7% higher in 2013 than in 2012. The increase in 2014 was due to an increase in acquisition-related costs, professional fees and self-insurance expense, partially offset by a decrease in short-term and long-term incentive compensation costs. The increase in 2013 was due to an increase in professional fees.
We believe that a discussion and analysis of the segment operating earnings of our four operating segments is helpful in understanding the results of our operations. Operating earnings is our segment measure of profitability as discussed in Note 13, “Segment and Geographic Information," to the accompanying audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Operating earnings is the primary financial performance measure used by our senior management and CODM to evaluate the financial performance of our operating segments and make resource allocation decisions.
We believe operating earnings is a measure that is useful to others in that it allows them to evaluate segment operating performance using the same criteria used by our senior management and CODM. Segment operating earnings represent segment earnings, including the direct and indirect costs of certain administrative functions required to operate our business but excludes unallocated corporate and shared costs and credits, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, income taxes, and net income or loss attributable to noncontrolling interests.
Additional discussion and analysis of our income taxes, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, unallocated corporate and shared costs and credits, and special charges and credits follows the discussion and analysis of the results of operations of our four operating segments.
In the normal course of business, our operating segments incur certain out-of-pocket expenses that are thereafter reimbursed by our clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are required to be included when reporting expenses and revenues, respectively, in our consolidated results of operations. In the discussion and analysis of results of operations which follows, we do not include a gross up of expenses and revenues for these pass-through reimbursed expenses. The amounts of reimbursed expenses and related revenues offset each other in our results of operations with no impact to our net income or operating earnings. A reconciliation of revenues before reimbursements to consolidated revenues determined in accordance with GAAP is self-evident from the face of the accompanying statements of income. Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses.
The allocated indirect costs of our shared-services infrastructure are included in “Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor." In addition to allocated corporate and shared costs, “Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor" includes travel and entertainment, office rent and occupancy costs, automobile expenses, office operating expenses, data processing costs, cost of risk, professional fees, and amortization and depreciation expense other than amortization of customer-relationship intangible assets.
Reimbursements for out-of-pocket expenses incurred in our Americas segment which are included in total Company revenues were $17.5 million in 2014, decreasing from $19.8 million in 2013. The decrease in 2014 was due primarily to an outsourcing project in U.S. Claims Services in 2014, which does not have reimbursed expenses, and also to higher expenses incurred in 2013 related to handling superstorm Sandy cases.
The 2014 increase in cases in Latin America and the Caribbean were primarily due to increases in high-frequency, low-complexity automotive and property cases from both new and existing clients in Brazil.
The most significant expense in our Americas segment is the compensation of employees, including related payroll taxes and fringe benefits, and the payments to outsourced service providers that augment our staff. Americas direct compensation, fringe benefits, and non-employee labor expense, as a percent of segment revenues before reimbursements, was 65.8% for 2014 and 67.4% for 2013. The decrease was due to improved staff utilization.
EMEA/AP operating earnings decreased to $19.7 million in 2014, a decrease of 38.7% from 2013 operating earnings of $32.2 million. The operating margin decreased from 9.2% in 2013 to 5.7% in 2014. The decline in operating earnings was principally due to increased expenses in 2014 related to the continued investment in the start-up operations of our Specialty Markets service line that commenced in the third quarter of 2013. The decline in EMEA/AP operating earnings was also due to the inclusion in 2013 of revenues and operating earnings from the claims handling activity originating from the 2011 Thailand floods, flooding and bush fires in Australia, and a $900,000 performance bonus from a client in CEMEA.
The results for GAB Robins are not included in the EMEA/AP results for the year ended December 31, 2014, as the acquisition occurred after the October 31, 2014 fiscal year end of our U.K. subsidiaries.
Revenues before reimbursements from our EMEA/AP segment totaled $344.4 million in 2014, a 1.7% decrease from $350.2 million in 2013. Compared with 2013, the U.S. dollar was slightly weaker in 2014 against most major EMEA/AP currencies, resulting in a positive impact from exchange rate movements of $1.0 million, or 0.3%, of segment revenues from 2013 to 2014.
U.K. revenues increased due to increases in winter weather-related cases, increased revenues from the Specialty Markets service lines, and foreign exchange gains. The decrease in revenues in CEMEA for 2014 compared with 2013 was primarily due to the disposal of our South African subsidiary and the inclusion in 2013 of a $900,000 performance bonus from a client, partially offset by increased business in Scandinavia in 2014.
EMEA/AP unit volume, measured by cases received, increased 8.1% in 2014 compared with 2013, and increased 9.0% when cases from our South African subsidiary are removed from 2013 for comparison purposes. Revenues decreased by 10.5% from changes in the mix of services provided and in the rates charged for those services, primarily due to the decline in Thailand revenues and the additional high-frequency, low-complexity case volumes in CEMEA, net of an increase in the average fee per case in the U.K. from reduced high-frequency, low-complexity cases received in the period. The disposal of our South African subsidiary reduced revenue by 2.2%, while revenues resulting from the 2013 acquisition of Lloyd Warwick International Limited and the 2014 acquisition of Buckley Scott Holdings Limited increased revenues by 1.7%.
Reimbursements for out-of-pocket expenses incurred in our EMEA/AP segment which are included in total Company revenues decreased to $23.0 million in 2014 from $33.4 million in 2013. Reimbursements for out-of-pocket expenses were higher in 2013 because of increased expenses associated with handling the Thailand flood cases.
EMEA/AP unit volumes by region for 2014 and 2013 were as follows:
The decrease in cases received in the U.K. was primarily due to a continued decline in the general property market as well as a general decline in high-frequency, low-complexity cases. The increase in CEMEA cases, especially in Sweden, Norway and Spain, was primarily due to expanding insurer contracts. Asia-Pacific overall case volumes increased due to increases in high-frequency, low-complexity motor and property cases in China and Malaysia.
Direct compensation expenses, fringe benefits, and non-employee labor, as a percent of segment revenues before reimbursements, increased to 69.0% in 2014 from 67.0% in 2013. The percentage increase primarily reflected changes in the mix of services provided and lower utilization of our staff after the completion of claims servicing related to the 2011 Thailand floods. The dollar amount of these expenses increased in 2014 by $2.9 million due to continued investment in the start-up operations of our Specialty Markets service line. There was an average of 2,938 EMEA/AP FTEs in 2014, a slight decrease from 3,045 FTEs in 2013 due to a decline in FTEs in the U.K., partially offset by an increase in FTEs in CEMEA and Asia-Pacific.
Broadspire recorded operating earnings of $15.5 million in 2014, or 5.8% of revenues, compared with operating earnings of $8.2 million in 2013, or 3.3% of revenues. Operating earnings improved from 2013 to 2014 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.
The most significant expense in our Broadspire segment is the compensation of employees, including related payroll taxes and fringe benefits, and the payments to outsourced service providers that augment the functions performed by our employees. Broadspire direct compensation, fringe benefits, and non-employee labor expense, as a percent of the related revenues before reimbursements, decreased to 55.5% in 2014, compared with 56.7% in 2013. The decline was due to improved employee utilization. Average FTEs totaled 1,693 in 2014, up from 1,595 FTEs in 2013. The increase in employees was due to the increased case volumes.
At December 31, 2014, we had an estimated revenue backlog related to projects awarded totaling $102.0 million, compared with $108.2 million at December 31, 2013. Of the $102.0 million backlog at December 31, 2014, approximately $88.0 million is expected to be included in revenues within the next 12 months.
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 cases resulting from flood losses. Operating earnings for 2013 were also positively impacted by additional claims handling resulting from superstorm Sandy, continued growth in our U.S. 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.
The revenue increase in Canada was primarily due to an increase in cases received from both new and existing clients as a result of the aforementioned flood losses in Ontario, Canada, and other weather related events in British Columbia. The increase in cases received is not directly proportionate to the increase in revenues due to an increase in high-frequency, low-complexity cases, compared to 2012.
Revenues in Latin America and the Caribbean increased approximately 38.0% in local currency. The increase in 2013 was primarily due to an increase in case volume associated with the automotive and marine business lines in Brazil, from both new and existing clients.
Americas unit volumes by underlying case category, as measured by cases received, for 2013 and 2012 were as follows:
Americas expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor increased from $90.7 million in 2012 to $93.1 million in 2013, staying relatively consistent as a percentage of revenues, at 27.2% in 2013 compared with 27.1% in 2012. 2013 also included a $2.3 million gain from the sale of the rights to a customer contract in Latin America.
EMEA/AP operating earnings decreased to $32.2 million in 2013, a decrease of 33.7% from 2012 operating earnings of $48.5 million. The operating margin decreased from 13.2% in 2012 to 9.2% in 2013. The 2013 revenue decrease shown below was due to a $30.2 million reduction in revenues associated with the 2011 Thailand floods and a decline in U.K. revenues, which were partially offset by increased claims volume and new sales in the core property and casualty markets in CEMEA and Asia-Pacific.
EMEA/AP unit volume, measured by cases received, increased 2.7% in 2013 compared with 2012. Average revenue per case 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 case volumes in CEMEA.
Reimbursements for out-of-pocket expenses incurred in our EMEA/AP segment which are included in total Company revenues decreased to $33.4 million in 2013 from $40.2 million in 2012. Reimbursements for out-of-pocket expenses were higher in 2012 because of the increased expenses associated with handling the Thailand flood cases.
Broadspire revenues before reimbursements by major service line were as follows:
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 16.7% 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. 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 7.7% 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 cases 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 cases 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.
Broadspire direct compensation, fringe benefits, and non-employee labor, as a percent of the related revenues before reimbursements, decreased to 56.7% in 2013, compared with 58.2% in 2012. This decrease was due to both higher revenues and cost control measures, as there was a decrease in the number of employees. Average FTEs totaled 1,595 in 2013, down from 1,659 in 2012.
As expected, Legal Settlement Administration revenues in 2013 declined compared with 2012 levels primarily because of lower revenues from the Deepwater Horizon class action settlement project. Declines in Deepwater Horizon revenues were partially offset by a number of other meaningful class action and bankruptcy projects.
Legal Settlement Administration revenues before reimbursements decreased 7.5% to $218.8 million in 2013, compared with $236.6 million in 2012. The decrease in Legal Settlement Administration revenues was due primarily to reduced activity within the special project discussed above.
Legal Settlement Administration direct compensation expense, fringe benefits, and non-employee labor, as a percent of segment revenues before reimbursements, increased to 65.3% in 2013, compared with 64.0% in 2012. There was an average of 690 FTEs in 2013, compared with an average of 602 in 2012. The increase in full-time equivalent employees resulted from the hiring of some previously temporary employees where it was cost effective to do so.
Legal Settlement Administration expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor increased as a percent of related segment revenues before reimbursements to 13.2% in 2013 from 10.5% in 2012. 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.
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 $6.8 million, $7.2 million, and $9.6 million for 2014, 2013, and 2012, respectively. The decrease in interest expense over the three year period was due primarily to the reduction in interest rates. Corporate interest income was relatively consistent in each year, totaling $0.8 million, $0.8 million, and $1.0 million in 2014, 2013, and 2012, 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.
Unallocated corporate and shared costs and credits were $8.6 million, $10.8 million, and $10.5 million in 2014, 2013, and 2012, respectively. These costs decreased in 2014 compared with 2013 due primarily to decreases in unallocated professional fees, U.S. defined benefit plan expense, and incentive compensation, partially offset by increases in acquisition-related costs and self insured expenses. The increase in 2013 compared with 2012 was due primarily to an increase in unallocated professional fees and various other expenses, partially offset by a decrease in our U.S. defined benefit plan expense.
We fund our working capital requirements, capital expenditures and acquisitions from net cash provided by operating activities and borrowings under bank credit facilities. We may use interest rate swap instruments from time to time to manage our exposure to changes in interest rates on portions of our outstanding debt. At the inception of the swaps we usually designate such swaps as cash flow hedges of the interest rate exposure on an equivalent amount of our floating rate debt. During 2012, our interest rate swap agreement expired and as a result amounts deferred in accumulated other comprehensive income, which were not significant, were reclassified into earnings.
We are not aware of any additional restrictions placed on us, or being considered to be placed on us, related to our ability to access capital, such as borrowings under the Credit Facility. We do not rely on repurchase agreements or the commercial paper market to meet our short-term or long-term funding needs. For additional information on the key covenants contained in our Credit Facility, see "Other Matters Concerning Liquidity and Capital Resources" below. At December 31, 2014, we were in compliance with all of the covenants in our Credit Facility.
Cash and cash equivalents as of December 31, 2014 consisted of $7.4 million held in the U.S. and $45.1 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 current expectation is that such earnings will be reinvested by the subsidiaries or will be repatriated only when it would be tax effective or otherwise strategically beneficial to the Company such as if a very unusual event or project generated profits significantly in excess of ongoing business reinvestment needs. If such an event occurs, we would analyze our anticipated investment needs in that region and provide for U.S. taxes for earnings that are not expected to be permanently reinvested. Such events occurred in 2013 and 2012, and we 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 decreased by $71.2 million in 2014, from $77.8 million in 2013 to $6.6 million in 2014. This decrease was largely due to lower net income, increased accounts receivable, and an increase in other working capital components in 2014 compared with 2013. Interest payments on our debt were $5.9 million in 2014, and tax payments, net of refunds, were $13.0 million in 2014.
Cash provided by operating activities decreased by $15.0 million in 2013, from $92.9 million in 2012 to $77.8 million in 2013. This decrease was largely due to higher cash payments for accounts payable, accrued liabilities, defined benefit pension plan contributions, and accrued compensation in 2013 compared with 2012. Interest payments on our debt were $6.4 million in 2013, and tax payments, net of refunds, were $21.0 million in 2013.
Cash used in investing activities decreased by $1.8 million in 2014, from $33.5 million in 2013 to $31.8 million in 2014. Cash used to acquire property and equipment and capitalized software, including capitalization of costs for internally developed software, was $29.2 million in 2014 compared with $31.0 million in 2013. We forecast that our property and equipment additions in 2015, including capitalized software, will approximate $40 million.
Cash used in investing activities decreased by $0.3 million in 2013, from $33.8 million in 2012 to $33.5 million in 2013. Cash used to acquire property and equipment and capitalized software, including capitalization of costs for internally developed software, was $31.0 million in 2013 compared with $33.2 million in 2012.
Cash provided by financing activities was $4.5 million in 2014. We paid quarterly cash dividends totaling $11.7 million and repurchased $3.4 million of our common stock. In 2014, we borrowed $121.1 million in short-term borrowings during the year for working capital needs, and we repaid a total of $98.8 million in short-term borrowings and $0.9 million in long-term debt and capital lease obligations. Also in 2014, we received shares of our Class A common stock that were surrendered by employees to settle $2.1 million of withholding taxes owed on the issuance of restricted and performance shares.
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 $104.3 million and $52.2 million in 2014 and 2013, respectively. Our average month-end short-term debt obligations were $59.9 million and $31.6 million in 2014 and 2013, respectively. The outstanding balance of our short-term borrowings, excluding outstanding but undrawn letters of credit under our Credit Facility, was $2.0 million and $35.0 million at December 31, 2014 and 2013, respectively. The balance in short-term borrowings at December 31, 2014 represents amounts under our revolving Credit Facility that we expect, but are not required, to repay in the next twelve months. We have historically used the proceeds from our long-term borrowings to finance, among other things, business acquisitions.
Approximately $25.0 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, 2014, 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, 2014, we had approximately $5.9 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.
Compared with earlier years, 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 plan. In addition to HAFTA legislation discussed above, 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. 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. The 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.
At December 31, 2014, 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.
Significant changes on our consolidated balance sheet as of December 31, 2014, compared with our consolidated balance sheet as of December 31, 2013, were as follows:
Noncurrent deferred income tax assets increased by $5.6 million primarily due to the tax impact of the adjustments to retirement liabilities recorded in accumulated other comprehensive loss.
As of December 31, 2014, deferred revenues related to lifetime claim handling arrangements approximated $44.7 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 4.1%, and has averaged a decrease of 1.0%. 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, 2014, $1.4 million for the year ended December 31, 2013, and $1.6 million for the year ended December 31, 2012. If our average claim closing rates for lifetime claims increased by 1.0%, we could recognize additional revenues of approximately $1.3 million for the year ended December 31, 2014, $1.4 million for the year ended December 31, 2013, and $1.5 million for the year ended December 31, 2012.
We regularly evaluate whether events and circumstances have occurred which indicate that the carrying amounts of goodwill, indefinite-lived intangible assets, or other long-lived assets have been impaired. Our indefinite-lived intangible assets consist of trade names associated with acquired businesses. Our other long-lived assets consist primarily of property and equipment, deferred income tax assets, capitalized software, and amortizable intangible assets related to customer relationships, technology, and trade names with finite lives. When factors indicate that such assets should be evaluated for possible impairment, we perform an impairment test. We believe our goodwill, indefinite-lived intangible assets, and other long-lived assets were appropriately valued and not impaired at December 31, 2014.
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 2015 net periodic pension cost were estimated to be 6.50% and 7.12% for the U.S. and U.K. plans, respectively.
Cumulative unrecognized actuarial losses for all plans were $334.7 million through December 31, 2014, compared with $278.0 million through December 31, 2013. These unrecognized losses reflect changes in the discount rates, differences between expected and actual asset returns, and changes to mortality expectations for plan participants, 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 2015 includes $12.9 million of amortization of these actuarial losses versus $11.8 million in 2014, $13.3 million in 2013 and $9.8 million in 2012.
Our effective tax rate, defined as our provision for income taxes divided by income before income taxes, for financial reporting purposes in 2014, 2013, and 2012 was 48.1%, 36.7%, and 40.4%, 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 $591,000, $811,000, and $834,000 for the years ended December 31, 2014, 2013, and 2012, respectively. Our effective tax rate for financial reporting purposes is expected to range between 38% and 40% in 2015 before considering any discrete items.
Our most significant deferred tax assets are related to the unfunded liability of our defined benefit pension plans, tax credit carryforwards and net operating loss (“NOL”) carryforwards. The tax deduction for defined benefit pension plans generally occurs upon funding of plan liabilities. Assuming that the estimated minimum funding requirements for the defined benefit pension plans and the income projections are met, the deferred tax asset should be realized.
The net operating loss carryforwards primarily consists of $11.0 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 level without generating federal taxable income, such that utilization of the state NOL carryforwards is more likely than not to occur prior to their expiration.
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 $15.2 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.
Shares of the Company's two classes of common stock are traded on the New York Stock Exchange 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. The Company's website is www.crawfordandcompany.com. The information contained on, or hyperlinked from, the Company's website is not a part of, and is not incorporated by reference into, this report.
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, 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, 2014, 2013, and 2012 consolidated financial statements include the financial position of such operations as of October 31, 2014 and 2013, respectively, and the results of their operations and cash flows for the fiscal periods ended October 31, 2014, 2013, and 2012, respectively.
The Company has controlling ownership interests in several entities that are not wholly-owned by the Company. The financial results and financial positions of these controlled entities are included in the Company’s consolidated financial statements, including both the controlling interests and the noncontrolling interests. The noncontrolling interests represent the equity interests in these entities that are not attributable, either directly or indirectly, to the Company. Noncontrolling interests are reported as a separate component of the Company’s Shareholders’ Investment. On the Company’s Consolidated Statements of Income, net income is attributed to the controlling interests and the noncontrolling interests separately.
In March 2013, the Company acquired 51% of the capital stock of Lloyd Warwick International Limited ("LWI"). 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 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. Total assets and liabilities of LWI as of December 31, 2014 were $6,045,000 and $8,346,000, respectively. Included in LWI's total liabilities at December 31, 2014 is a loan from Crawford of $7,378,000. For additional information on the acquisition of LWI, see Note 2, "Acquisitions and Dispositions of Businesses."
The Company consolidates the liabilities of its deferred compensation plan and the related assets, which are held in a rabbi trust and 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, 2014 and 2013, the liabilities of this deferred compensation plan were $11,051,000 and $10,322,000, respectively, which represented obligations of the Company rather than of the rabbi trust, and the values of the assets held in the related rabbi trust were $15,519,000 and $15,140,000, respectively. These liabilities and assets are included in "Other noncurrent liabilities" and "Other noncurrent assets" on the Company’s Consolidated Balance Sheets, respectively.
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. The fair value of cash and cash equivalents approximates book value due to their short-term nature. At December 31, 2014, cash and cash equivalents included time deposits of approximately $2,293,000 that were in financial institutions outside the U.S.
The Company maintains an allowance for doubtful accounts for estimated losses resulting primarily from the inability of clients to make required payments and for adjustments to invoiced amounts. Losses resulting from the inability of clients to make required payments are accounted for as bad debt expense, while adjustments to invoices are accounted for as reductions to revenue. These allowances are established using historical write-off information to project future experience and by considering the current creditworthiness of clients, any known specific collection problems, and an assessment of current industry and economic conditions. Actual experience may differ significantly from historical or expected loss results. The Company writes off accounts receivable when they become uncollectible, and any payments subsequently received are accounted for as recoveries. A summary of the activities in the allowance for doubtful accounts for the years ended December 31, 2014, 2013, and 2012 is as follows:
Subsequent to a business acquisition in which goodwill and indefinite-lived intangibles are recorded as assets, post-acquisition accounting requires that both be tested to determine whether there has been an impairment. The Company performs an impairment test of goodwill, indefinite-lived intangible assets, and other long-lived assets at least annually on October 1 of each year. The Company regularly evaluates whether events and circumstances have occurred which indicate potential impairment of goodwill, indefinite-lived intangible assets, or other long-lived assets. When factors indicate that such assets should be evaluated for possible impairment between the scheduled annual impairment tests, the Company performs an impairment test. The Company believes its goodwill, indefinite-lived intangible assets, and other long-lived assets were appropriately valued and not impaired at December 31, 2014.
For step 1 of goodwill impairment testing, the book value of each of the Company’s reporting units is compared with the estimated fair value of the reporting unit as determined utilizing an income approach. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of the cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The discount rates used reflect the Company’s assessment of a market participant’s view of the risks associated with the projected cash flows. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions or any other assumptions, the Company believes that the income approach provides a reasonable estimate of the fair value of its reporting units.
Property and equipment, including assets under capital leases, consisted of the following at December 31, 2014 and 2013:
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 $13,954,000, $11,330,000, and $10,226,000 for the years ended December 31, 2014, 2013, and 2012, respectively.
Other factors which influence the effective tax rate used for financial reporting purposes include changes in enacted statutory tax rates, changes in the composition of taxable income from the jurisdictions in which the Company operates, the ability of the Company to utilize net operating loss and tax credit carryforwards, and the Company’s accounting for any uncertain tax positions. See Note 7, “Income Taxes.”
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, but are recorded on the balance sheet as pass-through amounts until remitted.
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 (loss) income in the Company’s Consolidated Statements of Comprehensive (Loss) Income, and the accumulated translation adjustment is reported as a component of "Accumulated other comprehensive loss" in the Company’s Consolidated Balance Sheets.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." Under ASU 2014-09, companies will be required to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and modify guidance for multiple-element arrangements. The revenue standard has been introduced into the FASB’s Accounting Standards Codification as Topic 606 and replaced the previous guidance on revenue recognition in Topic 605. ASU 2014-09 will be effective for the Company on January 1, 2017, with transition to the new standard following either a full retrospective approach or a modified retrospective approach (i.e., an approach that would allow the standard to be applied by recording a cumulative effect of the standard in the current period, with no restatement of the comparative periods, but with additional disclosures required). Early adoption is not permitted. The Company is currently evaluating the effect this standard may have on its results of operations, financial condition and cash flows.
In March 2013, the Company acquired 51% of the capital stock of LWI, 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 the Company's focus on offering market leading expertise in specialist and technical services. Crawford has begun 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.
The Company sold its 74.9% ownership interest in Crawford South Africa in February 2014 to the noncontrolling interest holder at net book value. Net assets sold were $2,542,000, including cash of $1,554,000. The purchase price was financed with a loan receivable due in two years. The Company had previously recognized a loss on the disposal of this entity of $474,000 in the fourth quarter of 2013. The results of Crawford South Africa were not material to the Company. The Company has an obligation to refer any work it receives within South Africa to the buyer and is entitled to a royalty equal to 2% of the buyer's future revenues in exchange for the continued use of the Crawford name, until either party gives 12 months notice to terminate the ongoing relationship. The buyer is not a related party of the Company, and the future royalties are not expected to be material to the Company.
Amortization of finite-lived intangible assets was $7,084,000, $7,127,000, and $7,141,000 for the years ended December 31, 2014, 2013, and 2012, respectively. For the years ended December 31, 2014, 2013, and 2012, amortization expense for finite-lived customer relationships and trade name intangible assets in the amounts of $6,341,000, $6,385,000, and $6,373,000, respectively, were excluded from segment operating earnings (see Note 13, “Segment and Geographic Information”). The amortization expense for the technology-based intangible assets is included in segment operating earnings. Intangible assets subject to amortization are amortized on a straight-line basis over lives ranging from 3 to 15 years.
At December 31, 2014 and 2013, a total of $155,002,000 and $135,000,000, respectively, was outstanding under the Credit Facility. In addition, undrawn commitments under letters of credit totaling $17,511,000 and $17,837,000 were outstanding at December 31, 2014 and 2013, respectively, under the letters of credit subfacility of the Credit Facility. These letter of credit commitments were for the Company’s own obligations. Including the amounts committed under the letters of credit subfacility, the available borrowing capacity under the Credit Facility totaled $149,134,000 and $247,163,000 at December 31, 2014 and 2013, respectively. The 2014 available balance takes into consideration the $78,355,000 in debt incurred by the UK borrower discussed in Note 17, "Subsequent Events," which is not on the Company's balance sheet at December 31, 2014.
Amounts in the table above exclude the impact of the additional $78,355,000 in U.K. debt discussed in Note 17, "Subsequent Events," which is not on the Company's Consolidated Balance Sheet at December 31, 2014. Such amounts will be due upon maturity of the Credit Facility in 2018.
At December 31, 2014, future minimum payments under non-cancelable operating leases with terms of more than 12 months were as follows:
In January 2013, the Company entered into a 10-year operating lease for approximately 24,000 square feet of office space in Berkeley Heights, NJ, primarily for its Broadspire segment. The lease began July 1, 2013. Total lease payments over the 10-year term are approximately $6,042,000. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
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 Legal Settlement Administration segment. Included in the future minimum lease payments noted above are total lease payments of $9,780,000 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.
Net cash payments for income taxes were $13,017,000, $21,030,000, and $14,378,000 in 2014, 2013, and 2012, respectively.
The tax rate change in 2014 was primarily due to state tax rate changes. The fiscal year 2013 tax rate change was primarily due to the U.K. Finance Bill 2013 that was enacted in 2013. This bill included a change in the main U.K. corporation tax rate from 23% to 21% effective April 1, 2014 and to 20% effective April 1, 2015. This tax rate change resulted in a discrete tax expense of approximately $1,300,000 in 2013 as the value of the U.K. deferred tax assets declined with the decrease in the tax rate.
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, 2014, 2013, and 2012.
Changes to the valuation allowance for the years ended December 31, 2014, 2013, and 2012 were primarily due to losses in certain of our international operations as well as state tax credits.
Included in the total unrecognized tax benefits at December 31, 2014, 2013, and 2012 were $2,475,000, $2,693,000, and $1,401,000, respectively, of tax benefits that, if recognized, would affect the effective income tax rate.
Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, including interest and penalties, have been provided for any adjustments that are expected to result from those years.
The Company expects no significant reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties.
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 U.S. GAAP.
External trusts are maintained to hold assets of the Company’s U.S. Qualified Plan, U.K. Plans, and other international plans. The Company’s funding policy is to make cash contributions in amounts at least sufficient to meet regulatory funding requirements and, in certain instances, to make contributions in excess thereof if such contributions would otherwise be in accordance with the Company's capital allocation plans. Assets of the plans are measured at fair value at the end of each reporting period, but the plan assets are not recorded on the Company’s Consolidated Balance Sheets. Instead, the funded or unfunded status of the Company’s U.S. Qualified Plan, U.K. Plans, and other international plans are recorded in "Accrued pension liabilities" on the Company’s Consolidated Balance Sheets based on the projected benefit obligations less the fair values of the plans’ assets.
A fixed number of U.S. employees, retirees, and eligible dependents are covered under a frozen post-retirement medical benefits plan. The liabilities for this plan are included in the Company's self-insured risks liabilities, and contributions from employees generally equal payments for their medical costs. This plan was frozen effective December 31, 2002.
The underfunded status of the Company’s defined benefit pension plans and post-retirement medical benefits plan recognized in the Consolidated Balance Sheets at December 31 consisted of:
Pension expense is affected by the accounting policy used to determine the value of plan assets at the measurement date. The Company applies the expected return on plan assets using fair market value as of the annual measurement date. The fair market value method results in greater volatility to pension expense than the calculated value method. The amounts recognized in the Consolidated Balance Sheets reflect a snapshot of the state of the Company's long-term pension liabilities at the plan measurement date and the effect of mark-to-market accounting on plan assets. Net periodic benefit cost related to all of the Company’s defined benefit pension plans recognized in the Company’s Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012 included the following components:
The Company reviews its employee demographic assumptions annually and updates the assumptions as necessary. During 2014, the Company revised the mortality assumptions for the U.S. plans to incorporate the new set of mortality tables issued by the Society of Actuaries, adjusted to reflect the Company's specific experience and future expectations. This resulted in an increase in the projected benefit obligation of approximately $35,400,000 for the U.S. plans. Certain assumptions used in computing the benefit obligations and net periodic benefit cost for the U.S. and U.K. defined benefit pension plans were as follows:
The discount rate assumptions reflect the rates at which the Company believes the benefit obligations could be effectively settled. The discount rates were determined based on the yield for a portfolio of investment grade corporate bonds with maturity dates matched to the estimated future payments of the plans’ benefit obligations. The expected long-term rates of return on plan assets were based on the plans’ asset mix, historical returns on equity securities and fixed income investments, and an assessment of expected future returns. The expected long-term rates of return on plan assets assumption used to determine 2015 net periodic pension cost are estimated to be 6.50% and 7.12% for the U.S. and U.K. plans, respectively. If actual long-term rates of return differ from those assumed or if the Company used materially different assumptions, actual funding obligations could differ materially from these estimates. Due to the frozen status of the U.S. plan and closed status of the U.K. plans, increases in compensation rates are not material to the computations of benefit obligations or net periodic benefit cost.
Effective August 16, 2014, the the Company's then-existing repurchase authorization was replaced with a new authorization pursuant to which the Company has been authorized to repurchase up to 2,000,000 shares of CRDA or CRDB (or both) through July 2017 (the "2014 Repurchase Authorization"). Under the 2014 Repurchase Authorization, repurchases may be made in open market or privately negotiated transactions at such times and for such prices as management deems appropriate, subject to applicable contractual and regulatory restrictions.
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 have actually been achieved. As of December 31, 2014, the Company does not expect these performance measurements to be achieved by December 31, 2015.
The total income tax benefit recognized in the Consolidated Statements of Income for stock-based compensation arrangements was approximately $311,000, $1,338,000, and $1,221,000 for the years ended December 31, 2014, 2013, and 2012, respectively. Some of the Company’s stock-based compensation awards are granted under plans which are designed not to be taxable as compensation to the recipient based on tax laws of the U.S. or other applicable country. Accordingly, the Company does not recognize tax benefits on all of its stock-based compensation expense. Adjustments to additional paid-in capital for differences between deductions taken on its income tax returns related to stock-based compensation plans and the related income tax benefits previously recognized for financial reporting purposes were not significant in any year.
The expected dividend yield used for 2013 was based on the Company's historical dividend yield for 2011 and 2012. The expected volatility of the price of CRDA was based on historical realized volatility. The risk-free interest rate was based on the U.S. Treasury Daily Yield Curve Rate on the grant date, with a term equal to the expected term used in the pricing formula. The expected term of the option took into account both the contractual term of the option and the effects of expected exercise behavior.
A summary of the status of the Company’s nonvested performance shares as of December 31, 2014, 2013, and 2012, and changes during each year, is presented below:
A summary of the status of the Company’s restricted shares of CRDA as of December 31, 2014, 2013, and 2012 and changes during each year, is presented below:
During the years ended December 31, 2014 and 2013, a total of 154,519 and 146,891 shares, respectively, of CRDA were issued under the U.S. Plan to the Company’s employees at purchase prices of $4.33 and $3.29 in 2014 and 2013, respectively. At December 31, 2014, an estimated 96,000 shares will be issued and purchased under the U.S. Plan in 2015. During the years ended December 31, 2014, 2013, and 2012, compensation expense of $259,000, $198,000, and $270,000, respectively, was recognized for the U.S. Plan.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
The following table summarizes the level within the fair value hierarchy used to determine the fair value of the Company's pension plan assets for its U.K. plans at December 31, 2014 and 2013:
Equity securities consist primarily of common and preferred stocks of publicly traded U.S. companies and international companies and common collective funds. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded. 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.
The following table provides a reconciliation of the beginning and ending balance of Level 3 assets within the Company's U.K. pension plan during the years ended December 31, 2014 and 2013:
The Company’s four reportable segments represent components of the business 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. The segments are organized based upon the nature of services and/or geographic areas served and are: Americas, which primarily serves the property and casualty insurance company markets in the U.S., Canada, Latin America, and the Caribbean; EMEA/AP which serves the property and casualty insurance company and self-insurance markets in Europe, including the U.K., the Middle East, Africa, and the Asia-Pacific region (which includes Australia and New Zealand); Broadspire which serves the self-insurance marketplace, primarily in the U.S.; and Legal Settlement Administration which serves the securities, bankruptcy, and other legal settlement markets, primarily in the U.S. Intersegment sales are recorded at cost and are not material.
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, goodwill and intangible asset impairment charges, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, special charges and credits, income taxes, and net income or loss attributable to noncontrolling interests.
Segment operating earnings includes allocations of certain corporate and shared costs. If the Company changes its allocation methods or changes the types of costs that are allocated to its four operating segments, prior period amounts presented in the current period financial statements are adjusted to conform to the current allocation process. In 2014, the amortization expense of capitalized internally developed software related to projects under direct control of Americas and Broadspire segment management was transferred from corporate and shared costs to direct costs of these two segments. The amortization expense in 2013 and 2012 has been revised to conform to this current presentation. This change had no impact on previously reported operating earnings of these segments, as these costs had been fully allocated.
Substantially all revenues earned in the Broadspire and Legal Settlement Administration segments are earned in the U.S. Substantially all of the revenues earned in the EMEA/AP segment are earned outside of the U.S.
Revenues by major service line in the U.S. and by area for other regions in the Americas segment and by major 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 Company considers all Legal Settlement Administration revenues to be derived from one service line. For the year ended December 31, 2012, it had revenues before reimbursements associated with two related special projects that exceeded 10% of the Company's consolidated revenues before reimbursements. Revenues from these special projects were $165.6 million in 2012.
The total of the Company’s reportable segments’ revenues before reimbursements reconciled to total consolidated revenues for the years ended December 31, 2014, 2013, and 2012 was as follows:
The Company’s reportable segments’ total assets reconciled to consolidated total assets of the Company at December 31, 2014 and 2013 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:
Revenues and long-lived assets for the countries in which revenues or long-lived assets represent more than 10 percent of the consolidated totals are set out in the two tables below. For the purposes of these geographic area disclosures, long-lived assets include items such as property and equipment and capital lease assets but exclude intangible assets, including goodwill. In the Americas segment, only the U.S. and Canada are considered material for disclosure.
In the EMEA/AP segment, only the U.K. is considered material for disclosure; CEMEA and Asia Pacific regions are shown in order to reconcile to the segment totals.
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 $364,144,000 and $337,424,000 at December 31, 2014 and 2013, respectively. In addition, the Company’s Legal Settlement Administration segment administers funds in noncustodial accounts at financial institutions that totaled $451,033,000 and $504,074,000 at December 31, 2014 and 2013, respectively.
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 includes 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 $1,153,000. For additional information on these obligations and rights, see Note 2, "Acquisitions and Dispositions of Businesses."
Net assets acquired totaled $25,858,000, including $5,735,000 of cash acquired. The difference between the purchase price and the net assets acquired represents definite-lived intangibles of $35,082,000, consisting of customer relationship and trade names, and $17,888,000 of goodwill. Goodwill acquired represents the estimated value of the assembled workforce and expected synergies with existing businesses. A deferred tax liability of $7,016,000 was recognized on the acquired intangible assets. The purchase price includes $6,329,000 placed in escrow for up to two years related to certain acquired contingencies and working capital adjustments per the terms of the acquisition agreement. The acquisition was funded primarily through additional borrowings under the Credit Facility.
Based upon the timing of the acquisition, the allocation of the purchase price presented below is preliminary and subject to change, as the Company gathers additional information related to assets acquired and liabilities assumed, including unbilled accounts receivable, intangible assets, other assets, accrued liabilities, deferred taxes, and uncertain tax positions. The purchase price allocation may also be impacted by net debt and net working capital adjustments under the terms of the acquisition agreement.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.
The following table summarizes the Company's initial allocation of the purchase price for GAB Robins:
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, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, 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 23, 2015 expressed an unqualified opinion thereon.