Notes to Consolidated Financial Statements
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1.
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Significant Accounting and Reporting Policies
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Nature of Operations
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.
Shares of the Company's
two
classes of common stock are traded on the New York Stock Exchange ("NYSE") under the symbols CRD-A and CRD-B, respectively. The Company's
two
classes of stock are substantially identical, except with respect to voting rights and the Company's ability to pay greater cash dividends on the non-voting Class A Common Stock than on the voting Class B Common Stock, subject to certain limitations. In addition, with respect to mergers or similar transactions, holders of Class A Common Stock must receive the same type and amount of consideration as holders of Class B Common Stock, unless different consideration is approved by the holders of
75%
of the Class A Common Stock, voting as a class. 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.
Principles of Consolidation
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 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 Operations, net income or loss is attributed to the controlling interests and the noncontrolling interests separately.
The Company consolidates the results of a variable interest entity ("VIE") when it is determined to be the primary beneficiary. In accordance with GAAP, in determining whether the Company is the primary beneficiary of a VIE for financial reporting purposes, it considers whether it has the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether it has the obligation to absorb losses or the right to receive returns that would be significant to the VIE.
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.
Prior Year Reclassifications
The prior year presentation of certain segment information has been reclassified to conform to the current year presentation.
Management's Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Actual results could differ materially from those estimates.
Revenue Recognition
The Company's revenues are primarily comprised of claims processing or program administration fees and are generated from the Company's
four
operating segments.
Both the
U.S. Services
segment and the
International
segment earn revenues by providing field investigation and evaluation of property and casualty claims for insurance companies and self-insured entities and by providing access to Company-owned networks of direct repair service providers. The Company's
Broadspire
segment earns revenues by providing field investigation and claims evaluation of workers' compensation and liability claims, initial loss reporting services for its clients' claimants, loss mitigation services such as medical bill review, medical case management and vocational rehabilitation, administration of trust funds established to pay claims, and risk management information services. The
Garden City Group
segment earns revenues by providing administration services related to settlements of class actions, regulatory matters, mass tort, bankruptcy administrations, and other legal settlements by identifying and qualifying class members, determining and dispensing settlement payments, and administering settlement funds.
Fees for professional services are recognized in unbilled revenues at the time such services are rendered, at estimated collectible amounts. Substantially all unbilled revenues are billed within one year.
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.
In the normal course of business, the Company incurs certain out-of-pocket expenses that are thereafter reimbursed by the Company's clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are required to be included when reporting expenses and revenues, respectively, in the Company's consolidated results of operations. The amounts of reimbursed expenses and related revenues from reimbursements offset each other in the Company's consolidated statements of operations with no impact to its net income.
Intersegment sales are recorded at cost and are not material.
Cash and Cash Equivalents
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, 2016
, cash and cash equivalents included time deposits of approximately
$715,000
that were in financial institutions outside the U.S.
Accounts Receivable and Allowance for Doubtful Accounts
The Company extends credit based on an evaluation of a client's financial condition and, generally, collateral is not required. Accounts receivable are typically due upon receipt of the invoice and are stated on the Company's Consolidated Balance Sheets at amounts due from clients net of an estimated allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The fair value of accounts receivable approximates book value due to their short-term contractual stipulations.
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. Such losses are accounted for as bad debt expense, while adjustments to invoices are accounted for as reductions to revenue. These allowances are established using historical write-off or adjustment information to project future experience and by considering the current creditworthiness of clients, any known specific collection problems, and an assessment of current industry and economic conditions. Actual experience may differ significantly from historical or expected loss results. The Company writes off accounts receivable when they become uncollectible, and any payments subsequently received are accounted for as recoveries. A summary of the activities in the allowance for doubtful accounts for the years ended
December 31, 2016
,
2015
, and
2014
is as follows:
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2016
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2015
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2014
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(In thousands)
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Allowance for doubtful accounts, January 1
|
$
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13,133
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$
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10,960
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$
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10,234
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Add/ (Deduct):
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Provision for bad debt expense
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2,654
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1,432
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|
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2,117
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Write-offs, net of recoveries
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50
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(684
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)
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(812
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)
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Currency translation and other changes
|
(937
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)
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(868
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)
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(579
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)
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Adjustments for business acquisitions and dispositions
|
(401
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)
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2,293
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|
|
—
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Allowance for doubtful accounts, December 31
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$
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14,499
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$
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13,133
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|
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$
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10,960
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|
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.
Goodwill, Indefinite-Lived Intangible Assets, and Other Long-Lived Assets
Goodwill is an asset that represents the excess of the purchase price over the fair value of the separately identifiable net assets (tangible and intangible) acquired in certain business combinations.
Indefinite-lived
intangible assets consist of trade names associated with acquired businesses.
Goodwill and indefinite-lived intangible assets are not amortized, but are subject to impairment testing at least annually.
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.
Other long-lived assets are evaluated for impairment when impairment indicators are identified.
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 and indefinite-lived intangible 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 or indefinite-lived intangible assets.
When factors indicate that such assets should be evaluated for possible impairment between the scheduled annual impairment tests,
the Company performs an interim impairment test.
Goodwill impairment testing is a two-step process, if necessary, performed on a reporting unit basis. If, as determined by the step 1 analysis, the fair value of the reporting unit exceeds its carrying value, goodwill is not deemed impaired. If the fair value of a reporting unit is determined to be less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill following a hypothetical acquisition accounting process. This hypothetical acquisition accounting process is applied only for the purpose of determining whether goodwill must be reduced; it is not used to adjust the carrying values of other assets or liabilities. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill, and it cannot subsequently be reversed.
The Company has 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 the Company concludes that this is the case, the Company must perform the step 1 analysis discussed above. Otherwise, the Company may forego the two-step process and is not required to perform any further testing.
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.
During 2016, the Company performed qualitative assessments on the U.S. Contractor Connection operations on a stand-alone basis and Garden City Group, which represent approximately 50 percent of the Company's consolidated goodwill balance, and the two-step process described above was not necessary. The estimated fair value as calculated in the step 1 goodwill impairment analysis for the International reporting unit exceeded its carrying value. As of December 31, 2016, the Company did not have any reporting unit with an amount of goodwill for which it is reasonably likely that it would fail step 1 of a goodwill impairment test in the near term.
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.
If changes to the Company's reporting structure impact the composition of its reporting units, existing goodwill is reallocated to the revised reporting units based on their relative estimated fair values as determined by a combination of the income and market approaches. If all of the assets and liabilities of an acquired business are assigned to a specific reporting unit, then the goodwill associated with that acquisition is assigned to that reporting unit at acquisition unless another reporting unit is also expected to benefit from the acquisition.
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
Property and equipment are stated at cost less accumulated depreciation. The Company depreciates the cost of property and equipment, including assets recorded under capital leases, over the shorter of the remaining lease term or the estimated useful lives of the related assets, primarily using the straight-line method. The estimated useful lives for property and equipment classifications are as follows:
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Classification
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Estimated Useful Lives
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Furniture and fixtures
|
|
3-10 years
|
|
Data processing equipment
|
|
3-5 years
|
|
Automobiles and other
|
|
3-4 years
|
|
Buildings and improvements
|
|
7-40 years
|
|
Property and equipment, including assets under capital leases, consisted of the following at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
(In thousands)
|
Land
|
$
|
321
|
|
|
$
|
312
|
|
Buildings and improvements
|
26,612
|
|
|
26,586
|
|
Furniture and fixtures
|
36,726
|
|
|
44,865
|
|
Data processing equipment
|
60,381
|
|
|
64,926
|
|
Automobiles
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1,453
|
|
|
3,694
|
|
Total property and equipment
|
125,493
|
|
|
140,383
|
|
Less accumulated depreciation
|
(95,888
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)
|
|
(102,331
|
)
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Net property and equipment
|
$
|
29,605
|
|
|
$
|
38,052
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|
Additions to property and equipment under capital leases, which are excluded from acquisitions of property and equipment in the Company's Statements of Cash Flows, totaled
$242,000
,
$1,283,000
, and
$21,000
for
2016
,
2015
, and
2014
, respectively.
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.
Capitalized Software
Capitalized software costs reflects costs related to internally developed or purchased software used by the Company that has expected future economic benefits. Certain internal and external costs incurred during the application development stage are capitalized. Costs incurred during the preliminary project and post implementation stages, including training and maintenance costs, are expensed as incurred. The majority of these capitalized software costs consist of internal payroll costs and external payments for software 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
$16,045,000
,
$15,372,000
, and
$13,954,000
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
Self-Insured Risks
The Company self-insures certain risks consisting primarily of professional liability, auto liability, and employee medical, disability, and workers' compensation liability. Insurance coverage is obtained for catastrophic property and casualty exposures, including professional liability on a claims-made basis, and those risks required to be insured by law or contract. Most of these self-insured risks are in the U.S. Provisions for claims under the self-insured programs are made based on the Company's estimates of the aggregate liabilities for claims incurred, including estimated legal fees, losses that have occurred but have not been reported to the Company, and for adverse developments on reported losses. The estimated liabilities are calculated based on historical claims experience, the expected lives of the claims, and other factors considered relevant by management. Changes in these estimates may occur as additional information becomes available. The estimated liabilities for claims incurred under the Company's self-insured workers' compensation and employee disability programs are discounted at the prevailing risk-free interest rate for U.S. government securities of an appropriate duration. All other self-insured liabilities are undiscounted. At
December 31, 2016
and
2015
, accrued liabilities for self-insured risks totaled
$26,311,000
and
$23,476,000
, respectively, including current liabilities of
$14,771,000
and
$14,122,000
, respectively. The noncurrent liabilities are included in "Other noncurrent liabilities" on the Company's Consolidated Balance Sheets.
Income Taxes
The Company accounts for certain income and expense items differently for financial reporting and income tax purposes. Provisions for deferred taxes are made in recognition of these temporary differences. The most significant differences relate to revenue recognition, accrued compensation, pension plans, self-insurance, and depreciation and amortization.
For financial reporting purposes, the provision for income taxes is the sum of income taxes both currently payable and payable on a deferred basis. Currently payable income taxes represent the liability related to the income tax returns for the current year, while the net deferred tax expense or benefit represents the change in the balance of deferred income tax assets or liabilities as reported on the Company's Consolidated Balance Sheets that are not related to balances in "Accumulated other comprehensive loss." The changes in deferred income tax assets and liabilities are determined based upon changes in the differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for income tax purposes, measured by the enacted statutory tax rates in effect for the year in which the Company estimates these differences will reverse. The Company must estimate the timing of the reversal of temporary differences, as well as whether taxable income in future periods will be sufficient to fully recognize any gross deferred tax assets. A valuation allowance is provided when it is deemed more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Other factors which influence the effective tax rate used for financial reporting purposes include
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.
See Note 7, "Income Taxes."
Sales and Other 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 Consolidated Statements of Operations, but are recorded on the Consolidated Balance Sheets as pass-through amounts until remitted.
Foreign Currency
Foreign currency transactions for the years ended
December 31, 2016
,
2015
, and
2014
resulted in net losses of
$339,000
,
$684,000
, and
$274,000
respectively.
For operations outside the U.S. that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated into U.S. dollars at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. The resulting translation adjustments, on a net basis, are included in "Comprehensive income (loss)" in the Company's Consolidated Statements of Comprehensive Income (Loss), and the accumulated translation adjustment is reported as a component of "Accumulated other comprehensive loss" in the Company's Consolidated Balance Sheets.
Advertising Costs
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
.
Adoption of New Accounting Standards
Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern
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.
Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU 2015-02, "Consolidation (topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 focuses on the consolidation evaluation for reporting organizations (public and private companies) that are required to evaluate whether they should consolidate certain legal entities. The standard is effective for fiscal years beginning after December 15, 2015, and interim periods within those years. Early adoption is permitted. The Company adopted this standard during the quarter ended March 31, 2016 with no impact to its results of operations, financial condition or cash flows.
Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU 2015-05, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." This ASU amended guidance on internal use software to clarify how customers in cloud computing arrangements should determine whether the arrangement includes a software license. This guidance specifies that these licenses should be accounted for as licenses of intangible assets. The guidance is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2015. The Company adopted this guidance without any material effect on its results of operations or financial condition.
Pending Adoption of Recently Issued Accounting Standards
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-1, "
Clarifying the Definition of a Business.
" The ASU was issued to clarify the definition of a business for purposes of acquisitions and dispositions. The amendments in this update provide a more robust framework than prior guidance to use in determining when a set of assets and activities constitutes a business. The update is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this ASU may have on its financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, "Restricted Cash." The ASU was issued to address diversity in practice in the classification and presentation of a change in restricted cash on the statement of cash flows. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The update is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this ASU may have on its statement of cash flows.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." The update was issued to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. The initiative is designed to reduce the complexity in accounting standards. Under the amendment an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The update is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this ASU may have on its results of operations, financial condition and cash flows.
Classification of Certain Cash Receipts and Cash Payments in the Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments." The update addresses diversity in cash flow reporting issues. The guidance specifically addresses issues concerning debt repayment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination, proceeds from insurance claims and corporate owned life insurance beneficial interests in securitization transactions, and distributions from equity method investees. The guidance also clarifies how the predominant principle should be applied when cash receipts and cash payments have more than one class of cash flows. The update is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this ASU may have on its cash flows.
Measurement of Credit Losses on Financial Instruments
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.
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This update was issued as part of a simplification effort for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, change in forfeiture accounting, and classification on the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this ASU may have on its results of operations, financial condition and cash flows.
Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued ASU 2016-07, "Simplifying the Transition to the Equity Method of Accounting." This update eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The update is effective for all entities for annual periods beginning after December 15, 2016, and interim periods thereafter. The Company is currently evaluating the effect this ASU may have on its results of operations, financial condition and cash flows.
Financial Accounting for Leases
In February 2016, the FASB issued ASU 2016-02, "Financial Accounting for Leases." Under this update, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, this ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The update is effective for annual periods beginning after December 15, 2018, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effect this update may have on its results of operations, financial condition and cash flows.
Revenue from Contracts with Customers
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 control for 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. In August 2015, the FASB issued ASU 2015-14, which deferred by one year the effective date of ASU 2014-09. The one year deferral of the effective date of this standard changed the effective date for the Company to January 1, 2018. Early adoption is permitted, but not before the original effective date. The FASB issued ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" in March 2016, ASU 2016-10, "Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing" in April 2016, ASU 2016-12, "Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients," in May 2016, and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” in December 2016. All of these amendments are intended to improve and clarify the implementation guidance of ASU 2014-09 and have the same effective date as the original standard.
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.
|
|
2.
|
Acquisitions and Dispositions of Businesses
|
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 December 15, 2015, the Company acquired an additional
36%
of the capital stock of GAB Robins Aviation Limited, a U.K.-based international aviation loss adjusting and claims management provider, for
$3,672,000
, bringing its total ownership interest to
95%
. The Company acquired its initial
59%
ownership interest in GAB Robins Aviation Limited through its acquisition of GAB Robins and, because of its controlling financial interest, the Company consolidated the results of GAB Robins Aviation Limited before and after the acquisition of the additional interest in the current year. The Company accounted for this subsequent acquisition as an equity transaction in accordance with ASC 810-10, "Consolidation".
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 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 Company recognized a loss on the disposal of this entity of
$474,000
in 2013. The results of Crawford South Africa were not material to the Company.
|
|
3.
|
Goodwill and Intangible Assets
|
Goodwill
The following table shows the changes in the carrying amount of goodwill for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Services
|
|
International
|
|
Broadspire
|
|
Garden City Group
|
|
Total
|
|
(In thousands)
|
Balance at December 31, 2014:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
31,829
|
|
|
$
|
81,024
|
|
|
$
|
151,133
|
|
|
$
|
19,599
|
|
|
$
|
283,585
|
|
Accumulated impairment losses
|
—
|
|
|
(567
|
)
|
|
(151,133
|
)
|
|
—
|
|
|
(151,700
|
)
|
Net goodwill
|
31,829
|
|
|
80,457
|
|
|
—
|
|
|
19,599
|
|
|
131,885
|
|
2015 Activity:
|
|
|
|
|
|
|
|
|
|
Goodwill of acquired businesses
|
—
|
|
|
19,046
|
|
|
—
|
|
|
—
|
|
|
19,046
|
|
Impairment of goodwill
|
(5,465
|
)
|
|
(43,849
|
)
|
|
—
|
|
|
—
|
|
|
(49,314
|
)
|
Other activity
(1)
|
—
|
|
|
668
|
|
|
—
|
|
|
—
|
|
|
668
|
|
Foreign currency effects
|
—
|
|
|
(6,669
|
)
|
|
—
|
|
|
—
|
|
|
(6,669
|
)
|
Balance at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
31,829
|
|
|
94,069
|
|
|
151,133
|
|
|
19,599
|
|
|
296,630
|
|
Accumulated impairment losses
|
(5,465
|
)
|
|
(44,416
|
)
|
|
(151,133
|
)
|
|
—
|
|
|
(201,014
|
)
|
Net goodwill
|
26,364
|
|
|
49,653
|
|
|
—
|
|
|
19,599
|
|
|
95,616
|
|
2016 Activity:
|
|
|
|
|
|
|
|
|
|
Other activity
(1)
|
—
|
|
|
(531
|
)
|
|
—
|
|
|
—
|
|
|
(531
|
)
|
Foreign currency effects
|
—
|
|
|
(3,335
|
)
|
|
—
|
|
|
—
|
|
|
(3,335
|
)
|
Balance at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
31,829
|
|
|
90,203
|
|
|
151,133
|
|
|
19,599
|
|
|
292,764
|
|
Accumulated impairment losses
|
(5,465
|
)
|
|
(44,416
|
)
|
|
(151,133
|
)
|
|
—
|
|
|
(201,014
|
)
|
Net goodwill
|
$
|
26,364
|
|
|
$
|
45,787
|
|
|
$
|
—
|
|
|
$
|
19,599
|
|
|
$
|
91,750
|
|
(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.
Intangible Assets
The following is a summary of finite-lived intangible assets acquired through business acquisitions as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Weighted-Average Amortization Period
|
|
(In thousands, except years)
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
122,403
|
|
|
$
|
(66,281
|
)
|
|
$
|
56,122
|
|
|
6.7 years
|
Technology-based
|
5,913
|
|
|
(5,913
|
)
|
|
—
|
|
|
0.0 years
|
Trade name
|
1,697
|
|
|
(1,639
|
)
|
|
58
|
|
|
0.1 years
|
Total
|
$
|
130,013
|
|
|
$
|
(73,833
|
)
|
|
$
|
56,180
|
|
|
6.1 years
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
130,964
|
|
|
$
|
(58,685
|
)
|
|
$
|
72,279
|
|
|
8.0 years
|
Technology-based
|
5,913
|
|
|
(5,536
|
)
|
|
377
|
|
|
0.5 years
|
Trade name
|
2,098
|
|
|
(1,068
|
)
|
|
1,030
|
|
|
1.1 years
|
Total
|
$
|
138,975
|
|
|
$
|
(65,289
|
)
|
|
$
|
73,686
|
|
|
6.9 years
|
|
|
|
|
|
|
|
|
Amortization of finite-lived intangible assets was
$9,969,000
,
$10,410,000
, and
$7,084,000
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. For the years ended
December 31, 2016
,
2015
, and
2014
, amortization expense for finite-lived customer relationships and trade name intangible assets in the amounts of
$9,592,000
,
$9,668,000
, and
$6,341,000
, 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
2
to
15
years.
At
December 31, 2016
, annual estimated aggregate amortization expense for intangible assets subject to amortization is as follows:
|
|
|
|
|
|
Annual Amortization Expense
|
Year Ending December 31,
|
(In thousands)
|
2017
|
$
|
8,381
|
|
2018
|
8,317
|
|
2019
|
8,317
|
|
2020
|
8,267
|
|
2021
|
7,257
|
|
The following is a summary of indefinite-lived intangible assets at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Impairments
|
|
Net Carrying Value
|
|
(In thousands)
|
December 31, 2016:
|
|
|
|
|
|
Trade names
|
$
|
31,351
|
|
|
$
|
(600
|
)
|
|
$
|
30,751
|
|
December 31, 2015:
|
|
|
|
|
|
Trade names
|
$
|
31,775
|
|
|
$
|
(600
|
)
|
|
$
|
31,175
|
|
|
|
4.
|
Short-Term and Long-Term Debt, Including Capital Leases
|
Long-term debt consisted of the following at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
(In thousands)
|
Credit Facility
|
$
|
186,196
|
|
|
$
|
243,667
|
|
Capital lease obligations
|
1,818
|
|
|
3,615
|
|
Total long-term debt and capital leases
|
188,014
|
|
|
247,282
|
|
Less: portion of Credit Facility classified as short-term
|
(30
|
)
|
|
(19,958
|
)
|
Less: current installments of capital leases
|
(982
|
)
|
|
(1,959
|
)
|
Total long-term debt and capital leases, less current installments
|
$
|
187,002
|
|
|
$
|
225,365
|
|
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.
The Credit Facility consists of a
$400.0 million
revolving credit facility, with a letter of credit subfacility of
$100.0 million
. The Credit Facility contains sublimits of
$185.0 million
for borrowings by the UK Borrower,
$40.0 million
for borrowings by the Canadian Borrower, and
$15.0 million
for borrowings by the Australian Borrower. The Credit Facility matures, and all amounts outstanding thereunder, will be due and payable on November 25, 2018.
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.
Borrowings under the Credit Facility may be made in U.S. dollars, Euros, the currencies of Canada, Japan, Australia or United Kingdom and, subject to the terms of the Credit Facility, other currencies. Borrowings under the Credit Facility bear interest, at the option of the applicable Borrower, based on the Base Rate (as defined below) or the London Interbank Offered Rate ("LIBOR"), in each case plus an applicable interest margin based on the Company's leverage ratio (as defined below), provided that borrowings in foreign currencies may bear interest based on LIBOR only. The interest margin for LIBOR loans ranges from
1.50%
to
2.25%
and for Base Rate loans ranges from
0.50%
to
1.25%
. Base Rate is defined as the highest of (i) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus
1/2 of 1%
, (ii) the prime commercial lending rate of the Administrative Agent and (iii) LIBOR for a
one month
interest period plus
1.0%
.
At
December 31, 2016
and
2015
, a total of
$186,196,000
and
$243,667,000
, respectively, was outstanding under the Credit Facility. In addition, undrawn commitments under letters of credit totaling
$14,809,000
and
$17,211,000
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
$198,477,000
and
$142,413,000
at
December 31, 2016
and
2015
, respectively.
The obligations of the Borrowers under the Credit Facility are guaranteed by each existing domestic subsidiary of the Company and certain existing material foreign subsidiaries of the Company that are disregarded entities for U.S. income tax purposes (each a "Disregarded Foreign Entity"). Such obligations are required to be guaranteed by each subsequently acquired or formed material domestic subsidiary and Disregarded Foreign Entity (each, a "Guarantor"), and the obligations of the Foreign Borrowers are also guaranteed by the Company. In addition, the Borrowers' obligations under the Credit Facility are secured by a first priority lien on substantially all of the personal property of the Company and the Guarantors, including, without limitation, intellectual property,
100%
of the capital stock of the Company's and the Guarantors' present and future domestic subsidiaries and
65%
of the voting stock and
100%
of the non-voting stock issued by any present and future first-tier material foreign subsidiary of the Company or any Guarantor. In addition, the obligations of the Foreign Borrowers are secured by a first priority lien on
100%
of the capital stock of the Foreign Borrowers.
The representations, covenants and events of default in the Credit Facility are customary for financing transactions of this nature, including required compliance with a minimum fixed charge coverage ratio and a maximum leverage ratio (each as defined below).
Under the Credit Facility as amended in 2015, the fixed charge coverage ratio, defined as the ratio of (i)(A) consolidated earnings before interest expense, income taxes, depreciation, amortization, stock-based compensation expense, and certain other charges and expenses ("EBITDA")
minus
(B) aggregate income taxes to the extent paid in cash
minus
(C) unfinanced capital expenditures to (ii) the sum of: (A) consolidated interest expense to the extent paid (or required to be paid) in cash,
plus
(B) the aggregate of all scheduled payments of principal on funded debt (including the principal component of payments made in respect of capital lease obligations) required to have been made (whether or not such payments are actually made),
plus
(C) the aggregate of all restricted payments (as defined) paid,
plus
(D) the aggregate of all earnouts paid or required to be paid, must not be less than
1.25
to
1.00
for the
four
-quarter period ending at the end of each fiscal quarter.
Also under the Credit Facility as amended in 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
3.50
to 1.00 for fiscal quarters ending December 31, 2016 through September 30, 2017 and
3.25
to 1.00 for fiscal quarters thereafter.
At
December 31, 2016
, the Company was in compliance with the financial covenants under the Credit Facility. If the Company does not meet the covenant requirements in the future, it would be in default under the Credit Facility. Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Credit Facility and ancillary loan documents.
Short-term borrowings under the Credit Facility totaled
$30,000
and
$19,958,000
at
December 31, 2016
and
2015
, respectively. The Company expects, but is not required, to repay all of such short-term borrowings at December 31, 2016 in 2017.
The Company's capital leases are primarily comprised of equipment leases with terms ranging from
24
to
60
months.
Interest expense, including any impact from the Company's cross currency basis swap through its termination date and amortization of capitalized loan costs, on the Company's short-term and long-term borrowings was
$9,934,000
,
$8,983,000
, and
$6,812,000
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The increase in 2016 is due to higher average borrowings during the first part of 2016 and an increase in interest rates. Interest paid on the Company's short-term and long-term borrowings was
$8,451,000
,
$7,973,000
, and
$5,880,000
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
Capital Lease Obligations
|
|
Total
|
Year Ending December 31,
|
(In thousands)
|
2017
|
$
|
30
|
|
|
$
|
982
|
|
|
$
|
1,012
|
|
2018
|
186,166
|
|
|
549
|
|
|
186,715
|
|
2019
|
—
|
|
|
205
|
|
|
205
|
|
2020
|
—
|
|
|
56
|
|
|
56
|
|
2021
|
—
|
|
|
26
|
|
|
26
|
|
Total
|
$
|
186,196
|
|
|
$
|
1,818
|
|
|
$
|
188,014
|
|
|
|
|
|
|
|
|
|
5.
|
Derivative Instruments
|
In February 2011, the Company entered into a U.S. dollar and Canadian dollar ("CAD") cross currency basis swap with an initial notional amount of CAD
34,749,000
as an economic hedge to an intercompany note payable to the U.S. parent by a Canadian subsidiary. The cross currency basis swap required the Canadian subsidiary to deliver quarterly payments of CAD
589,000
to the counterparty and entitled the U.S. parent to receive quarterly payments of U.S.
$593,000
. The Canadian subsidiary also made interest payments to the counterparty based on 3-month Canada Bankers Acceptances plus a spread, and the U.S. parent received payments based on U.S. 3-month LIBOR. The cross currency basis swap had a scheduled expiration date of September 30, 2025. The Company elected not to designate this swap as a hedge of the intercompany note from the Canadian subsidiary. Accordingly, changes in the fair value of this swap, as well as changes in the value of the intercompany note, were recorded as gains or losses in "Selling, general, and administrative expenses" in the Company's Consolidated Statements of Operations over the term of the swap and substantially offset one another prior to the settlement defined below. The changes in the fair value of the cross currency basis swap did not exactly offset changes in the value of the intercompany note, as the fair value of this swap was determined based on forward rates while the value of the intercompany note was determined based on end of period spot rates. The net gains and losses for the swap historically were not significant.
During September 2016, the Company entered into a transaction ("settlement") in which the Canadian subsidiary repaid the intercompany note payable to the U.S. parent and the Company terminated the cross currency basis swap. In connection with the settlement, the Company received proceeds of
$4,100,000
in exchange for terminating the cross currency basis swap. For the
year ended December 31, 2016
, the Company recognized a net loss of
$585,000
due to changes in the fair value of the cross currency basis swap, the value of the intercompany note, and on the settlement. A net loss was recognized on the settlement due to a change in the forward rates used to value the cross currency basis swap which was not substantially offset by the change in the value of the intercompany note based on the spot rate on the day of the settlement.
6. Commitments Under Operating Leases
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.
Rental expenses, net of amortization of any incentives provided by lessors, for operating leases consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Office space
|
$
|
43,245
|
|
|
$
|
44,577
|
|
|
$
|
43,277
|
|
Automobiles
|
6,043
|
|
|
7,319
|
|
|
7,615
|
|
Computers and equipment
|
111
|
|
|
13
|
|
|
378
|
|
Total operating leases
|
$
|
49,399
|
|
|
$
|
51,909
|
|
|
$
|
51,270
|
|
At
December 31, 2016
, future minimum payments under non-cancelable operating leases with terms of more than
12 months
were as follows:
|
|
|
|
|
Year Ending December 31,
|
(In thousands)
|
2017
|
$
|
41,099
|
|
2018
|
29,498
|
|
2019
|
26,735
|
|
2020
|
20,500
|
|
2021
|
17,773
|
|
2022 and Thereafter
|
33,620
|
|
Where applicable, the amounts above include sales taxes.
Significant Operating Leases and Subleases
Effective
October 10, 2016
, the Company entered into a
13
-year operating lease for approximately
109,000
square feet of office space in Atlanta, Georgia, as a replacement and consolidation for its Atlanta Support Center beginning late 2017. The Company has future total lease payments associated with this lease of approximately
$31,500,000
. Additionally, the Company is responsible for certain related property operating expenses above 2018 base year costs, which are excluded from the table above.
Effective
June 24, 2015
, the Company entered into
10
-year operating leases for approximately
16,000
square feet of office space in
London, England
, for its
International
segment as a replacement and consolidation of certain of its London facilities. The Company has total lease payments associated with the leases of approximately
$9,100,000
subject to market rate adjustments on the fifth anniversary of the lease commitment date. Additionally, the Company is responsible for certain value-added taxes and operating expenses, which are excluded from the table above.
In
November 2014
, the Company entered into an amendment and extension of an existing lease, resulting in a
7 years, 5 months
operating lease agreement for approximately
50,000
square feet of office space in
Jacksonville, FL
, for its U.S. Contractor Connection service line in its
U.S. Services
segment. The amended lease on the expanded premises began January 1, 2015. Total lease payments over the remaining lease term are approximately
$4,106,000
. Additionally, the Company is responsible for certain related real estate taxes and operating expenses, which are excluded from the table above.
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 remaining lease term are approximately
$4,703,000
. 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
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.
On
March 16, 2010
, the Company entered into an
11
-year operating lease for the lease of approximately
44,000
square feet of office space in Lake Success, New York, for use as its
Garden City Group
segment's corporate headquarters. The lease, as amended, includes a total of approximately
47,000
square feet. Total lease payments over the remaining lease term are approximately
$8,573,000
. 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.
Effective
August 1, 2006
, the Company entered into an
11
-year operating lease for approximately
160,000
square feet of office space in Atlanta, Georgia for use as the Company's corporate headquarters. Total lease payments over the remaining lease term are approximately
$3,961,000
. Additionally, the Company is responsible for certain related property operating expenses, which are excluded from the table above.
Included in the acquired commitments of Broadspire Management Services, Inc. was a long-term operating lease for a
two
-building office complex in Plantation, Florida. The term of this lease ends in December 2021. Total lease payments over the remaining lease term are approximately
$22,363,000
. All of the office space was subleased at
December 31, 2016
. Under executed sublease arrangements at
December 31, 2016
, the sublessors are obligated to pay the Company minimum sublease payments as follows:
|
|
|
|
|
Year Ending December 31,
|
(In thousands)
|
2017
|
$
|
3,569
|
|
2018
|
4,057
|
|
2019
|
4,146
|
|
2020
|
4,238
|
|
2021
|
4,332
|
|
Total minimum sublease payments to be received
|
$
|
20,342
|
|
One
of the sublease agreements is for
three
of the
four
floors of
one
of the leased buildings in Plantation, Florida; this lease expires in December 2021. The remaining floor was subleased through the remaining lease term during 2016. The other sublease is for an entire building and expires in December 2021.
7. Income Taxes
Income (loss) before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
U.S.
|
$
|
33,051
|
|
|
$
|
22,414
|
|
|
$
|
40,840
|
|
Foreign
|
30,190
|
|
|
(54,187
|
)
|
|
19,048
|
|
Income (loss) before income taxes
|
$
|
63,241
|
|
|
$
|
(31,773
|
)
|
|
$
|
59,888
|
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Current:
|
|
|
|
|
|
U.S. federal and state
|
$
|
5,196
|
|
|
$
|
5,716
|
|
|
$
|
4,867
|
|
Foreign
|
9,838
|
|
|
3,996
|
|
|
8,724
|
|
Deferred:
|
|
|
|
|
|
U.S. federal and state
|
9,788
|
|
|
5,786
|
|
|
13,645
|
|
Foreign
|
743
|
|
|
(1,666
|
)
|
|
1,544
|
|
Provision for income taxes
|
$
|
25,565
|
|
|
$
|
13,832
|
|
|
$
|
28,780
|
|
Net cash payments for income taxes were
$16,170,000
,
$9,690,000
, and
$13,017,000
in
2016
,
2015
, and
2014
, respectively.
The provision for income taxes is reconciled to the federal statutory income tax rate of
35%
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Federal income taxes at statutory rate
|
$
|
22,134
|
|
|
$
|
(11,121
|
)
|
|
$
|
20,961
|
|
State income taxes, net of federal benefit
|
2,280
|
|
|
1,872
|
|
|
1,975
|
|
Goodwill impairment
|
—
|
|
|
15,824
|
|
|
—
|
|
Foreign taxes
|
2,273
|
|
|
3,804
|
|
|
1,544
|
|
Change in valuation allowance
|
(2,196
|
)
|
|
3,643
|
|
|
3,023
|
|
Research and development credits
|
(429
|
)
|
|
(1,912
|
)
|
|
(266
|
)
|
Foreign tax credits
|
(865
|
)
|
|
(651
|
)
|
|
(1,043
|
)
|
Nondeductible meals and entertainment
|
1,111
|
|
|
1,441
|
|
|
1,662
|
|
Tax rate changes
|
(71
|
)
|
|
412
|
|
|
1,002
|
|
Other
|
1,328
|
|
|
520
|
|
|
(78
|
)
|
Provision for income taxes
|
$
|
25,565
|
|
|
$
|
13,832
|
|
|
$
|
28,780
|
|
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
:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(In thousands)
|
Accrued compensation
|
$
|
13,862
|
|
|
$
|
12,057
|
|
Accrued pension liabilities
|
33,295
|
|
|
42,485
|
|
Self-insured risks
|
9,304
|
|
|
9,999
|
|
Deferred revenues
|
9,949
|
|
|
10,725
|
|
Accrued rent
|
1,511
|
|
|
1,804
|
|
Interest
|
5,258
|
|
|
6,178
|
|
Tax credit carryforwards
|
24,784
|
|
|
32,232
|
|
Loss carryforwards
|
23,518
|
|
|
27,123
|
|
Other
|
895
|
|
|
3,099
|
|
Gross deferred income tax assets
|
122,376
|
|
|
145,702
|
|
Accounts receivable allowance
|
6,148
|
|
|
6,300
|
|
Unbilled revenues
|
13,917
|
|
|
12,143
|
|
Depreciation and amortization
|
58,985
|
|
|
63,775
|
|
Other post-retirement benefits
|
235
|
|
|
294
|
|
Gross deferred income tax liabilities
|
79,285
|
|
|
82,512
|
|
Net deferred income tax assets before valuation allowance
|
43,091
|
|
|
63,190
|
|
Valuation allowance
|
(14,498
|
)
|
|
(17,204
|
)
|
Net deferred income tax assets
|
$
|
28,593
|
|
|
$
|
45,986
|
|
Amounts recognized in the Consolidated Balance Sheets consist of :
|
|
|
|
|
|
Long-term deferred income tax assets included in "Deferred income tax assets"
|
30,379
|
|
|
47,371
|
|
Long-term deferred income tax liabilities included in "Other noncurrent liabilities"
|
(1,786
|
)
|
|
(1,385
|
)
|
Net deferred income tax assets
|
$
|
28,593
|
|
|
$
|
45,986
|
|
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
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Balance, beginning of year
|
$
|
17,204
|
|
|
$
|
15,231
|
|
|
$
|
12,518
|
|
Other changes
|
(2,706
|
)
|
|
1,973
|
|
|
2,713
|
|
Balance, end of year
|
$
|
14,498
|
|
|
$
|
17,204
|
|
|
$
|
15,231
|
|
Changes to the valuation allowance for the year ended
December 31, 2016
were primarily due to release of valuation allowances based on expected utilization of deferred tax assets. For the years ended December 31, 2015, and 2014 the changes were primarily due to losses in certain of the Company's international operations.
A reconciliation of the beginning and ending balance of unrecognized income tax benefits follows:
|
|
|
|
|
|
(In thousands)
|
Balance at December 31, 2013
|
$
|
7,924
|
|
Reductions for tax positions related to the current year
|
(1,664
|
)
|
Additions for tax positions related to prior years
|
$
|
49
|
|
Lapses of applicable statutes of limitation
|
(412
|
)
|
Balance at December 31, 2014
|
5,897
|
|
Additions for tax provisions related to the current year
|
229
|
|
Reductions for tax positions related to prior years
|
$
|
(2,224
|
)
|
Additions for tax positions related to prior years
|
2,349
|
|
Lapses of applicable statutes of limitation
|
$
|
(64
|
)
|
Balance at December 31, 2015
|
6,187
|
|
Additions for tax provisions related to the current year
|
159
|
|
Reductions for tax positions related to prior years
|
(989
|
)
|
Additions for tax positions related to prior years
|
278
|
|
Lapses of applicable statutes of limitation
|
(166
|
)
|
Balance at December 31, 2016
|
$
|
5,469
|
|
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.
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
$1,200,000
in reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties.
8. Retirement Plans
The Company and its subsidiaries sponsor various retirement plans. Substantially all employees in the U.S. and certain employees outside the U.S. are covered under the Company's defined contribution plans. Certain employees, retirees, and eligible dependents are also covered under the Company's defined benefit pension plans.
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 Company sponsors a qualified defined benefit pension plan in the U.S. (the "U.S. Qualified Plan") and
three
defined benefit pension plans in the U.K. (the "U.K. Plans"). Effective December 31, 2002, the Company elected to freeze its U.S. Qualified Plan. Benefits payable under the Company's U.S. Qualified Plan are generally based on career compensation; however, no additional benefits have accrued on this plan since December 31, 2002. The Company's U.K. Plans were closed to new participants as of October 31, 1997, but existing participants may still accrue additional limited benefits based on salary amounts in effect at the time the relevant plan was closed. Benefits payable under the U.K. Plans are generally based on an employee's final salary at the time the plan was closed. Benefits paid under the U.K. Plans are also subject to adjustments for the effects of inflation. The actuarial present value of the projected benefit payments under the U.K. Plans are based on the employees' expected dates of separation by retirement.
The 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.
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" or "Other noncurrent assets" on the Company's Consolidated Balance Sheets based on the projected benefit obligations less the fair values of the plans' assets.
The majority of the Company's defined benefit pension plans have projected benefit obligations in excess of the fair value of plan assets. For these plans, the projected benefit obligations and the fair value of plan assets were as follows as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
(In thousands)
|
Projected benefit obligations
|
$
|
520,906
|
|
|
$
|
538,507
|
|
Fair value of plans' assets
|
412,205
|
|
|
413,204
|
|
Certain of the Company's U.K. Plans have fair values of plan assets that exceed the projected benefit obligations. For these plans, the projected benefit obligations and the fair value of plan assets were as follows as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
(In thousands)
|
Projected benefit obligations
|
$
|
243,661
|
|
|
$
|
261,186
|
|
Fair value of plans' assets
|
265,253
|
|
|
276,295
|
|
In addition, the Company sponsors
two
frozen nonqualified, unfunded defined benefit pension plans for certain employees and retirees, which are based on career compensation. These plans were frozen effective December 31, 2002. The liabilities of these plans, which equal their projected benefit obligations, are included in "Other accrued liabilities" and "Other noncurrent liabilities" on the Company's Consolidated Balance Sheets based on the expected timing of funding these obligations, since they are funded as needed from Company assets.
A reconciliation of the beginning and ending balances of the projected benefit obligations and the fair value of plans' assets for the Company's defined benefit pension plans as of the plans' most recent measurement dates is as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
(In thousands)
|
Projected Benefit Obligations:
|
|
|
|
Beginning of measurement period
|
$
|
799,693
|
|
|
$
|
868,747
|
|
Service cost
|
1,218
|
|
|
1,698
|
|
Interest cost
|
30,129
|
|
|
32,655
|
|
Employee contributions
|
86
|
|
|
187
|
|
Actuarial loss (gain)
|
51,859
|
|
|
(31,078
|
)
|
Plan curtailments
|
—
|
|
|
(5,490
|
)
|
Benefits paid
|
(63,537
|
)
|
|
(52,187
|
)
|
Foreign currency effects
|
(54,881
|
)
|
|
(14,839
|
)
|
End of measurement period
|
764,567
|
|
|
799,693
|
|
Fair Value of Plans' Assets:
|
|
|
|
Beginning of measurement period
|
689,499
|
|
|
725,770
|
|
Actual return on plans' assets
|
94,750
|
|
|
12,863
|
|
Employer contributions
|
14,727
|
|
|
16,600
|
|
Employee contributions
|
86
|
|
|
187
|
|
Benefits paid
|
(63,537
|
)
|
|
(52,187
|
)
|
Foreign currency effects
|
(58,067
|
)
|
|
(13,734
|
)
|
End of measurement period
|
677,458
|
|
|
689,499
|
|
Unfunded Status
|
$
|
(87,109
|
)
|
|
$
|
(110,194
|
)
|
Due to the frozen status of the U.S. Qualified Plan and the closed status of the U.K. Plans, the accumulated benefit obligations and the projected benefit obligations are not materially different.
The underfunded status of the Company's defined benefit pension plans recognized in the Consolidated Balance Sheets at
December 31
consisted of:
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
(In thousands)
|
U.S. Qualified Plan
|
$
|
103,545
|
|
|
$
|
120,542
|
|
U.K. Plans
|
—
|
|
|
—
|
|
Other international plans
|
1,630
|
|
|
1,190
|
|
Subtotal, included in "Accrued pension liabilities"
|
105,175
|
|
|
121,732
|
|
Prepaid pension asset included in "Other noncurrent assets"
|
(21,591
|
)
|
|
(15,109
|
)
|
Unfunded status of nonqualified defined benefit deferred pension plans included in "Other accrued liabilities"
|
320
|
|
|
322
|
|
Unfunded status of nonqualified defined benefit pension plans included in "Other noncurrent liabilities"
|
3,205
|
|
|
3,249
|
|
Total unfunded status
|
$
|
87,109
|
|
|
$
|
110,194
|
|
Accumulated other comprehensive loss, before income taxes
|
$
|
(279,422
|
)
|
|
$
|
(309,120
|
)
|
A fixed number of U.S. employees, retirees, and eligible dependents were previously covered under a frozen post-retirement medical benefits plan and are now provided Company-subsidized premiums for participation in health care exchanges. The liabilities for this plan are included in the Company's self-insured risks liabilities and are not material. This plan was frozen effective December 31, 2002.
The following tables set forth the
2016
and
2015
changes in accumulated other comprehensive loss for the Company's defined benefit retirement plans and post-retirement medical benefits plan on a combined basis:
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
Post-Retirement Medical Benefits Plan
|
|
(In thousands)
|
Net unrecognized actuarial (loss) gain, December 31, 2014
|
$
|
(334,661
|
)
|
|
$
|
912
|
|
Amortization of net loss (gain)
|
14,223
|
|
|
(152
|
)
|
Net gain arising during the year
|
7,439
|
|
|
—
|
|
Currency translation
|
3,119
|
|
|
—
|
|
Net unrecognized actuarial (loss) gain, December 31, 2015
|
(309,880
|
)
|
|
760
|
|
Amortization of net loss (gain)
|
13,338
|
|
|
(152
|
)
|
Net gain arising during the year
|
6,183
|
|
|
—
|
|
Currency translation
|
10,329
|
|
|
—
|
|
Net unrecognized actuarial (loss) gain, December 31, 2016
|
$
|
(280,030
|
)
|
|
$
|
608
|
|
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).
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 Operations for the years ended
December 31, 2016
,
2015
, and
2014
included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Service cost
|
$
|
1,218
|
|
|
$
|
1,698
|
|
|
$
|
2,667
|
|
Interest cost
|
30,129
|
|
|
32,655
|
|
|
35,270
|
|
Expected return on assets
|
(36,406
|
)
|
|
(41,710
|
)
|
|
(45,481
|
)
|
Amortization of actuarial loss
|
12,840
|
|
|
13,371
|
|
|
11,828
|
|
Net periodic benefit cost
|
$
|
7,781
|
|
|
$
|
6,014
|
|
|
$
|
4,284
|
|
Benefit cost for the U.S. Qualified Plan does not include service cost since the plan is frozen.
Over the next ten years, the following benefit payments are expected to be required to be made from the Company's U.S. and U.K. defined benefit pension plans:
|
|
|
|
|
Year Ending December 31,
|
Expected Benefit Payments
|
|
(In thousands)
|
2017
|
$
|
41,661
|
|
2018
|
42,277
|
|
2019
|
42,796
|
|
2020
|
43,285
|
|
2021
|
43,584
|
|
2022-2026
|
219,194
|
|
The Company reviews its employee demographic assumptions annually and updates the assumptions as necessary. During 2015, 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 a
$7,200,000
decrease in the projected benefit obligation 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:
|
|
|
|
|
|
|
U.S. Qualified Plan:
|
2016
|
|
2015
|
Discount rate used to compute benefit obligations
|
4.15
|
%
|
|
4.40
|
%
|
Discount rate used to compute periodic benefit cost
|
4.40
|
%
|
|
4.06
|
%
|
Expected long-term rates of return on plans' assets
|
6.50
|
%
|
|
6.50
|
%
|
|
|
|
|
|
|
|
U.K. Defined Benefit Plans:
|
2016
|
|
2015
|
Discount rate used to compute benefit obligations
|
2.65
|
%
|
|
3.85
|
%
|
Discount rate used to compute periodic benefit cost
|
3.85
|
%
|
|
3.90
|
%
|
Expected long-term rates of return on plans' assets
|
5.85
|
%
|
|
5.60
|
%
|
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.
Beginning with the December 31, 2016 measurement, the Company changed the method used to estimate the service and interest components of net periodic benefit cost for its U.S. and international pension and other postretirement benefits. This new estimation approach discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used to discount the cash flows used to measure the benefit obligation. Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period.
The Company has 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. The Company has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly has 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
$4,200,000
. The Company does 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 U.S. Qualified plan and
2.71%
for the U.K. plans.
The expected long-term rates of return on plan assets were based on the plans' asset mix, historical returns on equity securities and fixed income investments, and an assessment of expected future returns. The expected long-term rates of return on plan assets assumption used to determine
2017
net periodic pension cost are estimated to be
6.30%
and
5.85%
for the U.S.Qualified Plan and U.K. plans, respectively. If actual long-term rates of return differ from those assumed or if the Company used materially different assumptions, actual funding obligations could differ materially from these estimates. Due to the frozen status of the U.S. plan and closed status of the U.K. plans, increases in compensation rates are not material to the computations of benefit obligations or net periodic benefit cost.
Plans' Assets
Asset allocations at the respective measurement dates, by asset category, for the Company's U.S. and U.K. qualified defined benefit pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Qualified Plan
|
|
U.K. Plans
|
December 31,
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Equity securities
|
30.2
|
%
|
|
28.0
|
%
|
|
26.7
|
%
|
|
24.6
|
%
|
Fixed income securities
|
66.7
|
%
|
|
65.8
|
%
|
|
60.1
|
%
|
|
57.9
|
%
|
Alternative strategies
|
1.1
|
%
|
|
2.9
|
%
|
|
11.8
|
%
|
|
16.6
|
%
|
Cash, cash equivalents and short-term investment funds
|
2.0
|
%
|
|
3.3
|
%
|
|
1.4
|
%
|
|
0.9
|
%
|
Total asset allocation
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Investment objectives for the Company's U.S. and U.K. pension plan assets are to ensure availability of funds for payment of plan benefits as they become due; provide for a reasonable amount of long-term growth of capital, without undue exposure to volatility; protect the assets from erosion of purchasing power; and provide investment results that meet or exceed the plans' actuarially assumed long-term rate of return.
Alternative strategies include funds that invest in derivative instruments such as futures, forward contracts, options and swaps, and funds that invest in real estate. These investments are used to help manage risks.
The long-term goal for the U.S. and U.K. plans is to reach fully-funded status and to maintain that status. The investment policies recognize that the plans' asset return requirements and risk tolerances will change over time. Accordingly, reallocation of the portfolios' mix of return-seeking assets and liability-hedging assets will be performed as the plans' funded status improves.
See Note 12, "Fair Value Measurements" for the fair value disclosures of the U.S. and U.K. qualified defined benefit pension plan assets. The assets of the Company's other international plans are primarily insurance contracts, which are measured at contract value and are not measured at fair value. Obligations of the U.S. nonqualified plans are paid from Company assets.
9. Common Stock and Earnings (Loss) per Share
Shares of the Company's
two
classes of common stock are traded on the NYSE under the symbols CRD-A and CRD-B, respectively. The Company's
two
classes of stock are substantially identical, except with respect to voting rights and the Company's ability to pay greater cash dividends on the non-voting Class A Common Stock than on the voting Class B Common Stock, subject to certain limitations. In addition, with respect to mergers or similar transactions, holders of Class A Common Stock must receive the same type and amount of consideration as holders of Class B Common Stock, unless different consideration is approved by the holders of
75%
of the Class A Common Stock, voting as a class. As described in Note 11, "Stock-Based Compensation," certain shares of CRD-A are issued with restrictions under incentive compensation plans.
The Company's share repurchase authorization, approved in August 2014, provides the Company with the ability to repurchase up to
2,000,000
shares of CRD-A or CRD-B (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.
During the year ended
December 31, 2016
no
shares of CRD-A or CRD-B were repurchased under the 2014 Repurchase Authorization. During the year ended December 31, 2015, the Company reacquired
517,700
shares of CRD-A at an average cost of
$6.62
under the 2014 Repurchase Authorization.
No
shares of CRD-B were repurchased during the year ended December 31, 2015. At
December 31, 2016
, the Company has remaining authorization to repurchase
1,455,300
shares under the 2014 Repurchase Authorization.
Net Income (Loss) Attributable to Shareholders of Crawford & Company per Common Share
The Company computes earnings (loss) per share of CRD-A and CRD-B
using the two-class method, which allocates the undistributed earnings (loss) for each period to each class on a proportionate basis. The Company's Board of Directors has the right, but not the obligation, to declare higher dividends on CRD-A than on CRD-B, subject to certain limitations. In periods when the dividend is the same for CRD-A and CRD-B or when no dividends are declared or paid to either class, the two-class method generally will yield the same earnings (loss) per share for CRD-A and CRD-B.
During
2016
,
2015
and
2014
, the Board of Directors declared a higher dividend on CRD-A than on CRD-B.
The computations of basic net income (loss) attributable to shareholders of Crawford & Company per common share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
CRD-A
|
CRD-B
|
|
CRD-A
|
CRD-B
|
|
CRD-A
|
CRD-B
|
|
(In thousands, except earnings (loss) per share)
|
Earnings (loss) per share - basic:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings (loss)
|
$
|
12,432
|
|
$
|
9,969
|
|
|
$
|
(32,651
|
)
|
$
|
(26,348
|
)
|
|
$
|
10,408
|
|
$
|
8,499
|
|
Dividends paid
|
8,627
|
|
4,938
|
|
|
8,573
|
|
4,938
|
|
|
7,273
|
|
4,444
|
|
Net income (loss) available to common shareholders, basic
|
21,059
|
|
14,907
|
|
|
(24,078
|
)
|
(21,410
|
)
|
|
17,681
|
|
12,943
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic
|
30,793
|
|
24,690
|
|
|
30,596
|
|
24,690
|
|
|
30,237
|
|
24,690
|
|
Earnings (loss) per share - basic
|
$
|
0.68
|
|
$
|
0.60
|
|
|
$
|
(0.79
|
)
|
$
|
(0.87
|
)
|
|
$
|
0.58
|
|
$
|
0.52
|
|
The computations of diluted net income (loss) attributable to shareholders of Crawford & Company per common share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
CRD-A
|
CRD-B
|
|
CRD-A
|
CRD-B
|
|
CRD-A
|
CRD-B
|
|
(In thousands, except earnings (loss) per share)
|
Earnings (loss) per share - diluted:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings (loss)
|
$
|
12,563
|
|
$
|
9,838
|
|
|
$
|
(32,651
|
)
|
$
|
(26,348
|
)
|
|
$
|
10,522
|
|
$
|
8,385
|
|
Dividends paid
|
8,627
|
|
4,938
|
|
|
8,573
|
|
4,938
|
|
|
7,273
|
|
4,444
|
|
Net income (loss) available to common shareholders, diluted
|
21,190
|
|
14,776
|
|
|
(24,078
|
)
|
(21,410
|
)
|
|
17,795
|
|
12,829
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic
|
30,793
|
|
24,690
|
|
|
30,596
|
|
24,690
|
|
|
30,237
|
|
24,690
|
|
Weighted-average effect of dilutive securities
(1)
|
737
|
|
—
|
|
|
—
|
|
—
|
|
|
746
|
|
—
|
|
Weighted-average number of shares outstanding, diluted
|
31,530
|
|
24,690
|
|
|
30,596
|
|
24,690
|
|
|
30,983
|
|
24,690
|
|
Earnings (loss) per share - diluted
|
$
|
0.67
|
|
$
|
0.60
|
|
|
$
|
(0.79
|
)
|
$
|
(0.87
|
)
|
|
$
|
0.57
|
|
$
|
0.52
|
|
|
|
(1)
|
For the year ended December 31, 2015, the Company excluded from its loss per share calculations all common share equivalents because their inclusion would have been anti-dilutive. The weighted-average number of these common share equivalents for the year ended December 31, 2015 totaled approximately
494,000
.
|
Listed below are the shares excluded from the denominator in the above computation of diluted earnings (loss) per share for CRD-A because their inclusion would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Shares underlying stock options excluded due to the options' respective exercise prices being greater than the average stock price during the period
|
115
|
|
|
24
|
|
|
—
|
|
Performance stock grants excluded because performance conditions had not been met
(1)
|
—
|
|
|
1,045
|
|
|
1,568
|
|
|
|
(1)
|
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.
|
10. Accumulated Other Comprehensive Loss
Comprehensive income (loss) for the Company consists of the total of net income, foreign currency translation adjustments, and accrued pension and retiree medical liability adjustments. Foreign currency translation adjustments include net unrealized gains (losses) from intra-entity loans that are long-term in nature of
$2,547,000
,
$(6,894,000)
, and
$(1,344,000)
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The changes in components of "Accumulated other comprehensive loss" ("AOCL"), net of taxes and noncontrolling interests, included in the Company's Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Retirement liabilities
|
|
AOCL attributable to shareholders of Crawford & Company
|
|
(In thousands)
|
Balance at December 31, 2014
|
$
|
(4,659
|
)
|
|
$
|
(217,299
|
)
|
|
$
|
(221,958
|
)
|
Other comprehensive loss before reclassifications
|
(19,688
|
)
|
|
—
|
|
|
(19,688
|
)
|
Unrealized net gains arising during the year
|
—
|
|
|
8,209
|
|
|
8,209
|
|
Amounts reclassified from accumulated other comprehensive income
(1)
|
—
|
|
|
10,806
|
|
|
10,806
|
|
Net current period other comprehensive (loss) income
|
(19,688
|
)
|
|
19,015
|
|
|
(673
|
)
|
Balance at December 31, 2015
|
(24,347
|
)
|
|
(198,284
|
)
|
|
(222,631
|
)
|
Other comprehensive loss before reclassifications
|
(9,102
|
)
|
|
—
|
|
|
(9,102
|
)
|
Unrealized net gains arising during the year
|
—
|
|
|
11,337
|
|
|
11,337
|
|
Amounts reclassified from accumulated other comprehensive income to net income
(1)
|
—
|
|
|
8,623
|
|
|
8,623
|
|
Net current period other comprehensive (loss) income
|
(9,102
|
)
|
|
19,960
|
|
|
10,858
|
|
Balance at December 31, 2016
|
$
|
(33,449
|
)
|
|
$
|
(178,324
|
)
|
|
$
|
(211,773
|
)
|
|
|
(1)
|
Retirement liabilities reclassified to net income are related to the amortization of actuarial losses and are included in "Selling, general, and administrative expenses" in the Company's Consolidated Statements of Operations. See Note 8, "Retirement Plans" for additional details.
|
As discussed in Note 8, "Retirement Plans," during the year ended December 31, 2015, there was a curtailment of the defined benefit pension plan in the Netherlands 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
.
Other comprehensive loss amounts attributable to noncontrolling interests shown in the Company's Consolidated Statements of Shareholders' Investment are foreign currency translation adjustments.
11. Stock-Based Compensation
The Company has various stock-based incentive compensation plans for its employees and members of its Board of Directors. Only shares of CRD-A can be issued under these plans. The fair value of an equity award is estimated on the grant date without regard to service or performance conditions. The fair value is recognized as compensation expense over the requisite service period for all awards that vest. When recognizing compensation expense, estimates are made for the number of awards that are expected to vest, and subsequent adjustments are made to reflect both changes in the number of shares expected to vest and actual vesting. Compensation expense recognized at the end of any year equals at least the portion of the grant-date value of an award that has vested at that date.
The pretax compensation expense recognized for all stock-based compensation plans was
$5,252,000
,
$3,229,000
, and
$1,189,000
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
The total income tax benefit recognized in the Consolidated Statements of Operations for stock-based compensation arrangements was approximately
$1,983,000
,
$921,000
, and
$311,000
for the years ended
December 31, 2016
,
2015
, and
2014
, 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.
Stock Options
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.
A summary of option activity as of
December 31, 2016
,
2015
, and
2014
, and changes during each year, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
Outstanding at December 31, 2013
|
1,660
|
|
|
$
|
5.57
|
|
|
5.1 years
|
|
$
|
3,517
|
|
Exercised
|
(449
|
)
|
|
5.11
|
|
|
|
|
|
Forfeited or expired
|
(375
|
)
|
|
6.51
|
|
|
|
|
|
Outstanding at December 31, 2014
|
836
|
|
|
5.40
|
|
|
6.7 years
|
|
2,647
|
|
Exercised
|
(106
|
)
|
|
5.20
|
|
|
|
|
|
Forfeited or expired
|
(212
|
)
|
|
5.86
|
|
|
|
|
|
Outstanding at December 31, 2015
|
518
|
|
|
5.26
|
|
|
5.0 years
|
|
8
|
|
Granted
|
250
|
|
|
8.90
|
|
|
|
|
|
Exercised
|
(164
|
)
|
|
5.08
|
|
|
|
|
|
Forfeited or expired
|
(115
|
)
|
|
5.20
|
|
|
|
|
|
Outstanding at December 31, 2016
|
489
|
|
|
$
|
7.19
|
|
|
7.0 years
|
|
$
|
1,168
|
|
Vested and Exercisable at December 31, 2016
|
239
|
|
|
$
|
5.40
|
|
|
4.5 years
|
|
$
|
973
|
|
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
.
At
December 31, 2016
, the unrecognized compensation cost related to unvested employee stock options was
$724,000
. Directors' stock options had no unrecognized compensation cost since directors' options vest upon grant, and the grant-date fair values were fully expensed on the grant date.
The fair value of each option was estimated on the date of grant using the Black-Scholes-Merton option-pricing formula, with the following weighted average assumptions:
|
|
|
|
|
|
|
2016
|
Expected dividend yield
|
|
2.75
|
%
|
Expected volatility
|
|
60.02
|
%
|
Risk-free interest rate
|
|
2.50
|
%
|
Expected term of options
|
|
10 years
|
|
The expected dividend yield used for 2016 was based on the Company's historical dividend yield. The expected volatility of the price of CRDA was based on historical realized volatility. The risk-free interest rate was based on the average borrowing rate for the Company. The expected term of the option took into account both the contractual term of the option and the effects of expected exercise behavior.
Performance-Based Stock Grants
Performance share grants are from time to time made to certain key employees of the Company. Such grants entitle employees to earn shares of CRD-A upon the achievement of certain individual and/or corporate objectives. Grants of performance shares are made at the discretion of the Company's Board of Directors, or the Board's Compensation Committee, and are subject to graded or cliff vesting over
three
-year periods. Shares are not issued until the vesting requirements have been met. Dividends are not paid or accrued on unvested/unissued shares. The grant-date fair value of a performance share grant is based on the market value of CRD-A on the date of grant, reduced for the present value of any dividends expected to be paid on CRD-A prior to the vesting of the award. Compensation expense for each award is recognized ratably from the grant date to the vesting date for each tranche.
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:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Nonvested at December 31, 2013
|
1,641,000
|
|
|
$
|
4.26
|
|
Granted
|
1,086,000
|
|
|
6.93
|
|
Vested
|
(193,289
|
)
|
|
5.47
|
|
Forfeited or unearned
|
(758,000
|
)
|
|
3.85
|
|
Nonvested at December 31, 2014
|
1,775,711
|
|
|
5.93
|
|
Granted
|
1,104,300
|
|
|
6.46
|
|
Vested
|
(259,150
|
)
|
|
6.22
|
|
Forfeited or unearned
|
(1,304,675
|
)
|
|
5.56
|
|
Nonvested at December 31, 2015
|
1,316,186
|
|
|
6.65
|
|
Granted
|
1,179,384
|
|
|
4.47
|
|
Vested
|
(499,370
|
)
|
|
5.28
|
|
Forfeited or unearned
|
(1,189,319
|
)
|
|
6.28
|
|
Nonvested at December 31, 2016
|
806,881
|
|
|
$
|
6.17
|
|
The total fair value of the performance shares that vested in
2016
,
2015
, and
2014
was
$2,638,000
,
$1,612,000
, and
$1,057,000
, respectively.
Compensation expense (credit) recognized for all performance shares totaled
$3,060,000
,
$1,911,000
, and
$(518,000)
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Compensation cost for these awards is net of estimated or actual award forfeitures. The credit in compensation expense for the year ended December 31, 2014 resulted from reductions in expense related to cliff vesting shares granted in 2014, 2013, and 2012, as the Company determined that the performance conditions for these shares were not likely to be met. Each of these awards required the Company to achieve cumulative earnings per share targets over a three-year period. Certain performance awards vest ratably over three years, without cumulative earnings per share targets. As of
December 31, 2016
, there was an estimated
$2,704,000
of unearned compensation cost for nonvested performance shares. This unearned compensation cost is expected to be fully recognized by the end of 2018.
Restricted Shares
The Company's Board of Directors may elect to issue restricted shares of CRD-A in lieu of, or in addition to, cash payments to certain key employees. Employees receiving these shares are subject to restrictions on their ability to transfer the shares. Such restrictions generally lapse ratably over vesting periods ranging from several months to five years. The grant-date fair value of a restricted share of CRD-A is based on the market value of the stock on the date of grant. Compensation cost is recognized on an accelerated basis over the requisite service period.
A summary of the status of the Company's restricted shares of CRD-A as of
December 31, 2016
,
2015
, and
2014
and changes during each year, is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Nonvested at December 31, 2013
|
69,000
|
|
|
$
|
5.07
|
|
Granted
|
154,145
|
|
|
7.85
|
|
Vested
|
(129,811
|
)
|
|
6.44
|
|
Forfeited or unearned
|
(5,000
|
)
|
|
6.59
|
|
Nonvested at December 31, 2014
|
88,334
|
|
|
7.83
|
|
Granted
|
53,000
|
|
|
6.72
|
|
Vested
|
(38,332
|
)
|
|
3.91
|
|
Forfeited or unearned
|
(2,000
|
)
|
|
4.44
|
|
Nonvested at December 31, 2015
|
101,002
|
|
|
5.01
|
|
Granted
|
133,871
|
|
|
6.54
|
|
Vested
|
(160,536
|
)
|
|
6.57
|
|
Forfeited or unearned
|
(6,668
|
)
|
|
8.90
|
|
Nonvested at December 31, 2016
|
67,669
|
|
|
$
|
7.56
|
|
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.
Employee Stock Purchase Plans
The Company has
three
employee stock purchase plans: the U.S. Plan, the U.K. Plan, and the International Plan. Eligible employees in Canada, Puerto Rico, and the U.S. Virgin Islands may also participate in the U.S. Plan. The International Plan is for eligible employees located in certain other countries who are not covered by the U.S. Plan or the U.K. Plan. All plans are compensatory.
For all plans, the requisite service period is the period of time over which the employees contribute to the plans through payroll withholdings. For purposes of recognizing compensation expense, estimates are made for the total withholdings expected over the entire withholding period. The market price of a share of stock at the beginning of the withholding period is then used to estimate the total number of shares that will be purchased using the total estimated withholdings. Compensation cost is recognized ratably over the withholding period.
Under the U.S. Plan, the Company is authorized to issue up to
1,200,000
shares of CRD-A to eligible employees. Participating employees can elect to have up to
$25,000
of their eligible annual earnings withheld to purchase shares at the end of the one-year withholding period which starts each July 1 and ends the following June 30. The purchase price of the stock is
85%
of the lesser of the closing price of a share of such stock on the first day or the last day of the withholding period. Participating employees may cease payroll withholdings during the withholding period and/or request a refund of all amounts withheld before any shares are purchased.
Since the U.S. Plan involves a look-back option, the calculation of compensation cost is separated into two components. The first component is calculated as
15%
(the employee discount) of a nonvested share of CRD-A. The second component involves using the Black-Scholes-Merton option-pricing formula to value a
one year
option to purchase
85%
of a share of CRD-A. This value is adjusted to reflect the effect of any estimated dividends that the employee will not receive during the life of the option component.
During the years ended
December 31, 2016
,
2015
and
2014
, a total of
99,750
,
90,919
, and
154,519
shares, respectively, of CRD-A were issued under the prior U.S. employee stock purchase plan to the Company's employees at purchase prices of
$6.49
,
$5.73
, and
$4.33
in
2016
,
2015
, and
2014
, respectively. At
December 31, 2016
, an estimated
137,000
shares will be issued and purchased under the U.S. Plan in
2017
. During the years ended
December 31, 2016
,
2015
, and
2014
, compensation expense of
$261,000
,
$288,000
, and
$259,000
, respectively, was recognized for the prior U.S. employee stock purchase plan.
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.
At
December 31, 2016
, an estimated
212,000
shares will be eligible for purchase under the U.K. Plan at the end of the current withholding periods. This estimate is subject to change based on future fluctuations in the value of the British pound against the U.S. dollar, future changes in the market price of CRD-A, and future employee participation rates. The purchase price per share of CRD-A under the U.K. Plan ranges from
$4.24
to
$6.22
. For the years ended
December 31, 2016
,
2015
, and
2014
, compensation expense of
$80,000
,
$123,000
, and
$126,000
, respectively, was recognized for the U.K. Plan. During
2016
,
2015
, and
2014
, a total of
159,256
shares,
104,267
shares, and
264,998
shares, respectively, of CRD-A were issued under the U.K. Plan.
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.
12. Fair Value Measurements
GAAP defines fair value as the price that would be received to sell an asset or to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
|
|
•
|
Level 1— Observable inputs that reflect quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 — Observable inputs other than quoted prices included in Level 1. The Company values assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
|
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
Recurring Fair Value Measurements
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
10,051
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,051
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent earnout liability
(3)
|
—
|
|
|
—
|
|
|
1,407
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Derivative not designated as hedging instrument:
|
|
|
|
|
|
|
|
Cross currency basis swap
(2)
|
—
|
|
|
6,060
|
|
|
—
|
|
|
6,060
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent earnout liability
(3)
|
—
|
|
|
—
|
|
|
1,921
|
|
|
1,921
|
|
____________________
|
|
(1)
|
The fair values of the money market funds were based on recently quoted market prices and reported transactions in an active marketplace. Money market funds are included on the Company's Consolidated Balance Sheets in "Cash and cash equivalents."
|
|
|
(2)
|
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.
|
|
|
(3)
|
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.
|
Fair Value Disclosures
There were no transfers of assets between fair value levels during the years ended
December 31, 2016
or
2015
. The categorization of assets and liabilities within the fair value hierarchy and the measurement techniques are reviewed quarterly. Any transfers between levels are deemed to have occurred at the end of the quarter.
The fair values of accounts receivable, unbilled revenues, accounts payable and short-term borrowings approximate their respective carrying values due to the short-term maturities of the instruments. The interest rate on the Company's variable rate long-term debt resets at least every
90 days
; therefore, the recorded value approximates fair value. These assets and liabilities are measured within Level 2 of the fair value hierarchy.
Nonrecurring Fair Value Measurements
During 2015 the Company impaired and expensed goodwill of
$49,314,000
. See Note 1, "Significant Accounting and Reporting Policies" and Note 3, "Goodwill and Intangible Assets," where discussed in more detail.
Fair Value Measurements for Defined Benefit Pension Plan Assets
The fair value hierarchy is also applied to certain other assets that indirectly impact the Company's consolidated financial statements. Assets contributed by the Company to its defined benefit pension plans become the property of the individual plans. Even though the Company no longer has control over these assets, it is indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts the Company's future net periodic benefit cost, as well as amounts recognized in its Consolidated Balance Sheets. The Company uses the fair value hierarchy to measure the fair value of assets held by its U.S. and U.K. defined benefit pension plans.
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.S Qualified Plan at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,441
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,441
|
|
|
$
|
5,928
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,928
|
|
Short-term investment funds
|
—
|
|
|
5,844
|
|
|
—
|
|
|
5,844
|
|
|
—
|
|
|
6,876
|
|
|
—
|
|
|
6,876
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
—
|
|
|
80,229
|
|
|
—
|
|
|
80,229
|
|
|
—
|
|
|
73,397
|
|
|
—
|
|
|
73,397
|
|
International
|
—
|
|
|
33,243
|
|
|
—
|
|
|
33,243
|
|
|
—
|
|
|
33,109
|
|
|
—
|
|
|
33,109
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
22,655
|
|
|
212,998
|
|
|
—
|
|
|
235,653
|
|
|
29,888
|
|
|
208,356
|
|
|
—
|
|
|
238,244
|
|
International
|
—
|
|
|
14,999
|
|
|
—
|
|
|
14,999
|
|
|
—
|
|
|
12,165
|
|
|
—
|
|
|
12,165
|
|
Other
|
—
|
|
|
4,222
|
|
|
—
|
|
|
4,222
|
|
|
—
|
|
|
10,946
|
|
|
—
|
|
|
10,946
|
|
TOTAL
|
$
|
24,096
|
|
|
$
|
351,535
|
|
|
$
|
—
|
|
|
$
|
375,631
|
|
|
$
|
35,816
|
|
|
$
|
344,849
|
|
|
$
|
—
|
|
|
$
|
380,665
|
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,770
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,770
|
|
|
$
|
2,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,600
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
—
|
|
|
54,712
|
|
|
—
|
|
|
54,712
|
|
|
—
|
|
|
44,034
|
|
|
—
|
|
|
44,034
|
|
International
|
—
|
|
|
16,167
|
|
|
—
|
|
|
16,167
|
|
|
—
|
|
|
23,789
|
|
|
—
|
|
|
23,789
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
—
|
|
|
120,458
|
|
|
—
|
|
|
120,458
|
|
|
—
|
|
|
103,399
|
|
|
—
|
|
|
103,399
|
|
Government securities
|
—
|
|
|
28,772
|
|
|
—
|
|
|
28,772
|
|
|
—
|
|
|
44,094
|
|
|
—
|
|
|
44,094
|
|
Corporate bonds and debt securities
|
—
|
|
|
9,467
|
|
|
—
|
|
|
9,467
|
|
|
—
|
|
|
11,755
|
|
|
—
|
|
|
11,755
|
|
Mortgage-backed securities
|
—
|
|
|
610
|
|
|
—
|
|
|
610
|
|
|
—
|
|
|
788
|
|
|
—
|
|
|
788
|
|
Alternative strategy funds
|
—
|
|
|
21,982
|
|
|
—
|
|
|
21,982
|
|
|
—
|
|
|
30,208
|
|
|
—
|
|
|
30,208
|
|
Real estate funds
|
—
|
|
|
—
|
|
|
9,315
|
|
|
9,315
|
|
|
—
|
|
|
—
|
|
|
15,627
|
|
|
15,627
|
|
TOTAL
|
$
|
3,770
|
|
|
$
|
252,168
|
|
|
$
|
9,315
|
|
|
$
|
265,253
|
|
|
$
|
2,600
|
|
|
$
|
258,067
|
|
|
$
|
15,627
|
|
|
$
|
276,294
|
|
Short-term investment funds consist primarily of funds with a maturity of 60 days or less and are valued at amortized cost which approximates fair value.
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.
Fixed income securities consist of money market funds, government securities, corporate bonds and debt securities, mortgage-backed securities and other common collective funds. Government securities are valued by third-party pricing sources and are valued daily in an active market (Level 1). Corporate bonds are valued using either the yields currently available on comparable securities of issuers with similar credit ratings or using a discounted cash flows approach that utilizes observable inputs, such as current yields of similar instruments, and includes adjustments for valuation adjustments from internal pricing models which use observable inputs such as issuer details, interest rates, yield curves, default rates and quoted prices for similar assets (Level 2). Mortgage-backed securities are valued by pricing service providers that use broker-dealer quotations or valuation estimates from their internal pricing models (Level 2). Other common collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date (Level 2).
Alternative strategy funds consist of funds invested in listings on active exchanges (Level 1) and amounts in funds valued at the net asset value per share multiplied by the number of shares held as of the measurement date (Level 2). Alternative strategy funds may include derivative instruments such as futures, forward contracts, options and swaps and are used to help manage risks. Derivative instruments are generally valued by the investment managers or in certain instances by third party pricing sources (Level 2).
Real estate funds are primarily property unit trusts whose values are primarily reported by the fund manager and are based on valuation of the underlying investments which include inputs such as cost, discounted cash flows, independent appraisals and market-based comparable data (Level 3). The fair values may, due to the inherent uncertainty of valuation for those investments, differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.
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, 2016
and
2015
:
|
|
|
|
|
|
Real Estate Funds
|
|
U.K.
|
|
|
(in thousands)
|
Balance at December 31, 2014
|
|
$
|
14,740
|
|
Actual return on plan assets:
|
|
|
Related to assets still held at the reporting date
|
|
887
|
|
Purchases, sales and settlements—net
|
|
—
|
|
Balance at December 31, 2015
|
|
15,627
|
|
Actual return on plan assets:
|
|
|
Related to assets still held at the reporting date
|
|
(3,145
|
)
|
Purchases, sales and settlements—net
|
|
(3,167
|
)
|
Balance at December 31, 2016
|
|
$
|
9,315
|
|
13. Segment and Geographic Information
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 CODM. The segments are organized based upon the nature of services and/or geographic areas served and are:
U.S. Services
, which primarily
serves the property and casualty insurance company markets in the U.S.
;
International
, which serves the property and casualty insurance company and self-insurance markets outside the U.S.;
Broadspire
, which
serves the self-insurance marketplace, primarily in the U.S.
; and
Garden City Group
which
serves the class action, regulatory, mass tort, 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,
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.
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 the normal course of its business, the Company sometimes pays for certain out-of-pocket expenses that are thereafter reimbursed by its clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are required to be included when reporting expenses and revenues, respectively, in the Company's consolidated results of operations. However, in evaluating segment results, Company management excludes these reimbursements and related expenses from segment results, as they offset each other.
Financial information as of and for the years ended
December 31, 2016
,
2015
, and
2014
related to the Company's reportable segments is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Services
|
|
International
|
|
Broadspire
|
|
Garden City Group
|
|
Total
|
|
(In thousands)
|
2016
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements
|
$
|
231,198
|
|
|
$
|
479,884
|
|
|
$
|
301,977
|
|
|
$
|
96,227
|
|
|
$
|
1,109,286
|
|
Segment operating earnings
|
35,716
|
|
|
42,538
|
|
|
30,003
|
|
|
7,843
|
|
|
116,100
|
|
Depreciation and amortization
(1)
|
2,832
|
|
|
7,673
|
|
|
9,638
|
|
|
3,512
|
|
|
23,655
|
|
Assets
|
55,823
|
|
|
306,542
|
|
|
96,619
|
|
|
78,369
|
|
|
537,353
|
|
2015
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements
|
$
|
242,488
|
|
|
$
|
506,650
|
|
|
$
|
293,032
|
|
|
$
|
128,215
|
|
|
$
|
1,170,385
|
|
Segment operating earnings
|
32,702
|
|
|
18,799
|
|
|
24,017
|
|
|
11,507
|
|
|
87,025
|
|
Depreciation and amortization
(1)
|
2,780
|
|
|
8,579
|
|
|
8,841
|
|
|
5,783
|
|
|
25,983
|
|
Assets
|
56,731
|
|
|
332,954
|
|
|
105,518
|
|
|
87,608
|
|
|
582,811
|
|
2014
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements
|
$
|
215,385
|
|
|
$
|
488,284
|
|
|
$
|
268,890
|
|
|
$
|
170,292
|
|
|
$
|
1,142,851
|
|
Segment operating earnings
|
18,039
|
|
|
25,344
|
|
|
15,469
|
|
|
22,849
|
|
|
81,701
|
|
Depreciation and amortization
(1)
|
2,415
|
|
|
7,525
|
|
|
8,448
|
|
|
5,895
|
|
|
24,283
|
|
Assets
|
46,846
|
|
|
318,689
|
|
|
103,899
|
|
|
122,129
|
|
|
591,563
|
|
______________________
|
|
(1)
|
Excludes amortization expense of finite-lived customer relationships and trade name intangible assets.
|
Substantially all revenues earned in the
Broadspire
and
Garden City Group
segments are earned in the U.S. Substantially all of the revenues earned in the
International
segment are earned outside of the U.S.
Revenues by major service line for the
U.S. Services
and the
Broadspire
segments are shown in the following table. It is not practicable to provide revenues by service line for the
International
segment. The Company considers all
Garden City Group
revenues to be derived from
one
service line.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
U.S. Services
|
|
|
|
|
|
U.S. Claims Field Operations
|
$
|
81,270
|
|
|
$
|
85,265
|
|
|
$
|
96,390
|
|
U.S. Technical Services
|
28,659
|
|
|
28,610
|
|
|
24,822
|
|
U.S. Catastrophe Services
|
50,549
|
|
|
69,290
|
|
|
43,656
|
|
Subtotal U.S. Claims Services
|
160,478
|
|
|
183,165
|
|
|
164,868
|
|
U.S. Contractor Connection
|
70,720
|
|
|
59,323
|
|
|
50,517
|
|
Total Revenues before Reimbursements—U.S. Services
|
$
|
231,198
|
|
|
$
|
242,488
|
|
|
$
|
215,385
|
|
|
|
|
|
|
|
Broadspire
|
|
|
|
|
|
Workers' Compensation, Disability, and Liability Claims Management
|
$
|
127,618
|
|
|
$
|
121,875
|
|
|
$
|
112,334
|
|
Medical Management
|
160,185
|
|
|
156,290
|
|
|
140,903
|
|
Risk Management Information Services
|
14,174
|
|
|
14,867
|
|
|
15,653
|
|
Total Revenues before Reimbursements—Broadspire
|
$
|
301,977
|
|
|
$
|
293,032
|
|
|
$
|
268,890
|
|
Capital expenditures for the years ended
December 31, 2016
,
2015
, and
2014
are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
U.S. Services
|
$
|
936
|
|
|
$
|
3,100
|
|
|
$
|
4,855
|
|
International
|
6,911
|
|
|
8,874
|
|
|
7,440
|
|
Broadspire
|
4,678
|
|
|
6,574
|
|
|
7,705
|
|
Garden City Group
|
2,607
|
|
|
600
|
|
|
2,476
|
|
Corporate
|
14,067
|
|
|
13,771
|
|
|
6,721
|
|
Total capital expenditures
|
$
|
29,199
|
|
|
$
|
32,919
|
|
|
$
|
29,197
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Segments' revenues before reimbursements
|
$
|
1,109,286
|
|
|
$
|
1,170,385
|
|
|
$
|
1,142,851
|
|
Reimbursements
|
68,302
|
|
|
71,135
|
|
|
74,112
|
|
Total consolidated revenues
|
$
|
1,177,588
|
|
|
$
|
1,241,520
|
|
|
$
|
1,216,963
|
|
The Company's reportable segments' total operating earnings reconciled to consolidated income (loss) before income taxes for the years ended
December 31, 2016
,
2015
, and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Operating earnings of all reportable segments
|
$
|
116,100
|
|
|
$
|
87,025
|
|
|
$
|
81,701
|
|
Unallocated corporate and shared costs and credits
|
(23,971
|
)
|
|
(16,605
|
)
|
|
(8,582
|
)
|
Net corporate interest expense
|
(9,185
|
)
|
|
(8,383
|
)
|
|
(6,031
|
)
|
Stock option expense
|
(621
|
)
|
|
(433
|
)
|
|
(859
|
)
|
Amortization of customer-relationship intangible assets
|
(9,592
|
)
|
|
(9,668
|
)
|
|
(6,341
|
)
|
Goodwill impairment charges
|
—
|
|
|
(49,314
|
)
|
|
—
|
|
Restructuring and special charges
|
(9,490
|
)
|
|
(34,395
|
)
|
|
—
|
|
Income (loss) before income taxes
|
$
|
63,241
|
|
|
$
|
(31,773
|
)
|
|
$
|
59,888
|
|
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:
|
|
|
|
|
|
|
|
|
December 31,
|
2016
|
|
2015
|
|
(In thousands)
|
Assets of reportable segments
|
$
|
537,353
|
|
|
$
|
582,811
|
|
Corporate assets:
|
|
|
|
Cash and cash equivalents
|
20,492
|
|
|
12,944
|
|
Unallocated allowances on receivables
|
(4,138
|
)
|
|
(4,293
|
)
|
Prepaid expenses and other current assets
|
16,362
|
|
|
15,282
|
|
Property and equipment
|
5,631
|
|
|
6,043
|
|
Capitalized software costs, net
|
77,019
|
|
|
74,790
|
|
Assets of deferred compensation plan
|
16,227
|
|
|
15,881
|
|
Capitalized loan costs
|
2,642
|
|
|
3,991
|
|
Deferred income tax assets
|
30,379
|
|
|
47,371
|
|
Other noncurrent assets
|
33,892
|
|
|
28,586
|
|
Total corporate assets
|
198,506
|
|
|
200,595
|
|
Total assets
|
$
|
735,859
|
|
|
$
|
783,406
|
|
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 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
International
segment, only the U.K. and Canada are considered material for disclosure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K.
|
|
Canada
|
|
Other
|
|
Total International Segment
|
|
(In thousands)
|
2016
|
|
|
|
|
|
|
|
Revenues before reimbursements
|
$
|
171,869
|
|
|
$
|
106,696
|
|
|
$
|
201,319
|
|
|
$
|
479,884
|
|
Long-lived assets
|
37,228
|
|
|
5,772
|
|
|
4,377
|
|
|
47,377
|
|
2015
|
|
|
|
|
|
|
|
Revenues before reimbursements
|
186,375
|
|
|
110,180
|
|
|
210,095
|
|
|
506,650
|
|
Long-lived assets
|
51,457
|
|
|
6,656
|
|
|
6,747
|
|
|
64,860
|
|
2014
|
|
|
|
|
|
|
|
Revenues before reimbursements
|
128,561
|
|
|
129,246
|
|
|
230,477
|
|
|
488,284
|
|
Long-lived assets
|
12,116
|
|
|
2,274
|
|
|
7,324
|
|
|
21,714
|
|
14. Client Funds
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.
15. Commitments and Contingencies
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."
In the normal course of its business, the Company is sometimes named as a defendant or responsible party in suits or other actions by insureds or claimants contesting decisions made by the Company or its clients with respect to the settlement of claims. Additionally, certain clients of the Company have in the past brought, and may, in the future bring, claims for indemnification on the basis of alleged actions by the Company, its agents, or its employees in rendering services to clients. The majority of these claims are of the type covered by insurance maintained by the Company. However, the Company is responsible for the deductibles and self-insured retentions under various insurance coverages. In the opinion of Company management, adequate provisions have been made for such known and foreseeable risks.
The Company is subject to numerous federal, state, and foreign labor, employment, worker health and safety, antitrust and competition, environmental and consumer protection, import/export, anti-corruption, and other laws, and from time to time the Company faces claims and investigations by employees, former employees, and governmental entities under such laws. Such claims, investigations, and any litigation involving the Company could divert management's time and attention from the Company's business operations and could potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on the Company's results of operations, financial position, and cash flows. In the opinion of Company management, adequate provisions have been made for any items that are probable and reasonably estimable.
In 2015, the Company voluntarily self-reported to the SEC and the Department of Justice certain potential violations of the Foreign Corrupt Practices Act discovered by the Company during the course of its regular internal audit process. Upon discovery, the Company, with the oversight of the Audit Committee and the Board of Directors, proactively initiated an investigation into this matter with the assistance of external legal counsel and external forensic accountants. In the first quarter of 2017, the Company received notice from the SEC that the SEC has concluded its investigation and did not intend to recommend an enforcement action against the Company with respect to this matter.
16. Restructuring and Special Charges
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
.
Restructuring charges for the years ended
December 31, 2016
and
2015
of
$8,565,000
and
$28,736,000
were recorded related to the establishment and phase in of the Company's Global Business Services Center in Manila, Philippines and Global Technology Services Center in Pune, India (the "Centers"), integration costs related to the GAB Robins acquisition and other
International
segment restructuring, and restructuring activities in other areas.
The following table shows the costs incurred by type of restructuring activity:
|
|
|
|
|
|
|
|
|
Restructuring Charges
|
2016
|
|
2015
|
Year Ended December 31,
|
(In thousands)
|
Implementation and phase-in of the Centers
|
$
|
3,741
|
|
|
$
|
4,429
|
|
Integration costs related to the GAB Robins acquisition and International segment restructuring
|
2,975
|
|
|
15,596
|
|
Restructuring activities for U.S. Services segment
|
—
|
|
|
1,238
|
|
Administrative restructuring costs
|
—
|
|
|
1,725
|
|
Cease use loss on leased facilities
|
255
|
|
|
2,847
|
|
Asset impairments and lease termination costs
|
1,594
|
|
|
2,901
|
|
Total restructuring charges
|
$
|
8,565
|
|
|
$
|
28,736
|
|
|
|
|
|
Costs associated with the Centers were primarily for severance costs and professional fees. Integration costs related to the GAB Robins acquisition and
International
segment restructuring were predominantly comprised of severance costs, lease costs, and to a lesser extent professional fees and other costs. The restructuring charges in
U.S. Services
and Administrative restructuring costs were for severance. Cease use loss is comprised of the net estimated loss on leased properties that the Company is no longer occupying and is aggressively marketing for sublease. Asset impairments relate to decisions to close certain operations. The Company expects to incur an additional
$13,200,000
in restructuring and special charges during 2017 related to these plans.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges
|
Deferred rent
|
|
Accrued compensation and related costs
|
|
Accounts payable
|
|
Other accrued liabilities
|
|
Total
|
Balance at December 31, 2014
|
$
|
1,431
|
|
|
$
|
131
|
|
|
$
|
—
|
|
|
$
|
308
|
|
|
$
|
1,870
|
|
Additions
|
2,588
|
|
|
16,262
|
|
|
6,713
|
|
|
3,173
|
|
|
28,736
|
|
Adjustments to accruals
|
(448
|
)
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(461
|
)
|
Cash payments
|
—
|
|
|
(9,387
|
)
|
|
(5,647
|
)
|
|
(211
|
)
|
|
(15,245
|
)
|
Balance at December 31, 2015
|
3,571
|
|
|
7,006
|
|
|
1,066
|
|
|
3,257
|
|
|
14,900
|
|
Additions
|
1,526
|
|
|
2,995
|
|
|
3,611
|
|
|
433
|
|
|
8,565
|
|
Adjustments to accruals
|
(1,112
|
)
|
|
—
|
|
|
(136
|
)
|
|
—
|
|
|
(1,248
|
)
|
Cash payments
|
(919
|
)
|
|
(8,476
|
)
|
|
(3,924
|
)
|
|
(1,741
|
)
|
|
(15,060
|
)
|
Balance at December 31, 2016
|
$
|
3,066
|
|
|
$
|
1,525
|
|
|
$
|
617
|
|
|
$
|
1,949
|
|
|
$
|
7,157
|
|
The Company recorded special charges for the years ended
December 31, 2016
and 2015 of
$925,000
and
$5,659,000
, respectively. The special charges incurred during 2016 consisted of legal and professional fees related to the investigation described in Note 15 "Commitments and Contingencies" and other professional fees. The special charges recorded for the year ended December 31, 2015 were comprised of two components: (1)
$1,627,000
in expenses related to the separation of the Company's former president and chief executive officer, and (2) legal and professional fees of
$4,032,000
related to the investigation described in Note 15 "Commitments and Contingencies." At
December 31, 2016
, substantially all special charges had been paid.
17. Subsequent Events
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 Company has an option, beginning on January 1, 2022 and expiring on December 31, 2023, to acquire the remaining
15%
outstanding membership interest of WeGoLook. In the event the Company does not exercise the option, beginning on January 1, 2024, the minority members shall have the right to require the Company to acquire the minority members’ interest on or before December 31, 2024. In addition, at the time of the exercise of the option or the put, the minority members may be entitled to additional consideration depending on whether certain financial targets are achieved between closing and December 31, 2021.
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.
The Company does not anticipate the WeGoLook operations will have a material impact on the Company’s consolidated results of operations or its earnings per share during 2017.
Management's Statement on Responsibility for Financial Reporting
The management of Crawford & Company is responsible for the integrity and objectivity of the financial information in this Annual Report on Form 10-K. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, using informed judgments and estimates where appropriate.
The Company maintains a system of internal accounting policies, procedures, and controls designed to provide reasonable, but not absolute, assurance that assets are safeguarded and transactions are executed and recorded in accordance with management's authorization. The internal accounting control system is augmented by a program of internal audits and reviews by management, written policies and guidelines, and the careful selection and training of qualified personnel.
The Audit Committee of the Board of Directors, comprised solely of outside directors, is responsible for monitoring the Company's accounting and reporting practices. The Audit Committee meets regularly with management, the internal auditors, and the independent auditors to review the work of each and to assure that each performs its responsibilities. The independent registered public accounting firm, Ernst & Young LLP, was selected by the Audit Committee of the Board of Directors. Both the internal auditors and Ernst & Young LLP have unrestricted access to the Audit Committee allowing open discussion, without management present, on the quality of financial reporting and the adequacy of accounting, disclosure and financial reporting controls.
|
|
|
|
|
/s/ Harsha V. Agadi
|
|
|
Harsha V. Agadi
|
|
|
President and
|
|
|
Chief Executive Officer
|
|
|
|
|
|
/s/ W. Bruce Swain
|
|
|
W. Bruce Swain
|
|
|
Executive Vice President
|
|
|
and Chief Financial Officer
|
|
|
|
|
|
/s/ Dalerick M. Carden
|
|
|
Dalerick M. Carden
|
|
|
Senior Vice President, Corporate Controller,
|
|
|
and Chief Accounting Officer
|
|
February 27, 2017