office location in Stockport, England, both of which are utilized by the Registrant’s International Operations segment. As of December 31, 2009, the Registrant leased approximately 526 other office locations under various leases with varying terms. The remainder of its office locations are occupied under various short-term rental arrangements. The Registrant generally believes that its office locations are sufficient for its operations and that, in the event it was required to obtain different or additional office locations, such locations would be available at times, and on commercially reasonable terms, as would be necessary for the conduct of its business. No assurances can be given, however, that the Registrant would be able to obtain such office locations as and when needed, or on terms it considered to be reasonable, if at all.
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, warranty inspections, legal settlement administration, including class action and bankruptcy administration and risk management information services. Shares of the Company’s two classes of common stock are traded on the NYSE under the symbols CRDA and CRDB, respectively.
As discussed in more detail in subsequent sections of this MD&A, we have four operating segments: U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration. Our four operating segments represent components of our Company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing operating performance. U.S. Property & Casualty serves the U.S. property and casualty insurance company market, including the product warranties and inspections marketplace. International Operations serves the property and casualty insurance company markets outside of the U.S. Broadspire serves the self-insurance marketplace primarily in the U.S. Legal Settlement Administration serves the securities, bankruptcy, and other legal settlements markets primarily in the U.S.
Insurance companies, which represent the major source of our global revenues, customarily manage their own claims administration function but often rely on third parties for certain services which we provide, primarily field investigation and the evaluation of property and casualty insurance claims. We also conduct inspections of building component products related to warranty and product performance claims.
We generally earn our revenues on an individual fee-per-claim basis for claims management services we provide to property and casualty insurance companies and self-insured entities. Accordingly, the volume of claim referrals to us is a key driver of our revenues. Generally, fees are earned on claims in the period the claim is assigned to us, although sometimes a portion or substantially all of the revenue will be earned in subsequent periods. Industry-wide claims volume in general will vary depending upon the insurance underwriting cycle.
Compared to 2008, our consolidated revenues before reimbursements (“revenues”) were lower in 2009 due to several key factors. International Operations segment revenues in 2009 were negatively impacted by $62.5 million in exchange rate fluctuations due to a stronger U.S. dollar during most of 2009. U.S. Property & Casualty segment revenues were lower in 2009 due primarily to an overall industry-wide softness in property and casualty claims. Broadspire segment revenues decreased in 2009 primarily due to the reduced number of workers’ compensation claims resulting primarily from lower U.S. employment levels. However, Legal Settlement Administration segment revenues increased in 2009 reflecting the positive impact of several major bankruptcy and securities class action administration projects awarded to this operating segment during 2008 and 2009.
income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, certain other gains and expenses, and certain unallocated corporate and shared costs. Net income or loss attributable to noncontrolling interests has been removed from operating earnings.
Income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, and stock option expense are recurring components of our net income or loss, but they are not considered part of our segment operating earnings because they are managed on a corporate-wide basis. Income tax expense is based on statutory rates in effect in each of the jurisdictions where we provide services, and vary throughout the world. Net corporate interest expense results from company-level capital structure decisions made by management. Amortization expense relates to non-cash amortization expense of customer-relationship intangible assets resulting from business combinations. Stock option expense represents the non-cash costs generally related to stock options and employee stock purchase plan expenses which are not allocated to our operating segments. None of these costs relate directly to the performance of our services or operating activities and, therefore, are excluded from segment operating earnings in order to better assess the results of each segment’s operating activities on a consistent basis.
Certain other gains and expenses may arise from events (such as gains on sales of businesses and real estate, expenses related to restructurings, and goodwill impairment charges) that are not allocated to any particular segment since they historically have not regularly impacted our performance and are not expected to impact our future performance on a regular basis.
Our discussion and analysis of segment operating expenses is comprised of two components. “Direct Compensation and Fringe Benefits” includes all compensation, payroll taxes, and benefits provided to our employees which, as a service company, represents our most significant and variable operating expense. “Expenses Other Than Direct Compensation and Fringe Benefits” includes outsourced services, office rent and occupancy costs, office operating expenses, cost of risk, amortization and depreciation expense other than amortization of customer-relationship intangible assets, and allocated corporate and shared costs. These costs are more fixed in nature as compared to direct compensation and fringe benefits.
Operating results for our U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration segments reconciled to pretax (loss) income attributable to Crawford & Company and net (loss) income attributable to Crawford & Company, were as follows:
Operating earnings for our U.S. Property & Casualty segment decreased from $22.6 million in 2008 to $18.9 million in 2009, representing an operating margin of 9.1% in 2009 compared to 10.4% in 2008. The decrease in 2009 was primarily due to a decrease in revenues as discussed below.
U.S. Property & Casualty revenues are primarily generated from the property and casualty insurance company markets, with additional revenues generated from the warranties and inspections marketplace. U.S. Property & Casualty revenues before reimbursements by major service line were as follows:
U.S. Property & Casualty revenues before reimbursements decreased 4.7% to $206.6 million in 2009 compared to $216.8 million in 2008. This 2009 decrease was due primarily to a decrease in claims field operations driven by reduced property, vehicle and warranty services claims, partially offset by increases in revenues in our technical services unit, which primarily handles major commercial losses, and in our direct repair network, Contractor Connection.
U.S. Property & Casualty’s 4.7% revenue decline from 2008 to 2009 was due to a 2.3% decrease from changes in the mix of services provided and in the rates charged for those services, and a 2.4% decrease in segment unit volume, measured principally by cases received.
Reimbursements for out-of-pocket expenses included in total revenues for our U.S. Property & Casualty operations were $10.0 million in 2009, decreasing from $11.2 million in 2008. The decrease in 2009 was due primarily to a decline in claims field operations cases received.
U.S. Property & Casualty unit volumes by underlying case category, as measured by cases received, for 2009 and 2008 were as follows:
The 2009 decrease in property and casualty claims was due primarily to lower industry-wide claims volumes, which have resulted in fewer claims referred to us from our clients. The 2009 decline in vehicle claims was due primarily to general economic conditions which we believe have resulted in fewer miles driven and thus fewer claims, and also due to decisions by certain insurance companies to reduce adjuster involvement in handling vehicle-related claims. We expect the trend of reduced adjuster involvement in vehicle claims to continue. The 2009 decrease in warranty services claims resulted from the expiration of several long-running class action contracts. This trend is expected to continue as we are not aware of any large new class action warranty claims that will replace the expiring contracts. The 2009 decrease in workers’ compensation claims was due primarily to decreased referrals for outside investigations from insurance carriers and internal referrals from our Broadspire segment. The 2009 increase in Contractor Connection cases was due to the ongoing expansion of our contractor network and due to the trend of insurance carriers moving high-frequency, low-severity property claims directly to repair networks, which we expect to continue. The 2009 increase in catastrophe services claims was due primarily to severe weather earlier in the year. The 2009 increase in technical services claims was due primarily to our continued expansion in this market by increasing the number of executive general adjusters that we employ and due to the resulting increase in market share. As discussed in more detail elsewhere herein, we cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related claims and the occurrence of natural and man-made disasters, which are a significant source of claims for us and are generally not subject to accurate forecasting.
U.S. Property & Casualty salaries and wages decreased 4.8%, to $106.2 million in 2009 from $111.6 million in 2008. The decrease in 2009 compared to 2008 was due primarily to the reduction in FTEs. Payroll taxes and fringe benefits for U.S. Property & Casualty totaled $19.8 million in 2009, decreasing 11.6% from 2008 expenses of $22.4 million. The decrease in 2009 compared to 2008 was due primarily to the reduction in FTEs, lower incentive compensation expense, and temporary reductions in planned contributions to defined contribution retirement plans. Incentive compensation is variable and is primarily tied to growth in revenues and operating earnings and to reductions in a days-sales-outstanding measure for accounts receivable.
U.S. Property & Casualty expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits increased as a percent of U.S. Property & Casualty revenues before reimbursements to 29.9% in 2009 from 27.8% in 2008. The increase in 2009 was primarily due to lower revenues in 2009 since these expenses tend to be more fixed in nature. In addition, the segment’s bad debt expense was $1.8 million lower in 2008 compared to 2009. In 2008, the segment collected a previously charged-off account receivable and also introduced an incentive compensation plan that includes a focus on reducing outstanding accounts receivable balances.
Substantially all International Operations segment revenues are earned from the property and casualty insurance company market outside of the U.S. International Operations revenues before reimbursements by major region were as follows:
Excluding the disposition of the Netherlands subsidiary in 2008, International Operations unit volume, measured by cases received, declined 5.5% in 2009 compared to 2008. This decline primarily reflected decreased case referrals during 2009 in the U.K. and Canada, partially offset by increases in case referrals in other major regions of our International Operations segment, as discussed below. Average revenue per claim increased 9.2% from changes in the mix of services provided and in the rates charged for those services. Net decreases in 2009 of high-frequency, low-severity claims primarily in Canada raised the average revenue per claim in 2009, as discussed below. The disposition of the Netherlands subsidiary in 2008 decreased revenues by $6.6 million, or 1.5%, in 2009 compared to 2008.
The 2009 decrease in the U.K. was due primarily to a reduction of storm-related claims in the current year. The 2009 decrease in Canada was due primarily to a reduction in weather-related activity. The 2009 increase in CEMEA was due primarily to an increase in high-frequency, low severity claims in Scandinavia and Belgium. The changes in Asia-Pacific volumes were primarily due to high frequency, low severity claims activity in China and an increase in weather-related activity in Australia. The increase in the Americas was due primarily to an increase in high frequency, low severity claims in Brazil. As discussed in more detail elsewhere herein, we cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related claims and the occurrence of natural and man-made disasters, which are a significant source of claims for us and are generally not subject to accurate forecasting.
As a percent of segment revenues before reimbursements, direct compensation expense, including related payroll taxes and fringe benefits, increased slightly to 68.9% in 2009 from 68.1% in 2008. This percentage increase in 2009 was primarily due to higher costs related to our U.K. defined benefit retirement plans in 2009. The dollar amount of these expenses decreased in 2009 by $32.6 million, due primarily to a stronger U.S. dollar in 2009, offset partially by the higher costs in the U.K. for defined benefit retirement plans. There was an average of 4,279 International Operations FTEs in 2009, up slightly from 4,229 in 2008.
Salaries and wages of International Operations segment personnel decreased 12.5% to $227.1 million in 2009 compared to $259.5 million in 2008, decreasing as a percent of revenues before reimbursements from 58.3% in 2008 to 57.9% in 2009. The decrease in these expenses in 2009 was primarily related to the stronger U.S. dollar during 2009. Payroll taxes and fringe benefits decreased slightly to $43.5 million in 2009 compared to $43.7 million in 2008 as the increased U.K. defined benefit retirement plan expense substantially offset the impact of a stronger U.S. dollar.
Expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of segment revenues before reimbursements from 23.2% in 2008 to 22.6% in 2009. This percentage decrease in 2009 was due primarily to increased operational efficiencies which allowed us to service additional revenue when measured on a constant-dollar basis without adding an equivalent amount of costs which are generally more fixed in nature. The dollar amount of these expenses decreased in 2009 by $14.3 million due primarily to a stronger U.S. dollar in 2009.
As disclosed in Note 3, “Goodwill and Intangible Asset,” to the accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K, we recorded a noncash goodwill and intangible asset impairment charge totaling $140.9 million related to our Broadspire segment during 2009. These impairment charges have been excluded from Broadspire’s segment operating earnings (loss) and are not included in the following discussion and analysis of Broadspire’s segment operating results.
Our Broadspire segment recorded an operating loss of $1.6 million, or (0.6)% of segment revenues before reimbursements in 2009, compared to operating earnings of $3.5 million, or 1.1% of segment revenues before reimbursements in 2008. Declining case volumes in 2009 and the weakened labor market in the U.S. have negatively impacted Broadspire’s operating results.
and risk management information services provided to the U.S. self-insured marketplace. Broadspire revenues before reimbursements by major service line were as follows:
Broadspire segment revenues before reimbursements decreased 7.4% to $288.7 million in 2009 compared to $311.8 million in 2008. Unit volumes for the Broadspire segment, measured principally by cases received, decreased 11.2% from 2008 to 2009. Partially offsetting the decline in unit volumes was a 3.8% increase from changes in the mix of services provided and in the rates charged for those services. The change in the mix of services provided reflected the utilization of medical management services at a higher rate compared to claim management services. During periods of high unemployment, we tend to see the duration of workers’ compensation claims extended which generally results in higher utilization of medical management services such as field and telephonic case management and medical bill review. The net result of these factors was a 7.4% decrease in Broadspire segment revenues before reimbursements from 2008 to 2009.
The 2009 declines in workers’ compensation claims reflected a continuing decline in reported workplace injuries in the U.S primarily as a result of the overall decline in employment due to the current economic climate. The U.S. market has experienced a decline in reported workplace injuries over the past decade resulting in a loss in revenue from our existing customer base. The 2009 declines in casualty claims were primarily due to reductions in claims from our existing clients as a result of the overall industry-wide reduction in claims volume, partially offset by net new business gains. The 2009 increases in other claims were primarily due to increases in health management services resulting from employers that added such services to their employee benefits programs. As discussed in more detail elsewhere herein, we cannot predict the future trend of case volumes as they are generally dependent on the timing and extent of job creation in the U.S. and the occurrence of casualty-related events which are not subject to accurate forecasting.
Broadspire’s direct compensation and fringe benefits expense, as a percent of the related revenues before reimbursements, decreased to 56.0% in 2009 compared to 56.3% in 2008. The decrease in 2009 was primarily due to fewer FTEs in 2009 as a result of reduced case volumes, lower incentive compensation expense, and lower costs related to temporary reductions in planned contributions to defined contribution retirement plans. Average FTEs totaled 2,243 in 2009, down from 2,362 in 2008.
Broadspire segment salaries and wages decreased 6.8%, to $135.0 million in 2009 from $144.8 million in 2008, reflecting the decline in FTEs and lower incentive compensation expense in 2009. Payroll taxes and fringe benefits for our Broadspire segment totaled $26.8 million in 2009, decreasing 12.4% from 2008 expenses of $30.6 million, reflecting the temporary reduction in planned contributions to defined contribution retirement plans in 2009.
Legal Settlement Administration revenues are primarily derived from securities, product liability and other legal settlements, and Chapter 11 bankruptcy administration in the U.S.
Legal Settlement Administration revenues before reimbursements increased 9.5% to $82.0 million in 2009, compared to $74.9 million in 2008. Legal Settlement Administration revenues are project-based and can fluctuate significantly due primarily to the timing of securities class action and bankruptcy settlements. During 2009, we were awarded 275 new settlement administration assignments compared to 182 in 2008. The growth in revenues and the number of new assignments is due primarily to an increase in the number of bankruptcy assignments received as a result of current economic conditions.
In the first quarter of 2007, we sold our subrogation services business.
catastrophic claims activity in 2008 which drove revenue increases in each of our major service lines. U.S. Property & Casualty revenues before reimbursements by major service line were as follows:
Reimbursements for out-of-pocket expenses included in total revenues for our U.S. Property & Casualty segment were $11.2 million in 2008, increasing from $10.8 million in 2007. The increase in 2008 was due primarily to increased vehicle fuel costs and mileage reimbursements.
due to increases in referrals made within our managed repair network as a result of catastrophic claims activity and the expansion of our contractor network. The 2008 decline in technical services claims was due to declines in construction defect cases which were expected.
U.S. Property & Casualty direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, decreased to 61.8% in 2008 compared to 65.4% in 2007. This percentage decrease in 2008 was due primarily to higher revenues and increased operating efficiencies obtained from the Company’s technology investments in this segment. There was an average of 1,676 FTEs (including 132 catastrophe adjusters) in 2008 compared to an average of 1,746 (including 62 catastrophe adjusters) in 2007. During the 2008 fourth quarter, we deployed over 300 catastrophe adjusters to the Gulf Coast region of the U.S in response to hurricanes.
U.S. Property & Casualty expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of U.S. Property & Casualty revenues before reimbursements to 27.8% in 2008 from 30.7% in 2007. The decrease in the amount as a percentage of segment revenues before reimbursements in 2008 was primarily due to higher revenues in 2008 as these expenses are typically more fixed in nature. The dollar amount of these expenses increased slightly in 2008 due mainly to the increased number of catastrophe adjusters.
International Operations’ operating earnings increased to $38.9 million in 2008, an increase of 57.7% from 2007 operating earnings of $24.7 million for the reasons described below. This improvement reflected an increase in the operating margin from 6.5% in 2007 to 8.7% in 2008.
Revenues before reimbursements from our International Operations segment totaled $445.1 million in 2008, an 18.2% increase from the $376.6 million in 2007. This 2008 revenue increase was due to currency exchange rates and changes in the mix of services provided and in the rates charged for those services. Compared to 2007, the U.S. dollar was weaker in 2008 against most major foreign currencies, resulting in a net exchange rate benefit in 2008 of 2.8% or $10.6 million. Excluding the benefit of exchange rate fluctuations, International Operations revenues would have been $434.5 million in 2008, reflecting growth in
Reimbursements for out-of-pocket expenses included in total revenues for our International Operations segment increased to $42.1 million in 2008 from $38.7 million in 2007. This increase in 2008 was due primarily to increased out-of-pocket reimbursable expenses related to a major Canadian service agreement and also due to a weaker U.S. dollar in 2008.
Excluding the impact of the 2008 disposition of the Netherlands business, International Operations unit volumes by region for 2008 and 2007 were as follows:
The 2008 decrease in the United Kingdom case volumes was due primarily to higher flood claims in the prior year. The higher case volume in Canada was due to storm-related activity during 2008 and higher case volume from new and existing clients. The decrease in CEMEA case volume was due primarily to a reduction in storm-related claims in the current year in France, Holland, and Germany, and a decrease in high frequency, low severity claims activity in Spain. The 2008 decrease in the Americas case volumes was due primarily to a decrease in high-frequency, low-severity claims activity in Brazil. The 2008 increase in Asia-Pacific case volumes was primarily due to high frequency, low severity claims activity in China and Singapore and an increase in weather-related activity in Australia.
As a percent of segment revenues before reimbursements, direct compensation expense including related payroll taxes and fringe benefits, decreased to 68.1% in 2008 from 69.1% in 2007. This percentage decrease in 2008 was primarily due to higher revenues in Canada and the U.K. and the management of related expenses. There was an average of 4,229 International Operations FTEs in 2008, up from 3,702 in 2007.
Salaries and wages of International Operations segment personnel increased 17.4% to $259.5 million in 2008 compared to $221.0 million in 2007, decreasing as a percent of revenues before reimbursements from 58.7% in 2007 to 58.3% in 2008. The dollar amount of increase in these expenses in 2008 was primarily related to the increase in employees necessary to service the increased revenues and a weaker U.S. dollar during 2008. Payroll taxes and fringe benefits increased 12.1% to $43.7 million in 2008 compared to $39.0 million in 2007, decreasing as a percent of revenues before reimbursements from 10.4% in 2007 to 9.8% in 2008.
Our Broadspire segment recorded operating earnings of $3.5 million, or 1.1% of segment revenues before reimbursements in 2008, compared to $3.1 million, or 1.0% of segment revenues before reimbursements in 2007.
Broadspire segment revenues before reimbursements decreased 3.0% to $311.8 million in 2008 compared to $321.3 million in 2007. Unit volumes for the Broadspire segment, measured principally by cases received, decreased 11.1% from 2007 to 2008. Revenues increased by 8.1% from changes in the mix of services provided and in the rates charged for those services due to higher risk management information services revenues and the higher utilization of medical management services, resulting in a net 3.0% decrease in Broadspire segment revenues before reimbursements from 2007 to 2008. Broadspire revenues before reimbursements by major service line were as follows:
Reimbursements for out-of-pocket expenses included in total revenues for our Broadspire segment were $5.3 million in 2008, decreasing from $6.2 million in 2007. This 2008 decrease was primarily attributable to the declines in case volumes.
Broadspire segment salaries and wages decreased 4.3%, to $144.8 million in 2008 from $151.3 million in 2007. Payroll taxes and fringe benefits for our Broadspire segment totaled $30.6 million in 2008, decreasing 5.0% from 2007 expenses of $32.2 million. These 2008 decreases were primarily the result of the reduction in the number of FTEs in 2008.
Our Legal Settlement Administration segment reported 2008 operating earnings of $10.8 million, increasing slightly from $10.7 million in 2007 with the related operating margin increasing from 12.7% in 2007 to 14.4% in 2008 for the reasons discussed below.
Legal Settlement Administration revenues before reimbursements declined 11.0% to $74.9 million in 2008, compared to $84.2 million in 2007. Legal Settlement Administration revenues are project-based and can fluctuate significantly due primarily to the timing of securities class action and bankruptcy settlements. During 2008, we were awarded 182 new settlement administration assignments compared to 192 in 2007. At
Legal Settlement Administration expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of related segment revenues before reimbursements to 38.4% in 2008 from 40.4% in 2007. The 2008 decrease was primarily due to changes in the utilization of outsourced service providers.
Income tax provisions totaled $2.6 million, $11.6 million, and $5.4 million for 2009, 2008, and 2007, respectively. Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our various domestic and international operations which may be subject to differing tax rates, our ability to utilize net operating loss and tax credit carryforwards, and amounts related to uncertain income tax positions. Our effective tax rate, including discrete items and adjustments related to uncertain tax positions, for financial reporting purposes was 2.3%, 26.0%, and 24.8% for 2009, 2008, and 2007, respectively. Compared to 2007 and 2008, our effective tax rate was lower in 2009. After adjusting for the $140.3 million non-deductible goodwill charge, our effective tax rate was 9.7% in 2009. The lower rate in 2009 was due to a one-time $3.3 million income tax benefit for foreign tax credits and $2.4 million in ongoing reduced foreign taxes as a result of the completion of an internal restructuring of certain of our international operations in the second quarter of 2009.
Net corporate interest expense is comprised of interest expense that we incur on our short- and long-term borrowings, partially offset by interest income we earn on available cash balances and short-term investments. These amounts vary based on interest rates, borrowings outstanding, and the amounts of invested cash and investments. Interest expense is also impacted by our interest rate swap agreements. Corporate interest expense totaled $15.2 million, $19.6 million, and $19.2 million for 2009, 2008, and 2007, respectively. The decrease in interest expense in 2009 compared to 2008 and 2007 was due primarily to lower interest rates and lower levels of outstanding borrowings in 2009. Corporate interest income totaled $1.1 million, $2.0 million, and $1.9 million in 2009, 2008, and 2007, respectively. Corporate interest income decreased in 2009 compared to 2008 and 2007 primarily due to the overall decline in interest rates during 2009 and lower levels of available cash balances for investing during the course of 2009.
Amortization of customer-relationship intangible assets represents the non-cash amortization expense of customer-relationship intangible assets arising from our 2006 acquisitions of Broadspire Management Services Inc. and Specialty Liability Services, Ltd. Amortization expense associated with these intangible assets totaled $6.0 million in 2009, 2008, and 2007, respectively. This amortization is included in Selling, General, and Administrative expenses in our Consolidated Statements of Operations.
Unallocated corporate and shared costs were a net expense of $10.7 million, $6.7 million, and $8.9 million in 2009, 2008 and 2007, respectively. These costs increased in 2009 compared to 2008 due primarily to a $12.1 million increase in U.S. defined benefit pension expense, partially offset by lower self-insurance expenses and lower incentive compensation expense for our CEO. Unallocated corporate and shared costs in 2008 also included a loss of approximately $900,000 on the sublease of a portion of a Legal Settlement Administration facility. This loss affects the comparison of 2009 to 2008 and 2008 to 2007. Unallocated corporate and shared costs decreased in 2008 compared to 2007 due primarily to a $5.0 million decrease in U.S. defined benefit pension expense, partially offset by higher self-insurance expenses and higher incentive compensation expense for our CEO. In addition, during 2007 we incurred moving and relocation expenses associated with the move of our corporate headquarters and had lower expenses due to a bad debt recovery that was not allocated to any of our operating segments.
During October 2009, we entered into an agreement to sublease a portion of our leased Broadspire office building located in Plantation, Florida. The agreement currently provides the sublessor with options to sublease all or a portion of the remainder of the building at various dates in 2010. The sublease is for the remaining term of the lease. In February 2010, the subtenant exercised one of its options for additional space in the building and the sublessor may still exercise its option in 2010 for all of the remaining space. We have entered into a new lease for our Broadspire operations in Plantation and expect to vacate the current premises in April 2010. In connection with our move and the subleases, we estimate moving and sublease losses could be approximately $3.5 million in 2010. These charges represent the loss on the sublease space and the cost of moving from the current facility into the new facility.
We continue to evaluate current and forecasted economic conditions and their potential implications for us, including, among other things, estimating the fair value of our financial instruments, asset impairments, liquidity, compliance with our debt covenants, and relationships with our financing agreement counterparties and customers.
Currently, we believe that all of our material financial assets subject to fair value accounting have readily observable market prices. Most of our liquid assets are invested in cash and cash equivalents consisting of payable-on-demand bank deposit accounts and short-term money market funds. However, the recent financial crisis which affected the banking system and financial markets and the going-concern threats to banks and other financial institutions has resulted in significant market volatility. As a result, we intend to continue to monitor these assets for any changes in marketability. While we are not aware of any losses, or expected losses, related to these bank deposits or money market funds, in the U.S. or abroad, we cannot provide any assurances that future market events will not materially adversely impact the values of any such assets.
In May 2007, we entered into a three-year interest rate swap agreement that effectively converts the LIBOR-based portion of the interest rate under our Credit Agreement on an initial notional amount of $175.0 million of our floating-rate debt to a fixed rate of 5.25% ($80.0 million at December 31, 2009). This swap expires on May 31, 2010. In November 2009, the Company entered into a two-year forward-starting interest rate swap agreement that is effective beginning on June 30, 2010. The swap effectively converts the LIBOR-based portion of the interest rate on an initial notional amount of $90.0 million of the Company’s floating-rate debt to a fixed rate of 3.05% plus the applicable credit spread. The Company designated the interest rate swap as a cash flow hedge of exposure to changes in cash flows due to changes in interest rates on an equivalent amount of debt. The notional amount of the swap is reduced to $85.0 million on March 31, 2011 to match the expected repayment of the Company’s outstanding debt. The swap expires on September 30, 2012.
In connection with the Fifth Amendment to the Company’s Credit Agreement, dated as of October 31, 2006, by and among the Company, Crawford & Company International, Inc., SunTrust Bank, as agent and a lender, and the other lenders party thereto (as amended, the “Credit Agreement”) executed on October 27, 2009, the May 2007 interest rate swap was discontinued as a cash flow hedge of exposure to changes in cash flows due to changes in interest rates. Accordingly, any future changes in the fair value of this swap agreement will be recorded by the Company as an expense adjustment rather than a component of the Company’s accumulated other comprehensive loss. Such amount was not material for the year ended December 31, 2009. The amount in accumulated comprehensive loss at the time the hedge was discontinued was $2,652,000 and was $1,593,000 at December 31, 2009. Because it is still probable that the forecasted transactions that were hedged will occur, this loss on the interest rate swap agreement will be reclassified into earnings as an increase to interest expense over the remaining life of the interest rate swap agreement as the forecasted transactions occur. Although highly unlikely, should it become probable that the forecasted transactions will not occur, any amount in accumulated other comprehensive loss at such time would be reclassified as an expense adjustment.
We continue the ongoing monitoring of our customers’ ability to pay us for the services that we render to them. However, we have not experienced recent increases in bad-debt-related charge-offs of our accounts receivable. Based on historical results, we currently believe there is a low likelihood that writeoffs of our accounts receivable will have a material impact on our financial results. However, if one or more of our key customers files bankruptcy or otherwise becomes unable to make required payments to us, or if overall economic conditions continue to deteriorate, we may need to make material provisions in the future to increase our allowance for accounts receivable.
Our International Operations segment exposes us to foreign currency exchange rate changes that can impact translations of foreign-denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results. Increases in the value of the U.S. dollar compared to the other functional currencies in the locations in which we do business have negatively impacted our revenues and operating earnings in 2009 compared to recent years. We can not predict the impact that foreign currency exchanges rates may have on our future revenues or operating earnings in our International Operations segment.
At December 31, 2009, our working capital balance (current assets less current liabilities) was approximately $66.7 million, an increase of $7.4 million from the working capital balance at December 31, 2008. The primary causes of this increase at December 31, 2009 were a net reduction of $30.0 million in current liabilities, offset partially by a $23.5 net decrease in accounts receivable and unbilled revenues. During 2009, $15.1 million of cash was used to fund our defined benefit pension plans in the U.S. and U.K. Cash and cash equivalents at the end of 2009 totaled $70.4 million, decreasing $2.8 million from $73.1 million at the end of 2008.
Cash provided by operating activities decreased by $19.9 million in 2009, from $71.6 million in 2008 to $51.7 million in 2009. This decrease was due primarily to lower net income, and reductions in other current liabilities partially offset by continuing improvements in receivables management. In 2009, we reduced the average days-sales-outstanding in billed and unbilled accounts receivable by nearly 3 days. The 2009 cash flow from operations included $10.3 million in contributions to our frozen U.S. defined benefit plan. In 2010, we plan to make contributions of $4.3 million to our U.S. defined contribution retirement plans, $33.5 million to our U.S. defined benefit pension plan (including a discretionary $10.0 million contribution which was made in January 2010), and $8.0 million to our U.K. defined benefit pension plans. We expect to fund these contributions with cash provided by operating activities in 2010, which we expect to be less than 2009 as a result. Interest payments on our debt were $14.3 million in 2009, and tax payments, net of refunds, were $10.3 million in 2009.
Cash provided by operating activities increased by $47.7 million in 2008, from $23.3 million in 2007 to $71.0 million in 2008. This increase was due primarily to higher net income and improved receivables management, offset partially by increased cash contributions to our underfunded defined benefit pension plans. In 2008, we reduced the average days-sales-outstanding in billed and unbilled accounts receivable by 19 days. The 2008 improvement in cash flow from operations was net of $17.4 million in additional contributions to our frozen U.S. defined benefit pension plan. Interest payments on our debt were $19.0 million in 2008, and tax payments, net of refunds, were $8.0 million in 2008.
Cash used in investing activities increased by $3.1 million in 2009, from $28.0 million in 2008 to $31.2 million in 2009. Cash used to acquire property and equipment and capitalized software, including capitalization of internal software development costs, was $24.7 million in 2009 compared to $32.0 million in 2008. During 2009 we made cash payments for acquisitions of $6.3 million, primarily consisting of earnout
Cash used in financing activities was $12.8 million in 2008. In 2008, we repaid a net of $14.2 million of short-term and long-term borrowings.
Our compliance with the leverage ratio covenant is also sensitive to changes in our level of consolidated total funded debt, as defined in our Credit Agreement. In addition to short- and long-term borrowings, capital leases, and bank overdrafts, among other things, consolidated total funded debt includes letters of credit which can fluctuate based on our business requirements. An increase in borrowings under our Credit Agreement could negatively impact our leverage ratio, unless those increased borrowings are offset by a corresponding increase in our EBITDA. In addition, a reduction in EBITDA in the future could limit our ability to utilize available credit under the revolving credit facility contained in our Credit Agreement, which could negatively impact our ability to fund our current operations or make needed capital investments.
providing the Company the option, subject to its receipt of additional commitments, to increase the revolving commitment amount or incur additional term loans under the Credit Agreement of up to a maximum of $50.0 million in aggregate;
extending the revolving credit termination date to October 30, 2013, which is coterminous with the term loan maturity date thereunder;
increasing the Applicable Margin (as defined) and applicable commitment fee percentage and modifying the various leverage ratio thresholds upon which the Applicable Margin and applicable commitment fee percentage is based (and adjusted from time to time);
increasing the unsecured indebtedness basket from $5.0 million to $200 million, provided that 50% of the proceeds thereof are applied as a mandatory prepayment to the term loans and revolving loans, in that order under the Credit Agreement; and
We believe our current financial resources, together with funds generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations for the next 12 months. The most significant obligation we currently have which will become due after 12 months is the repayment of our Term Loan which is required in October 2013. We currently intend to enter into a new credit facility by December 31, 2012. We expect that we would use proceeds thereof to repay amounts outstanding under the term loan and, along with funds generated from operations, provide financial flexibility beyond 2012. No assurances can be provided that we will be able to enter into a new credit facility in a timely manner, or as to the terms or requirements thereunder.
As of December 31, 2009, the impact that our contractual obligations, including estimated interest payments, are expected to have on our liquidity and cash flow in future periods is as follows:
We are required to make substantial future payments on borrowings outstanding under our Credit Agreement, which payments will vary based on prevailing interest rates. Based on interest rates and borrowings at December 31, 2009, the preceding table shows estimated future interest payments over the remaining term of the term loan and revolving credit facility under our Credit Agreement, after considering the impact of required minimum quarterly principal payments on the term loan facility. The actual amounts of interest that we will ultimately pay will likely differ from the amounts presented above due to future changes in interest rates, which we are unable to predict, and possibly due to any accelerated principal payments that we may voluntarily make.
Future cash funding of our defined benefit pension plans will depend largely on future investment performance, interest rates, changes to mortality tables, and regulatory requirements. Effective December 31, 2002, we froze our U.S. defined benefit pension plan. The aggregate deficit in the funded status of our defined benefit pension plans totaled $216.3 million and $183.3 million at the end of 2009 and 2008, respectively. The 2009 increase in the funding deficit of our defined benefit pension plans primarily resulted from the decline in the discount rate used to determine the present value of the U.S. pension obligation. For 2010, we expect to make contributions of approximately $33.5 million (including a $10.0 discretionary contribution which was made in January 2010) and $8.0 million to our U.S. and U.K. defined benefit pension plans, respectively. During 2009, we made contributions of $10.3 million and $4.8 million to our U.S. and U.K. defined benefit pension plans, respectively.
In 2006, the Pension Protection Act of 2006 (“PPA”) was signed into U.S. law. The Act, among others things, introduced new funding requirements for our frozen U.S. defined benefit pension plan and impacts financial reporting for these plans. The requirements of the Act were effective for plan years beginning after December 31, 2007. PPA was thereafter amended by the Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”). Our frozen U.S. defined benefit pension plan was underfunded by $159 million at December 31, 2009 based on an accumulated benefit obligation of $420 million. Based on current assumptions of 5.88% for the interest rate to discount plan liabilities and 8.50% for the expected long-term rate of return on the plan’s assets, we estimate that we will have to make the following annual minimum contributions over the next eight years to our frozen U.S. defined benefit pension plan in order to meet the funding requirements under PPA and WRERA:
Legislation enacted on November 6, 2009 contained a provision that allowed U.S. businesses with net operating losses (“NOL”) in 2008 or 2009 to carry those losses back five years and obtain tax refunds. We filed a carryback claim for our 2008 U.S. NOL and anticipate receiving a $4.2 million tax refund in the first quarter of 2010. It is possible that cash outlays for income taxes may exceed income tax expense during the next three years as some deferred tax liabilities may enter into the determination of current taxable income.
Significant changes in our consolidated balance sheet as of December 31, 2009, compared to our consolidated balance sheet as of December 31, 2008, are as follows:
Our fixed-fee service arrangements typically call for us to handle claims on either a one- or two-year basis, or for the lifetime of the claim. In cases where we handle a claim on a non-lifetime basis, we typically receive an additional fee on each anniversary date that the claim remains open. For service arrangements where we provide services for the life of the claim, we are only paid one fee for the life of the claim, regardless of the ultimate duration of the claim. As a result, our deferred revenues for claims handled for one or two years are not as sensitive to changes in claim closing rates since the revenues are ultimately recognized in the near future and additional fees are generated for handling long-lived claims. Deferred revenues for lifetime claim handling are considered more sensitive to changes in claim closing rates since we are obligated to handle these claims to their ultimate conclusion with no additional fees for long-lived claims.
As of December 31, 2009, deferred revenues related to lifetime claim handling arrangements approximated $61.6 million. If the rate at which we close cases changes, the amount of revenues recognized within a period could be affected. In addition, given the competitive environment in which we operate, we may be unable to raise our prices to offset the additional expense associated with handling longer-lived claims should such case closing rates change. The change in our first-year case closing rates over the last ten years has ranged from a decrease of 3.4% to an increase of 1.7%, and has averaged 1.1%. A 1% change is a reasonable likely change in our estimate based on historical data. Absent an increase in per-claim fees from our clients, a 1% decrease in claim closing rates for lifetime claims would have resulted in the deferral of additional revenues of approximately $1.8 million, $1.8 million, and $2.1 million for the years ended December 31, 2009, 2008, and 2007, respectively. If our average claim closing rates for lifetime claims increased by 1%, we
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments and adjustments to invoiced amounts. Losses resulting from the inability of clients to make required payments are accounted for as bad debt expense, while adjustments to invoices are accounted for as reductions to revenues. These allowances are established by using historical write-off information intended to determine future loss expectations and by considering the current credit worthiness of our clients, any known specific collection problems, and our assessment of current industry conditions. Actual experience may differ significantly from historical or expected loss results. Each quarter, we evaluate the adequacy of the assumptions used in determining these allowances and make adjustments as necessary. Changes in estimates are recognized in the period in which they are determined. Historically, our estimates have been materially accurate.
We perform an annual impairment analysis of goodwill in which we compare the carrying value of our reporting units to the estimated market value of those reporting units as determined by discounting future projected cash flows. Based upon our scheduled annual analyses completed in the 2009, 2008, and 2007 fourth quarters, we did not have an impairment of goodwill in 2009, 2008, or 2007. However, as discussed below, we did recognize an impairment charge during 2009 prior to the annual impairment analysis. The estimated market values of our reporting units are based upon certain assumptions made by us. The estimated market values of our reporting units are reconciled to the Company’s market value as determined by its stock price in order to validate the reasonableness of the estimated market values. The reasonableness of the implied control premium estimated from the reconciliation of the sum of the reporting units’ fair values to the overall company fair value is determined by evaluating it against publicly available information about control premiums in recent transactions. Except as discussed below, the estimated market value of all of our reporting units significantly exceeded the carrying values of the reporting units.
Due to declines in current and forecasted operating results for our Broadspire reportable segment and reporting unit, the impact that declining U.S. employment levels have had on Broadspire’s revenue, and the weakness in our stock prices, we recorded a noncash goodwill and intangible asset impairment charge of $140.9 million in 2009. The $140.3 million goodwill impairment charge is not deductible for income tax purposes. The other intangible asset portion of the charge relates to the value of a trade name indefinite-lived intangible asset used in a small portion of the Broadspire reporting unit and was $600,000 of the total charge.
These impairment charges are not reflected in Broadspire’s segment operating loss. This impairment charge did not affect the Company’s liquidity or cash flows and had no effect on the Company’s compliance with the financial covenants under its Credit Agreement.
We sponsor various defined benefit pension plans in the U.S. and U.K. that cover a substantial number of employees in each location. We utilize the services of independent actuaries to help us estimate our pension obligations and measure pension costs. In 2008, we began using a year-end measurement date to determine net periodic pension costs for our defined benefit pension plans. Our U.S. defined benefit pension plan was frozen on December 31, 2002. Effective January 1, 2009 we determined that almost all of the U.S. plan participants are inactive and accordingly, changed the amortization period for net gains and losses from the average remaining service period of active employees (7.8 years) to the average remaining life expectancy of the inactive participants (24.3 years). Our U.K. defined benefit pension plans have been closed for new employees, but existing participants may still accrue additional limited benefits based on salary levels existing at the close date. Benefits payable under our U.S. defined benefit pension plan are generally based on career compensation; however, no additional benefits accrue on our frozen U.S. plan after December 31, 2002. Benefits payable under the U.K. plans are generally based on an employee’s salary at the time the applicable plan was closed. Our funding policy is to make cash contributions in amounts sufficient to maintain the plans on an actuarially sound basis, but not in excess of amounts deductible under applicable income tax regulations. Plan assets are invested in equity securities and fixed income investments, with a target allocation of approximately 65% in equity securities and 35% in fixed income investments.
of our U.S. and U.K. defined benefit pension plans changed by 0.50%, representing either an increase or decrease in expected returns, the impact to 2009 consolidated pretax income would have been approximately $1.7 million. If our assumptions for the discount rates used to determine the present value of projected benefits payable under the plans changed by 0.25%, representing either an increase or decrease in interest rates used to value pension plan liabilities, the impact to 2009 consolidated pretax income would have been approximately $$609,000.
Our effective tax rate, defined as our provision for income taxes divided by income (loss) before income taxes, for financial reporting purposes in 2009, 2008, and 2007 was 2.3%, 26.0%, and 24.8%, respectively, of taxable income. In 2009, $140.3 million of the $140.9 million goodwill and intangible asset impairment charges that we recorded is not deductible for income tax purposes. In determining the following sensitivity to changes in our effective tax rate, we are adding this amount to our 2009 pretax loss. If our effective tax rate used for financial reporting purposes changed by 1%, we would have recognized an increase or decrease to income tax expense of approximately $275,000, $438,000, and $215,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Our effective tax rate for financial reporting purposes is expected to range between 23.0% and 25.0% in 2010. This estimated tax rate range reflects enacted law as well as the impact of estimated discrete items, including the resolution of uncertain tax positions, that may affect our tax rate in 2010.
As of December 31, 2009 and 2008, our estimated liabilities for self-insured risks totaled $33.3 million and $36.5 million, respectively. The estimated liability is most sensitive to changes in the ultimate liability for a claim and, if applicable, the interest rate used to discount the liability. We believe our provisions for self-insured losses are adequate to cover the expected net cost of losses incurred. However, these provisions are estimates and amounts ultimately settled may be significantly greater or less than the provisions established. If the average discount rate we used to determine the present value of our self-insured workers’ compensation liabilities had changed by 1%, reflecting either an increase or decrease in underlying interest rates, our estimated liabilities for these self-insured risks at December 31, 2009 would have been impacted by approximately $481,000, resulting in an increase or decrease to 2009 consolidated net income of approximately $298,000.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ INVESTMENT, NONCONTROLLING INTERESTS, AND COMPREHENSIVE INCOME (LOSS)
For variable interest entities (“VIE”), the Company determines when it should include the assets, liabilities, and results of operations of a VIE in its consolidated financial statements. The Company consolidates the liabilities of its deferred compensation plan and the related assets, which are held in a rabbi trust and considered a VIE of the Company. At December 31, 2009 and 2008, the liabilities of this deferred compensation plan were $8,570,000 and $7,621,000, respectively, and the values of the assets held in the related rabbi trust were $13,551,000 and $12,985,000, respectively. These assets and liabilities are included in Other Noncurrent Assets and Other Noncurrent Liabilities on the Company’s Consolidated Balance Sheets.
References to the superseded standards in the Company’s consolidated financial statements have been replaced by references to the Codification. In the Codification, ASC referencing is in the following numerical format: XXX-YY-ZZ-PP, where XXX represents the Topic number, YY represents the Subtopic number, ZZ represents the Subsection number, and PP represents the paragraph number. Subsequent standard-setting activity will be issued in ASUs, referenced as follows: YYYY-XX, where YYYY is the year issued and XX represents the sequential number for each ASU issued in that year. An ASU will serve as a transient document during the time between issuance of the ASU and the date the new or revised guidance becomes completely effective; once effective, the Codification will reflect all necessary amendments for the new or revised guidance.
Both the U.S. Property & Casualty segment and the International Operations segment earn revenues by providing field investigation and evaluation of property and casualty claims for insurance companies. The Company’s Broadspire segment earns revenues by providing initial loss reporting services for their claimants, loss mitigation services such as medical case management and vocational rehabilitation, administration of trust funds established to pay claims, and risk management information services. The Legal Settlement Administration segment earns revenues by providing administration services related to settlements of securities cases, product liability cases, Chapter 11 bankruptcy noticing and distribution, and other legal settlements by identifying and qualifying class members, determining and dispensing settlement payments, and administering the settlement funds.
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 call for 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 only receives one fee for the life of the claim, regardless of the ultimate duration of the claim. Deferred revenues are recognized based on the estimated rate at which the services are provided. These rates are primarily based on a historical evaluation of actual claim closing rates by major line of coverage.
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 reported as revenues and expenses in the Company’s consolidated results of operations. The amounts of reimbursed expenses and related revenues offset each other in the Company’s results of operations with no impact to its net (loss) income.
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 within 30 days 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 carrying value due to their short-term contractual stipulations.
For step 1 of goodwill impairment testing, the carrying value of each of the Company’s reporting units is compared to the estimated fair value of the reporting unit as determined utilizing an income approach. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of the cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. The discount rate used reflects the Company’s assessment of a market participant’s view of the risks associated with the projected cash flows. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to these assumptions used and to management’s application of these assumptions, the Company believes that the income approach provides a reasonable estimate of the fair value of its reporting units.
Property and equipment are stated at cost less accumulated depreciation. Property and equipment, including assets under capital leases, consisted of the following at December 31, 2009 and 2008:
The Company self insures certain insurable risks consisting primarily of professional liability, auto liability, 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
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. A fixed number of U.S. employees, retirees, and eligible dependents are covered under a frozen post-retirement medical benefits plan in the U.S. In addition, the Company sponsors nonqualified, unfunded defined benefit pension plans for certain employees and retirees.
The Company sponsors defined benefit pension plans in the U.S. and U.K. Effective December 31, 2002, the Company elected to freeze its U.S. defined benefit pension plan. The Company’s U.K. defined benefit pension plans have also been closed for new employees, but existing participants may still accrue additional limited benefits based on salary amounts in effect at the time the plan was closed.
Effective December 31, 2006, the Company adopted new accounting guidance for the recognition and disclosure of defined benefit pension and other postretirement plans. This guidance requires sponsors of defined benefit pension and other postretirement benefit plans (collectively, “postretirement benefit plans”) to recognize the funded status of their postretirement benefit plans in the balance sheet, measure the fair value of plan assets and benefit obligations as of the date of the balance sheet, and provide additional disclosures. As permitted by the new guidance, the Company’s adoption was in two phases. On December 31, 2006, the Company adopted the first phase, the recognition and disclosure provisions. The requirement to measure the fair value of plan assets and benefit obligations as of the most recent balance sheet date, the second phase, was effective for the Company on January 1, 2008. Prior to 2008, the Company’s frozen U.S. defined benefit retirement plans as well as its frozen U.S. retiree medical benefit plan used a September 30 annual measurement date. Under the new guidance, the September 30 early measurement date can no longer be used and the Company became required to instead use December 31 as its year-end measurement date beginning in 2008. The Company’s United Kingdom (“U.K.”) and other international defined benefit plans already used a fiscal year-end measurement date, and thus no measurement date changes were needed for the non-U.S. plans. The new guidance provided entities with two alternatives to transition to a fiscal year-end measurement date. The Company selected the alternative that allowed it to use the existing early measurement date of September 30, 2007 to compute net benefit costs for the period between October 1, 2007 and December 31, 2008 (the “15-month alternative”). Net periodic benefit costs under the 15-month period alternative were a net credit of $711,000 before income taxes for the Company’s U.S. defined benefit pension plan and its frozen U.S. retiree medical benefit plan. Eighty percent of this net periodic benefit expense credit, or approximately $569,000 credit before income taxes, was recognized in the Company’s Consolidated Statement of Income as a periodic benefit cost reduction during 2008. The remaining 20% of the benefit credit, or approximately $94,000 credit after income taxes, was credited to the Company’s beginning retained earnings on January 1, 2008. The 2008 adoption of the second phase of the new guidance resulted in a credit of $769,000, or approximately $492,000 net of income taxes, to the Company’s Accumulated Other Comprehensive Loss.
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.
Both classes of the Company’s common stock, Common Stock Class A (“CRDA”) and Common Stock Class B (“CRDB”), share equally in the Company’s earnings for purposes of computing earnings per share (“EPS”).
For the year ended December 31, 2009, 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, 2009 totaled approximately 842,000 shares. These common share equivalents excluded weighted-average stock options of approximately 2,496,000, because their inclusion would have been anti-dilutive based on the average price of CRDA during 2009.
Weighted-average outstanding stock options to purchase approximately 1,944,000 shares of CRDA were excluded from the computations of diluted EPS for the year ended December 31, 2008, because their inclusion would have been antidilutive based on the average price of CRDA during 2008.
Weighted-average outstanding stock options to purchase approximately 2,494,000 shares of CRDA were excluded from the computations of diluted EPS for the year ended December 31, 2007, because their inclusion would have been antidilutive based on the average price of CRDA during 2007.
Realized net gains from foreign currency transactions totaled $2,011,000, $2,046,000, and $508,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
For operations outside the U.S. that prepare financial statements in currencies other than the U.S. dollar, results from 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 are included in comprehensive income (loss) in the Company’s Consolidated Statements of Shareholders’ Investment, Noncontrolling Interest, and 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.
Comprehensive income (loss) for the Company consists of the total of net income, foreign currency translations, the effective portions of the Company’s interest rate swaps, and accrued pension and retiree medical liability adjustments. The Company reports comprehensive income (loss), net of income taxes, in the Consolidated Statements of Shareholders’ Investment, Noncontrolling Interests, and Comprehensive Income (Loss). Ending accumulated balances for each item in accumulated other comprehensive loss included in the
Includes adjustment of $769,000, net of $492,000 after income tax, relating to the second phase adoption of new accounting guidance. See Note 9, “Retirement Plans.”
Effective January 1, 2006, the Company adopted the fair value recognition guidance issued by the FASB for share-based payments, using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2009, 2008, and 2007 included: (a) compensation cost for all share-based payments granted prior to, but not yet vested, as of January 1, 2006, based on the grant-date fair value, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value. Under the modified-prospective-transition method, results for prior periods have not been restated. The guidance requires the cash flows related to any tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) to be classified as financing cash flows. During the years ended December 31, 2009, 2008, and 2007, the Company recognized no such excess tax benefits.
Advertising costs are expensed in the period in which the costs are incurred. Advertising expenses were $3,121,000, $3,532,000, and $3,275,000, respectively, for the years ended December 31, 2009, 2008, and 2007.
On January 1, 2009, the Company adopted ASC 810-10-65-1, “Consolidation-Overall-Transition and Open Effective Date Information,” which revised the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Under this new guidance, noncontrolling interests are
On June 30, 2009, the Company adopted ASC 855, “Subsequent Events.” ASC 855 provides authoritative accounting and disclosure guidance for events occurring subsequent to the financial statement date. Prior to ASC 855, this subject was only addressed in the U.S. by existing auditing standards. The guidance in ASC 855 is similar to the existing guidance found in the auditing standards with some exceptions that are not intended to result in significant changes in the accounting and disclosure for subsequent events.
On August 28, 2009, ASU 2009-05 was issued by the FASB. ASU 2009-05 amended ASC 820-10, “Fair Value Measurements and Disclosures-Overall,” by providing additional guidance clarifying the measurement of liabilities at fair value. When a quoted price in an active market for the identical liability is not available, the amendments in ASU 2009-05 require that the fair value of a liability be measured using one or more of the listed valuation techniques that should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. In addition, the amendments in ASU 2009-05 clarify that when estimating the fair value of a liability, an entity is not required to include a separate input or adjustment to other inputs for the
existence of a restriction that prevents the transfer of the liability. The Company adopted the provisions of ASU 2009-05 on October 1, 2009. Its adoption did not have a material impact on the Company’s financial condition, results of operations, or cash flows.
On October 7, 2009, the FASB issued ASU 2009-13, which will supersede certain guidance in ASC 605-25, “Revenue Recognition-Multiple Element Arrangements,” and will require an entity to allocate arrangement consideration to all of its deliverables at the inception of an arrangement based on their relative selling prices (i.e., the relative-selling-price method). The use of the residual method of allocation will no longer be permitted in circumstances in which an entity recognized revenue for an arrangement with multiple deliverables subject to ASC 605-25. ASU 2009-13 will also require additional disclosures. The Company will adopt the provisions of ASU 2009-13 on January 1, 2011. Based on the Company’s current revenue arrangements, the adoption of ASU 2009-13 is not expected to have a material impact on the Company’s financial condition, results of operations, or cash flows.
The goodwill recognized, fair values of assets acquired, liabilities assumed, and the net cash paid in 2009 and 2008 related to acquired businesses, including adjustments for prior acquisitions, were as follows:
Adjustments for prior years’ acquisitions were for payments made under earnout agreements. Included in the 2008 goodwill adjustments of $4,949,000 for the International Operations segment is a $4,061,000 additional earnout payment due to the seller of Robertson & Company Group (“Robertson”). Robertson was acquired by the Company’s Australian subsidiary in 2002. Based on the earnout agreement, the Company recorded a determinable earnout payment in translated U.S. dollars of $4,061,000 in goodwill at December 31, 2008. However, the Company was not required to make this earnout payment until 2009, thus it was not reflected as a use of cash in the investing section of the Company’s Consolidated Statement of Cash Flows for the year ended December 31, 2008. This accrued earnout payment was paid to Robertson in 2009 when the translated amount in U.S. dollars had changed to $5,106,000 at time of payment.
Broadspire’s segment operating loss. This impairment charge did not affect the Company’s liquidity or cash flows and had no effect on the Company’s compliance with the financial covenants under its credit agreement.
The first step of the goodwill impairment testing and measurement process involved estimating the fair value of Broadspire using an internally prepared discounted cash flow analysis. The discount rate utilized in estimating the fair value of Broadspire was 14%, reflecting the Company’s assessment of a market participant’s view of the risks associated with Broadspire’s projected cash flows. The terminal growth rate used in the analysis was 3%. The results of step 1 of the process indicated potential impairment of the goodwill because the carrying value of Broadspire exceeded its estimated fair value. As a result, the Company then performed step 2 of the process to quantify the amount of the goodwill impairment. In this step, the estimated fair value of Broadspire was allocated among its respective assets and liabilities in order to determine an implied value of goodwill, in a manner similar to the calculations performed in the accounting for a business combination. The allocation process was performed only for purposes of measuring goodwill impairment, and not to adjust the carrying values of recognized tangible assets or liabilities. Accordingly, no impairment charge or carrying value adjustments were made to the basis of any tangible asset or liability as a result of this process. The fair value analysis relied upon both Level 2 data (publicly observable data such as market interest rates, the Company’s stock price, the stock prices of peer companies and the capital structures of peer companies) and Level 3 data (internal data such as the Company’s operating and cash flow projections).
The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008:
As a result of the Broadspire goodwill impairment noted above, the Company also performed impairment tests in 2009 for its intangible assets arising from business acquisitions. As a result, the Company recorded a noncash intangible asset impairment charge of $600,000 during 2009. This intangible asset related to the value of a trade name indefinite-lived intangible asset used in a small portion of the Broadspire reporting unit. This impairment charge is not reflected in Broadspire’s segment operating loss. This impairment charge did not affect the Company’s liquidity or cash flows and had no effect on the Company’s compliance with the financial covenants under its credit agreement.
On October 31, 2006, the Company entered into a secured credit agreement (the “Credit Agreement”) with a syndication of lenders. The Credit Agreement provides for a maximum borrowing capacity of $310,000,000, comprised of (i) a term loan facility (the “term loan”) with an original principal amount of $210,000,000 and (ii) a revolving credit facility in the principal amount of $100,000,000 with a swingline
subfacility, a letter of credit subfacility, and a foreign currency sublimit. The Credit Agreement has been amended five times since October 31, 2006. All amendments to the Company’s Credit Agreement have been accounted for as a modification of existing debt. Amended provisions of the original agreement and amendments that were subsequently superseded by other amendments are not included in this note.
At December 31, 2009 and 2008, a total of $180,675,000 and $194,618,000, respectively, was outstanding under the Credit Agreement. In addition, undrawn commitments under letters of credit totaling $19,569,000 and $19,870,000 were outstanding at December 31, 2009 and 2008, respectively, under the letters of credit subfacility of the Credit Agreement. These letter of credit commitments were for the Company’s own obligations. Including the amounts committed under the letters of credit subfacility, the unused balance of the revolving credit portion of the credit facility totaled $80,431,000 and $68,286,000 at December 31, 2009 and 2008, respectively.
Short-term borrowings, including bank overdraft facilities, totaled $32,000 and $13,366,000 at December 31, 2009 and 2008, respectively.
Interest expense, including any impact from the Company’s interest rate hedge and amortization of capitalized loan origination costs, on the Company’s short-term and long-term borrowings was $15,229,000, $19,616,000, and $19,202,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Interest paid on the Company’s short-term and long-term borrowings was $14,339,000, $19,037,000, and $21,166,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
The Credit Agreement contains customary representations, warranties and covenants, including covenants limiting liens, indebtedness, guaranties, mergers and consolidations, substantial asset sales, investments, loans, sales and leasebacks, dividends and distributions, and certain fundamental changes. Each of the direct and indirect domestic subsidiaries of the Company, and certain of its foreign subsidiaries, guarantee the obligations of the Company under the Credit Agreement. The Company’s and the subsidiary guarantors’ obligations under the Credit Agreement are secured by liens on all of their respective personal property and mortgages over certain of their owned and leased properties. In addition, the Credit Agreement requires the Company to meet certain financial tests.
increased the unsecured indebtedness basket from $5,000,000 to $200,000,000, provided that 50% of the proceeds thereof are applied as a mandatory prepayment to the term loans and revolving loans, in that order under the Credit Agreement; and
The Credit Agreement also provides for the Company and its consolidated subsidiaries to maintain a minimum net worth of at least the sum of (i) $150,000,000 plus (ii) 50% of the cumulative net income of the
In connection with the Fifth Amendment to the Company’s Credit Agreement, this interest rate swap was discontinued as a cash flow hedge of exposure to changes in cash flows due to changes in interest rates. Accordingly, any future changes in the fair value of this swap agreement will be recorded by the Company as a noninterest expense adjustment rather than a component of the Company’s accumulated other comprehensive loss. Such amount was not material for the year ended December 31, 2009. The pretax amount in accumulated comprehensive loss at the time the hedge was discontinued was $2,652,000 and was $1,593,000 at December 31, 2009. Because it is still probable that the forecasted transactions that were hedged will occur, this loss on the interest rate swap agreement will be reclassified into earnings as an increase to interest expense over the remaining life of the interest rate swap agreement as the forecasted transactions occur. The
Company believes there have been no material changes in the creditworthiness of the counterparty to this interest-rate swap agreement
The balances and changes in accumulated other comprehensive loss related to the effective portions of the Company’s interest rate hedges for the year ended December 31, 2009 and 2008 were as follows:
The Company’s interest rate swap agreements contain a provision providing that if the Company is in default under its Credit Agreement (see Note 4), the Company may also be deemed to be in default under its interest rate swap agreements. If there was such a default, the Company could be required to contemporaneously settle some or all of the obligations under the interest rate swap agreements at values determined at the time of default. At December 31, 2009, no such default existed, and the Company had no assets posted as collateral under its interest rate swap agreements.
The fair value hierarchy has three levels which are based on the reliability of the inputs used to determine fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The fair value of accounts payable and short-term borrowings approximates their carrying value due to the short-term maturity of the instruments. The Company estimates the fair value of its term note payable based on a discounted cash flow analysis based on current borrowing rates for new debt issues with similar credit quality. The fair value of the Company’s variable-rate long-term debt approximates carrying value at December 31, 2009.
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 the leased vehicles
are paid by the Company. Rental expenses, net of amortization of any incentives provided by lessors, for operating leases consisted of the following:
At December 31, 2009, future minimum payments under non-cancelable operating leases with terms of more than 12 months were as follows: 2010 - $51,723,000; 2011 - $41,668,000; 2012 - $34,429,000; 2013 - $28,342,000; 2014 - $21,386,000; and thereafter - $61,756,000. Where applicable, the amounts above include sales taxes.
On October 31, 2006, the Company acquired Broadspire Management Services, Inc. (“BMSI”). Included in the acquired commitments of BMSI was a long-term operating lease for a two-building office complex in Plantation, Florida. The term of this lease ends in December 2021. Included in the future minimum office lease payments for operating leases noted above are total lease payments $51,020,000 related to this Plantation, Florida lease. A majority of this office space is subleased at December 31, 2009. Under executed sublease arrangements at December 31, 2009 between the Company and sublessors, as described below, the sublessors are obligated to pay the Company minimum sublease payments as follows:
One of the Plantation, Florida sublease agreements is for an entire building and expires in March 2014. At expiration, this sublessor has the option to renew this sublease agreement through December 2021. Should this sublessor elect to renew the sublease agreement, additional sublease payments from this sublessor to the Company would be approximately $14,277,000 over the renewal period. This additional $14,277,000 is not included in the above table.
In February 2010, the sublessor exercised one of its options for additional space in the building, and the Company expects to recognize a pre-tax loss of approximately $1,942,000 on that phase of the sublease. For
the space subleased in February 2010, the Company expects to receive approximately $9,318,000 in additional sublease payments from the sublessor over the life of the sublease; this amount is not included in the above table. If the sublessor exercises it remaining option, the Company would record an additional loss of approximately $997,000 in 2010 on that phase of the sublease, and the Company would receive additional sublease payments of approximately $5,323,000 over the life of the sublease (not reflected in the above table).
Due to the subleases, in 2010 the Company plans to relocate its Broadspire operations in Plantation, Florida to another building. Accordingly, the Company entered into a new lease for office space in 2010. In connection with this relocation, the Company expects to incur moving expenses of approximately $600,000 during the second quarter of 2010.
the utilization of foreign tax credits. At December 31, 2009, such undistributed earnings totaled $89,001,000. Determination of the deferred income tax liability on these unremitted 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, 2009 and 2008:
At December 31, 2009, the Company had deferred tax assets related to net operating loss carryforwards of $19,443,000. An estimated $9,948,000 of the deferred tax asset will not expire, and $9,495,000 will expire over the next 20 years if not utilized by the Company. A valuation allowance is provided when it is deemed more-likely-than-not that some portion or all of a deferred tax asset will not be realized. At December 31, 2009, the Company has a $9,640,000 valuation allowance related to certain net operating loss carryforwards generated in its international operations. The remaining net operating loss deferred tax asset of $9,803,000 is expected to be fully utilized by the Company.
The Company accrues interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2009, 2008, and 2007, the Company recorded net interest income related to unrecognized tax benefits of $248,000, $29,000, and $397,000, respectively. Total accrued interest expense at December 31, 2009, 2008, and 2007, was $651,000, $899,000, and $928,000, respectively.
It is reasonably possible that a reduction in a range of $50,000 to $300,000 of unrecognized tax benefits may occur within 12 months as a result of projected resolutions of worldwide tax uncertainties.
Employer contributions under the Company’s defined contribution plans are determined annually based on employee contributions, a percentage of each covered employee’s compensation, and years of service. The
Certain other employees located in the Netherlands, Norway, and Germany (referred to herein as the “other international plans”) have retirement benefits that are accounted for as defined pension benefits under U.S. GAAP.
Benefit payments from supplemental pension plans during 2009 and 2008 included $309,000 and $311,000, respectively, in payments related to unfunded plans that were paid from Company assets.
The discount rate assumptions reflect the rates at which the Company believes the benefit obligations could be effectively settled. The discount rates were determined based on the yield for a portfolio of investment grade corporate bonds with maturity dates matched to the estimated future payments of the plans’ benefit obligations. The expected long-term rates of return on plan assets were based on the plans’ asset mix, historical returns on equity securities and fixed income investments, and an assessment of expected future returns. Due to the status of the plans, increases in compensation rates are not material to the computations of benefit obligations or net periodic benefit cost.
U.S. Plan assets included shares of the Company’s Class A and Class B Common Stock with a total fair value of $6,690,000 at December 31, 2008. These shares of the Company’s common stock were sold and removed from the U.S. Plan’s assets in 2009.
The fair value of the U.S. Plan and the U.K. Plans’ pension assets at December 31, 2009, by asset category, was as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
As disclosed in Note 4, the Company’s Credit Agreement contains restrictions on dividends and distributions.
The Company has various stock-based compensation plans for its employees and members of its board of directors. Only shares of the Company’s Class A Common Stock (“CRDA”) are involved in these plans. The fair value of an equity award is estimated on the grant date without regard to service or performance conditions. The fair value is recognized as compensation expense over the requisite service period for all awards that vest. When recognizing compensation costs, estimates are made for the number of awards that will vest, and subsequent adjustments are made to reflect both changes in the number of shares expected to vest and actual vesting. Compensation cost is not recognized for awards that do not vest because service or performance conditions are not satisfied. Compensation cost recognized at any date equals at least the portion of the grant-date value of an award that is vested at that date. For awards granted prior to January 1, 2006 that were not previously subject to the expense recognition provisions of previous accounting guidance, compensation expense under the revised accounting guidance is recognized only for the portions of those awards that were unvested at the adoption of the revised accounting guidance on January 1, 2006. Expense for these awards is recognized ratably beginning January 1, 2006 over the remaining vesting period of each award.
The pretax compensation expense recognized for all stock-based compensation plans was $5,510,000, $5,858,000 and $2,929,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
The total income tax benefit recognized in the Consolidated Statements of Operations for stock-based compensation arrangements was approximately $1,709,000, $1,801,000, and $816,000 for the years ended December 31, 2009, 2008, and 2007, 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 United States or the applicable country. Accordingly, the Company does not recognize tax benefits on all of its stock-based compensation expense.
During 2009, 2008 and 2007, the Company recognized no 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.
The Company has granted nonqualified and incentive stock options to key employees and directors. All stock options were for shares of CRDA. Option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant. The Company’s stock option plans have been approved by shareholders, although 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 five years (20% each year) and have a typical life of ten years. Compensation cost for stock options is recognized on a straight-line basis over the requisite service period for the entire award. For awards granted prior to January 1, 2006, compensation expense is recognized only for the portion of the award that was unvested on January 1, 2006. For the years ended December 31, 2009, 2008, and 2007, compensation expense of $418,000, $469,000 and $536,000, respectively, was recognized for employee stock option awards.
No stock options were granted to employees or members of the Board of Directors in 2009.
The intrinsic value of all outstanding stock options at December 31, 2009 and 2007 was zero since the per share market price of CRDA was less than the exercise price of all outstanding stock options. The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2008, and 2007 was $2.55 and $2.07, respectively. No stock options were granted in 2009. The total intrinsic value of stock options exercised during the years ended December 31, 2008 and 2007 was $611,000 and $40,000, respectively. The options exercised in 2009 had no intrinsic value. The total fair value of stock options vesting during the years ended December 31, 2009, 2008, and 2007 was $484,000, $365,000, and $1,100,000, respectively.
The expected dividend yield used for 2007 was based on the Company’s historical dividend yield. However, a dividend yield of zero was used in 2008 since the Company has not paid any cash dividends to shareholders since August 2006 and at this time the Company cannot predict when cash dividends will resume. The expected volatility of the price of CRDA was based on historical realized volatility. The risk-free interest rate was the implied yield available on U.S. Treasury zero-coupon issues with terms equal to the expected term used in the pricing formula. The expected term of the option took into account both the contractual term of the option and the effects of expected exercise behavior. No stock options were granted in 2009.
A summary of the status of the Company’s nonvested performance shares as of December 31, 2009, and changes in 2009, 2008, and 2007, is presented below:
Compensation expense recognized for all performance shares totaled $3,514,000, $4,481,000, and $1,616,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Compensation cost for these awards is net of estimated or actual award forfeitures. As of December 31, 2009, there was an estimated $1,914,000 of unearned compensation cost for all nonvested performance shares. All of this unearned compensation cost is expected to be fully recognized by the end of 2011.
Compensation expense recognized for all restricted shares for the years ended December 31, 2009, 2008, and 2007 was $1,080,000, $515,000, and $121,000, respectively. As of December 31, 2009, there was $469,000 of total unearned compensation cost related to nonvested restricted shares which is expected to be recognized over a weighted-average period of 1.6 years.
The Company has three employee stock purchase plans: the U.S. Plan, the U.K. Plan, and the International Plan. The U.S. Plan is also available to eligible employees in Canada, Puerto Rico, and the U.S. Virgin Islands. 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. The International Plan is not yet active.
For both the U.S. and U.K. 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.
During the years ended December 31, 2009 and 2008, a total of 136,874 and 135,368 shares, respectively, of CRDA were issued under the U.S. Plan to the Company’s employees at discounted purchase prices of $3.11 and $5.32, respectively. At December 31, 2009, an estimated 259,000 shares will be purchased under the U.S. Plan in 2010. During the years ended December 31, 2009, 2008, and 2007, compensation expense of $372,000, $270,000, and $251,000, respectively, was recognized for the U.S. Plan.
At December 31, 2009, an estimated 634,000 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 CRDA, and future employee participation rates. The discounted purchase price for a share of the Company’s Class A Common Stock under the U.K. Plan ranges from $3.56 to $5.05, and based on the price of CRDA at December 31, 2009, no shares will be purchased at the end of the current withholding periods. For the years ended December 31, 2009, 2008, and 2007, compensation cost of $124,000, $94,000, and $157,000, respectively, was recognized for the U.K. Plan. During 2009 and 2008, a total of 2,478 shares and 3,568 shares, respectively, of CRDA were issued under the U.K. Plan. No shares were issued under this plan in 2007.
Under the International Employee Stock Purchase Plan approved in 2009, up to 1,000,000 shares of CRDA may be issued. As of December 31, 2009, no employees were participating in this plan.
In the normal course of its business, the Company sometimes pays for certain out-of-pocket expenses that are reimbursed by its clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are reported as revenues and expenses in the Company’s Consolidated Statement of Operations. However, in evaluating segment revenues, Company management excludes these reimbursements from segment revenues.
On January 1, 2008, the Company’s Strategic Warranty Services unit was transferred from the Legal Settlement Administration segment to the U.S. Property & Casualty segment. Prior period amounts for both segments have been restated to reflect this transfer.
The Company’s reportable segments’ total operating earnings reconciled to consolidated income (loss) before income taxes for the years ended December 31, 2009, 2008, and 2007 were as follows:
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 $242,334,000 and $246,280,000 at December 31, 2009 and 2008, respectively. In addition, the Company’s Legal Settlement Administration segment administers funds in noncustodial accounts at financial institutions that totaled $578,821,000 and $1,010,593,000 at December 31, 2009 and 2008, respectively.
Separately, the Company and Platinum have agreed to arbitration regarding the application of the purchase price adjustment mechanism contained in the Stock Purchase Agreement. The Company has received a notice from Platinum which disputes the Purchaser’s Statement (as defined in the Stock Purchase Agreement) delivered by the Company to Platinum and also asserts that Platinum is owed a certain amount thereunder. The Company is contesting this notice and has asserted its belief that it is owed a certain amount thereunder. At the present time, the Company is unable to determine any possible outcome of this dispute. Because all of the goodwill in the Broadspire segment is impaired, as disclosed in Note 2, “Goodwill and Intangible Assets,” any required payment or recovery will result in a nontaxable charge or credit to the Company’s results of operations.
In 2003, BMSI acquired NATLSCO, Inc. from a wholly-owned subsidiary of Lumberman Mutual Casualty Company (“LMC”). BMSI assumed certain obligations to service and administer a population of claims outstanding at the 2003 acquisition date. Liquidity to support these casualty claims operations for the foreseeable future was provided by cash infused by LMC at the 2003 acquisition date, and a receivable held in trust, which has and will continue to be distributed to BMSI in accordance with a trust agreement through August 2012. Broadspire received total distributions from this trust of $2,272,000 during 2009, $4,693,000 during 2008, and $7,569,000 during 2007. The Company believes that the funds that have been and will be received from LMC and the trust are sufficient to at least cover the actual costs that Broadspire will incur over the next several years to service and administer this population of claims through closure. Broadspire’s revenues from LMC totaled $9,071,000 for 2009, $10,710,000 for 2008, and $13,474,000 for 2007. Accounts
receivable from LMC included in accounts receivable in the Company’s Consolidated Balance Sheet were approximately $955,000 and $2,129,000 at December 31, 2009 and 2008, respectively.
Under the sale agreement, the $8,000,000 base sale price is subject to upward revision depending upon the buyer’s ability to subsequently redevelop the property. The gain of $4,844,000 was based on the base sale price and did not include any amount for the potential upward revision of the sale price. Should such revision subsequently occur, the Company could ultimately realize a larger gain.
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. Management believes it maintains an effective system of internal accounting controls.
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 and approved by shareholder vote. 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.
(i) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the Company’s assets;
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2009.
The Company’s independent registered public accounting firm, Ernst & Young LLP is appointed by the Audit Committee of the Company’s Board of Directors, subject to ratification by our Company’s shareholders. Ernst & Young LLP has audited and reported on the consolidated financial statements of Crawford & Company and the Company’s internal control over financial reporting. The reports of Ernst & Young LLP are contained in Item 8 of this Annual Report on Form 10-K.
We have audited the accompanying consolidated balance sheets of Crawford & Company as of December 31, 2009 and 2008 and the related consolidated statements of operations, shareholders’ investment, noncontrolling interests and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crawford & Company at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Crawford & Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2010 expressed an unqualified opinion thereon.
We have audited Crawford & Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Crawford & Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
This is a segment financial measure representing earnings (loss) before net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, other gains and expense, and income taxes. Net income or loss attributable to noncontrolling interests has been removed from segment operating earnings. See Note 12, “Segment and Geographic Information,” to the consolidated financial statements contained in this Item 8.
During the fourth quarter of 2009, the Company recognized pre-tax charges of $2,244,000 for restructuring expenses and a sublease agreement. See Note 16, “Restructuring Activities and Other Charges,” to the consolidated financial statements contained in this Item 8.
During the fourth quarter of 2008, the Company recognized pre-tax expenses of $3,300,000 related to restructuring charges and a non-taxable gain of $2,512,000 for the sale of a subsidiary. See Note 16, “Restructuring Activities and Other Charges,” and Note 2, “Dispositions and Acquisitions of Businesses,” to the consolidated financial statements contained in this Item 8.