a) Prior to January 1, 2010, the Company calculated the internal growth rate of the revenue of its businesses as a measure of financial performance. This calculation compared the change in revenue of a comparable group of businesses for the same time period in successive years. The Company included businesses in this calculation at the beginning of the first fiscal quarter that began one year after acquisition, unless a business internally consolidated with another owned business, made a sub-acquisition that represented more than 25% of the base earnings of the acquiring business, or a significant portion of the business’ assets were sold. With respect to two owned businesses that consolidated, the consolidated business was excluded from the calculation from the time of the consolidation until the first fiscal quarter that began one year after acquisition of the most recently acquired firm participating in the consolidation. However, if both firms involved in a consolidation were included in the internal growth rate calculation at the time of the consolidation, the combined firm continued to be included in the calculation after the consolidation. With respect to sub-acquisitions, to the extent the sub-acquired firm did not separately report financial statements to NFP, the acquiring firm was excluded from the calculation from the time of the sub-acquisition until the first fiscal quarter beginning one year following the sub-acquisition. Sub-acquisitions that represent less than 25% of the base earnings of the acquiring business were considered internal growth. With respect to situations where a significant portion of a business’ assets were sold, the surviving entity was excluded from the internal growth rate calculation from the time of the sale until one year following the sale. With respect to dispositions, the Company included businesses up to the time of disposition and excluded such businesses for all periods after the disposition.
b) Because the Company’s revenues include amounts that are passed through to producers as commissions and fees, the Company’s organic net revenue growth represents the Company’s internal growth rate, as defined in footnote (a) above, less the amount of commissions and fees included in operating expenses.
c) Effective January 1, 2010, the Company calculates organic revenue growth as a measure of financial performance. Organic revenue growth is generally calculated consistently with the internal revenue growth calculation described above, but with certain principal differences. First, other than for sub-acquisitions, the Company excludes revenue from new acquisitions for the first twelve months after acquisition, rather than waiting until the start of the first fiscal quarter that begins one year after acquisition. With respect to sub-acquisitions, the Company establishes an internal revenue generation expectation (the “acquired revenue”) of a new sub-acquisition. During the first twelve months immediately following a sub-acquisition, the Company subtracts this acquired revenue amount from the actual revenue generated by the business that made the sub-acquisition, and thereby includes only the revenue growth above or below the acquired revenue within the organic growth percentage. Additionally, where a significant portion of a business’ assets have been disposed, the Company reduces the prior year’s comparable revenue proportionally to the percentage of assets that have been disposed of in making the organic growth comparison.
Founded in 1998, the Company has grown organically and through acquisitions, operating in the independent distribution channel. This distribution channel offers independent advisors the flexibility to sell products and services from multiple non-affiliated providers to deliver objective, comprehensive solutions. The number of products and services available to independent advisors is large and can lead to a fragmented marketplace. NFP facilitates the efficient sale of products and services in this marketplace by using its scale and market position to contract with leading product providers. These relationships foster access to a broad array of insurance and financial products and services as well as better underwriting support and operational services. In addition, the Company is able to operate effectively in this distribution channel by leveraging financial and intellectual capital, technology solutions, cross-selling, and regulatory compliance support across the Company. The Company’s marketing and wholesale organizations also provide an independent distribution channel for benefits, insurance and investment products and services, serving both third-party affiliates as well as member NFP-owned businesses.
Effective January 1, 2010, NFP organized its businesses into three reportable segments: the CCG, the ICG and the ASG. Periods prior to January 1, 2010 have been restated to reflect this basis of segmentation. The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits, and commercial property and casualty insurance. The ICG is a leader in the delivery of independent life insurance, annuities, long term care and wealth transfer solutions for high net worth individuals and includes wholesale life brokerage, retail life and investment advisory services. The ASG, including NFPSI, a leading independent broker-dealer and registered investment advisor, serves independent financial advisors whose clients are high net worth individuals and companies by offering broker-dealer and asset management products and services. The ASG attracts financial advisors seeking to provide clients with sophisticated resources and an open choice of products. NFP promotes collaboration among its business lines to provide its clients the advantages of a single coordinated resource to address their corporate and individual benefits, insurance and wealth management planning needs.
NFP enhances its competitive position by offering its clients a broad array of insurance and financial solutions. NFP’s continued investments in marketing, compliance and product support provide its independent advisors with the resources to deliver strong client service. NFP believes its operating structure allows its businesses to effectively and objectively serve clients at the local level while having access to the resources of a national company. NFP’s senior management team is composed of experienced insurance and financial services leaders. The Company’s principals, who manage the day-to-day operations of many of NFP’s subsidiaries, are professionals who are well positioned to understand client needs.
While the challenging economic environment is showing signs of stabilization, there is uncertainty as to the scope of a full economic recovery. Market volatility and an uncertain economic environment may reduce the demand for the Company’s services or the products the Company distributes and could negatively affect the Company’s results of operations and financial condition.
The Company earns revenue that consists primarily of commissions and fees earned from the sale of financial products and services to their clients. The Company also incurs commissions and fees expense and compensation and non-compensation expense in the course of earning revenue. NFP pays management fees to non-employee principals and/or certain entities they own based on the financial performance of each respective business. The Company refers to revenue earned by the Company’s businesses less the operating expenses of its businesses and allocated shared expenses associated with shared corporate resources as income (loss) from operations. The Company’s operating expenses include commissions and fees, compensation and non-compensation expense, management fees, amortization, depreciation, impairment of intangible assets and (gain) loss on sale of businesses.
Information with respect to all sources of revenue and income (loss) from operations and income before management fees by reportable segment for the years ended December 31, 2010, 2009, and 2008, is presented below (in millions).
Overview of the Year ended December 31, 2010 compared with the year ended December 31, 2009
In 2009, the increase in management fees as a percentage of adjusted income before management fees was largely due to the increase in the accrual during the fourth quarter for the PIP of $9.0 million, of which $2.0 million was allocated to the CCG and the remaining $7.0 million to the ICG. Excluding the effect of this accrual, management fees was lower compared with the prior year period due to a decline in the ongoing incentive plan accrual and lower business earnings. On a segment level, management fees increased slightly within the CCG, and decreased by $27.1 million in the ICG.
Individual Client Group. Commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. In the marketing organization and wholesale life brokerage business line, the ICG generally receives commissions paid by the insurance carrier for facilitating the placement of the product. Wholesale life brokerage revenue also includes amounts received by NFP’s life brokerage entities, including its life settlements brokerage entities which assist advisors with the placement and sale of life insurance. In the retail life business line, commissions are generally calculated as a percentage of premiums, generally paid in the first year. The ICG receives renewal commissions for a period following the first year. The ICG’s investment advisory business line earns fees for offering financial advisory and related services. These fees are generally based on a percentage of assets under management and are paid quarterly. In addition, the ICG may earn commissions related to the sale of securities and certain investment-related insurance products.
including incentive fees, are recognized when all contractual obligations have been satisfied. Most NFP-owned businesses and members of NFP’s marketing and wholesale organizations conduct securities or investment advisory business through NFPSI.
The Company accounts for stock-based awards to principals as part of management fee expense in the consolidated statements of operations. Effective June 30, 2010, NFP accounts for stock-based awards granted to principals as liability awards. Liability classified stock-based compensation is adjusted each reporting period to account for subsequent changes in the fair value of NFP’s common stock. Prior to June 30, 2010, NFP incorrectly accounted for stock-based awards issued to principals as equity-classified awards, and therefore recognized stock-based compensation based on NFP’s common stock on the date of grant. The impact of the correction was not material to the prior period financial statements. On September 17, 2010 NFP accelerated the vesting of approximately 1.5 million restricted stock units (“RSUs”) granted to certain principals primarily through the 2009 Stock Incentive Plan. This action resulted in a reduction of NFP’s fully diluted shares, eliminated potential earnings volatility associated with the variable accounting treatment of the principals’ RSUs and resulted in a pre-tax charge of approximately $13.4 million in the third quarter of 2010.
compounded at 35% over three years, the new incentive target is fixed. If the principal does not receive contingent consideration or an incentive payment in a prior period, the incentive target remains unchanged. The bonus is structured to pay the principal 5% to 40% of NFP’s share of incremental earnings from growth. Effective December 31, 2008, NFP has elected to pay all incentive awards under this plan in cash. Executive officers do not participate in the ongoing incentive or PIP plan, both of which were funded with the Company’s cash flow.
Management fees may be offset by amounts paid by the principals and/or certain entities they own under the terms of the management contract for capital expenditures, including sub-acquisitions, in excess of $50,000. These amounts may be paid in full or over a mutually agreeable period of time and are recorded as a “deferred reduction in management fees.” Amounts recorded in deferred reduction in management fees are amortized as a reduction in management fee expense generally over the useful life of the asset. The ratio of management fees to adjusted income before management fees is dependent on the percentage of total earnings generated by the Company, the performance of the Company’s businesses relative to base earnings and target earnings, the growth of earnings of the Company’s businesses in the periods after their first three years following acquisition and the ASG’s impact on income from operations and a small number of businesses without a principal, to which no management fees are paid. Due to NFP’s priority earnings position, if earnings are below target earnings in a given year, NFP’s share of total earnings would be higher for that year for that business. If a business produces earnings at or above target earnings, NFP’s share of total earnings would be equal to the percentage of the earnings acquired by NFP in the initial transaction, less any percentage due to additional management fees earned under the ongoing incentive plan, PIP or BIP. The Company records share-based payments related to principals as management fees.
The table below summarizes the results of operations of NFP’s reportable segments for the periods presented and uses the following non-GAAP measures: (i) income before management fees, (ii) adjusted income before management fees (iii) management fees as a percentage of adjusted income before management fees and (iv) management fees (excluding accelerated vesting of certain RSUs).
The Company defines adjusted income before management fees as income before management fees excluding corporate income, which is the allocation of corporate revenue and expenses to businesses where management fees are earned by principals/an entity owned by the principals. The CCG and ICG’s corporate income includes revenue and expense allocations from the Company’s corporate shared services. As previously discussed, since the ASG is primarily comprised of NFPSI, an entity for which no management fees are paid and no earnings are shared with principals, all revenue and expenses from the ASG are considered a component of corporate income. The Company does not use these non-GAAP measures to evaluate entities for which no management fees are paid, such as NFPSI. Whether or not a principal participates in the earnings of a business is dependent on the specific characteristics and performance of that business.
Management fees as a percentage of adjusted income before management fees represents the percentage of earnings that is not retained by the Company as profit, but is paid out to principals. Management fees as a percentage of adjusted income before management fees may generally be lower for the CCG as compared to the ICG since in the last several years of acquisitions through 2008, the Company focused on acquiring larger businesses with a higher level of recurring revenue, such as benefits businesses in the CCG, and retaining a larger preferred position in the earnings of these businesses.
The Company uses management fees (excluding accelerated vesting of certain RSUs) to show management fees without the one-time impact of the accelerated vesting of certain RSUs on September 17, 2010. Management
The Company uses adjusted income before management fees, management fees as a percentage of adjusted income before management fees and management fees (excluding accelerated vesting of certain RSUs) to evaluate how much of the reportable segment’s margin and margin growth is being shared with principals. This management fee percentage is a variable, not a fixed, ratio. Management fees as a percentage of adjusted income before management fees will fluctuate based upon the aggregate mix of earnings performance by individual businesses. It is based on the percentage of the Company’s earnings that are acquired at the time of acquisition (as may be adjusted for restructures), the performance relative to NFP’s preferred position in the earnings and the growth of the individual businesses and in the aggregate. Management fees may be higher during periods of strong growth due to the increase in incentive accruals. Higher firm earnings will generally be accompanied by higher incentive accruals. Where business earnings decrease, management fees and management fees as a
Management uses these non-GAAP measures, in conjunction with GAAP measures, to evaluate the performance of the CCG and ICG. This cannot be effectively illustrated using the corresponding GAAP measures as management fees, the impact of the accelerated vesting of certain RSUs and corporate income would be included in these GAAP measures and do not show the standalone profitability of the acquired businesses. On a reportable segment and individual subsidiary basis, the Company uses these measures to help the Company determine where to allocate corporate and other resources to assist principals to develop additional sources of revenue and improve their earnings performance. The Company may assist these businesses in expense reductions, cross selling, providing new products or services, technology improvements, providing capital for sub-acquisitions or coordinating internal mergers. On a macro level, the Company uses these measurements to help it evaluate broad performance of products and services which, in turn, helps shape the Company’s acquisition policy. In the last several years of acquisitions through 2008 (no material acquisitions were completed in the last 2 years), the Company has emphasized acquiring businesses with a higher level of recurring revenue, such as benefits businesses in the CCG, and those which expand the Company’s platform capabilities. The Company also may use these measures to help it assess the level of economic ownership to retain in new acquisitions or existing businesses. Finally, the Company uses these measures to monitor the effectiveness of its incentive plans.
NFP views incentive plans as an essential component in compensating principals and as a way to activate growth across the Company. NFP historically incentivized its principals through the ongoing incentive plan, effective as of January 1, 2002 and in which two NFP-owned businesses participated as of December 31, 2010. In 2009, NFP adopted three new incentive plans that included both a cash and equity component (two annual cash-based plans and one long-term equity-based plan) for principals and key employees of its businesses. During the quarter ended September 30, 2010, NFP introduced a revised long-term incentive plan.
For example, if a business’s earnings growth rate exceeded its PIP Performance Target at the same level each quarter, the amount of management fee expense the Company took for the business’s PIP accrual was the same each quarter during the performance period. In contrast, if a business had weaker earnings growth for a quarter compared with stronger earnings growth in the previous quarter, the business would have a lower level of projected payout than it had in the previous quarter, based on the business’s cumulative performance. Because the PIP was accrued on a cumulative basis, for the weaker quarter, the cumulative accrual decreased to account for the lower level of projected payout at the end of the performance period and the Company reported a smaller PIP accrual management fees expense (or in some cases the Company reported a PIP accrual management fees benefit) for the business. Conversely, in a stronger quarter, the cumulative accrual increased sequentially to account for the higher level of projected payout at the end of the performance period and the Company reported a larger PIP accrual in management fees expense for the business.
A new PIP is in place for the 15-month performance period of October 1, 2010 through December 31, 2011 (the “Second PIP”). Management migrated to an incentive program that rewards only incremental growth but still maintains potential for material incentive payments. The Second PIP will be payable in cash beginning in the first quarter of 2012 and, similar to the initial PIP, is based on specific performance criteria for each business. Incentive targets (“Second PIP Performance Targets”) have been set based on the earnings of each business during the last PIP incentive period, with the fourth quarter of 2009 counted twice. The calculation of a business’s Second PIP Performance Target is based on a 15-month period and reflects the fact that the Second PIP will include 2 fourth quarter periods. The 15-month performance period was selected in order to align the plan with the calendar year. It is envisioned that future plans will be 12 months, consistent with the calendar year. NFP’s Executive Management Committee, in its sole discretion, may adjust any Second PIP Performance Target as necessary to account for extraordinary circumstances, including, without limitation, sub-acquisitions. The Second PIP accrual in management fee expense is based on the business’s earnings growth rate above its Second PIP Performance Target. To measure growth, the target will be allocated on a seasonally adjusted basis, using the seasonal earnings pattern by quarter for the past 2 years. NFP calculates the business’s Second PIP accrual amount and earnings growth rate on a cumulative basis. The Company has accrued $3.3 million within management fees expense relating to the Second PIP from October 1, 2010 through December 31, 2010, for potential payment in the first quarter of 2012.
Under the BIP, NFP funded incentive pools based on the achievement of certain growth targets specific to the reportable segments and business lines within those segments for the 12-month performance period ended December 31, 2010. The Company accrued $0.4 million within management fees expense relating to the BIP for the year ended December 31, 2010. The BIP will not be continued for subsequent fiscal years.
Income (loss) from operations. Income from operations increased $362.8 million to $43.0 million in 2010 compared with a loss from operations of $(319.8) million in 2009. The increase in income from operations was due to the substantial decline in the level of impairments. Excluding the impact of impairments, income from operations increased as increased revenue, an increase in gain on sale of businesses, and a decline in compensation expense and non-compensation expense were more than offset by an increase in management fees related to the accelerated vesting of certain RSUs of $7.4 million and an increase in commissions and fees. Dispositions were also a driver of variances within the CCG’s corporate benefits business line as these transactions contributed to a decline in revenue of $13.6 million. Dispositions also contributed $1.1 million to the overall decline in commissions and fees expense, a decline of $4.6 million in compensation expense and a decline of $2.8 million in non-compensation expense.
Commissions and fees. Commissions and fees increased $7.9 million, or 2.1%, to $387.9 million in 2010 compared with $380.0 million in 2009. Corporate benefits revenue increased approximately $6.8 million or 2.0% from $336.5 million in 2009 to $343.3 million in 2010. Disposed entities contributed to a decline of $13.6 million in revenue. The CCG saw an increase in revenue, which more than offset the decrease from dispositions, driven by new clients and product sales, strength in certain specialty benefits, and medical inflation, which leads to increases in health insurance premiums and the commissions earned from them.
Non-compensation expense. Non-compensation expense decreased $0.6 million, or 0.8%, to $75.2 million in 2010 compared with $75.8 million in 2009. The non-compensation expense ratio was 19.4% for the year ended December 31, 2010 compared with 19.9% in 2009. Non-compensation expense decreased primarily due to the recognition in the fourth quarter of 2009 of a $4.8 million allocated loss and related expenses recognized on the sublet of one of the floors of the Company’s New York corporate headquarters in the fourth quarter of 2009. The decrease was partially offset by a $1.9 million loss and related expenses recognized in 2010 on the sublet of office space for one of the CCG’s executive benefits businesses, as well as an increase in promotional expenses.
Management fees. Management fees increased $10.3 million, or 14.6%, to $80.8 million in 2010 compared with $70.5 million in 2009. Adjusted income before management fees was $169.9 million in 2010, an increase of $3.4 million, or 2.0%, from adjusted income before management fees of $166.4 million in 2009. Management fees as a percentage of adjusted income before management fees increased to 47.5% for the year ended December 31, 2010 from 42.4% for the year ended December 31, 2009. Included in management fees was $7.4 million of stock based compensation relating to the accelerated vesting of certain RSUs. Excluding the impact of this one-time vesting, management fees increased due to the year-over-year increase in stock-based compensation, related to the EIP. The EIP was in place in November 2009, and was terminated in September 2010.
Amortization of intangibles. Amortization expense declined $1.6 million, or 7.0%, to $21.4 million in 2010 compared with $23.0 million in 2009. Amortization expense declined as a result of a 4.8% decrease in amortizing intangible assets resulting primarily from dispositions and impairments.
retained investment for an overall gain of $9.2 million. During the year ended December 31, 2009, the CCG recognized a net loss from the disposition of 3 businesses and the sale of certain assets of another 2 businesses totaling less than $0.1 million.
Compensation expense. Compensation expense decreased $1.8 million, or 1.3%, to $132.5 million in 2009 compared with $134.3 million in 2008. The compensation expense ratio was 34.9% for the year ended December 31, 2009 compared with 33.2% in the same period last year. Compensation expense declined as a result of headcount reductions and reductions in commission payments among employee producers. Dispositions also contributed to a decline of $2.0 million in compensation expense.
Non-compensation expense. Non-compensation expense decreased $1.2 million, or 1.6%, to $75.8 million in 2009 compared with $77.0 million in 2008. The non-compensation expense ratio was 19.9% for the year ended December 31, 2009 compared with 19.0% in 2008. The decline in non-compensation expense at existing firms was largely a result of cost reduction initiatives across the businesses.
Amortization of intangibles. Amortization expense declined $0.4 million, or 1.7%, to $23.0 million in 2009 compared with $23.4 million in 2008. As a percentage of revenue, amortization expense was less than 1% in both the years ended December 31, 2009 and 2008.
The ICG accounted for 38.5%, 42.0% and 46.8% of NFP’s revenue for the years ended December 31, 2010, 2009, and 2008, respectively. The financial information below relates to the ICG for the periods presented (in millions):
Commissions and fees. Commissions and fees decreased $18.5 million, or 4.7%, to $378.8 million, in 2010 compared with $397.3 million for 2009. The decline was driven by $25.6 million of dispositions, offset by increases in revenue generated by existing firms within the ICG’s investment advisory and retail life business lines.
Commissions and fees. Commissions and fees expense increased $5.2 million, or 6.0%, to $89.4 million in 2010 compared with $84.3 million in 2009. The commission expense ratio was 23.6% in the year ended December 31, 2010 compared with 21.2% in 2009. The increase corresponded to an increase in revenue generated by the ICG’s marketing organization and wholesale life brokerage businesses which typically have relatively higher commission payouts than retail life, as well as an increase in the investment advisory business, offset by the decline in commissions and fees of $4.0 million relating to dispositions.
increase of $7.5 million for stock-based compensation was $6.0 million related to the accelerated vesting of certain RSUs during 2010. Excluding the impact of this one-time vesting, management fees decreased. Increases in fees due to the restructuring of certain management agreements, as well as the year-over-year increase in stock-based compensation relating to the EIP, were offset by decreases in the PIP expense for the year. The EIP was in place in November 2009, and was terminated in September 2010.
Depreciation. Depreciation expense decreased $4.4 million, or 49.4%, to $4.5 million in 2010 compared with $8.9 million in 2009. The decrease in depreciation resulted from dispositions, and from the acceleration of depreciation expense on certain items related to the sublet of one of the floors of the Company’s headquarters in 2009.
Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets decreased $263.1 million to $1.0 million in the year ended December 31, 2010 compared with $264.1 million in the prior year. The decline in impairments was driven by the significant impairment in the first quarter of 2009 as compared with the year ended December 31, 2010. The impairment taken for the year ended December 31, 2009 reflected the incorporation of market data, including NFP’s market value which had remained below net book value for a sustained period, the performance of the Company in the economic environment in the prior year period, and discount rates that were risk adjusted to reflect both company-specific and market-based credit spreads and other relevant market data. Among other significant factors, the market value in the prior year period reflected the stressed macroeconomic environment and its impact on the Company’s sales.
Loss (gain) on sale of businesses. During the year ended December 31, 2010, the ICG recognized a net gain from the disposition of seven subsidiaries and the sale of certain assets of another business for a total gain of $2.2 million. During the year ended December 31, 2009, the ICG recognized a net gain from the disposition of 20 businesses and the sale of certain assets of 9 businesses totaling $2.1 million.
Income (loss) from operations. Income (loss) from operations decreased $252.8 million to $(244.2) million in 2009 compared with income from operations of $8.6 million in 2008. The decrease in income (loss) from operations was due to an increase in the level of impairments of goodwill and intangible assets from $34.5 million in 2008 to $264.1 million in 2009. Excluding the impact of impairments, income (loss) from operations decreased due to declines in retail life and ICG’s marketing organization and wholesale life brokerage businesses which continued to be negatively impacted by the broader economic environment and uncertainty regarding the financial stability of insurance carriers in the first months of 2009. Offsetting this decline was a slight decrease in operating expenses, due to cost cutting measures, headcount reductions and reductions in commission payments among employee producers during 2009.
Commissions and fees. Commissions and fees decreased $141.0 million, or 26.2%, to $397.3 million in 2009 compared with $538.3 million in 2008. Retail life and ICG’s marketing organization and wholesale life brokerage businesses during the year ended December 31, 2009 continued to be negatively impacted by the broader economic environment and uncertainty regarding the financial stability of insurance carriers in the first months of 2009. Dispositions also accounted for $13.1 million of the decline in revenue, during the year ended December 31, 2009.
Commissions and fees. Commissions and fees expense decreased $57.1 million, or 40.4%, to $84.3 million in 2009 compared with $141.4 million in 2008. The commission expense ratio was 21.2% in 2009 compared with 26.3% in 2008. The overall decline in commissions and fees expense was primarily driven by the decline in revenue by the marketing organization, wholesale life brokerage, and retail life business lines, which typically have high commission payouts. Dispositions also contributed to a decline of $3.4 million in commissions and fees expense.
Compensation expense. Compensation expense decreased $15.1 million, or 11.2%, to $119.8 million in 2009 compared with $134.9 million in 2008. The compensation expense ratio was 30.2% for the year ended December 31, 2009 compared with 25.1% in 2008. Compensation expense declined due to headcount reductions and reductions in commission payments among employee producers. Dispositions also accounted for $4.2 million of the decline in compensation expense.
Management fees. Management fees decreased $27.1 million, or 26.4%, to $75.7 million in 2009 compared with $102.8 million in 2008. This decline was aligned with the decrease in adjusted income before management fees. Management fees as a percentage of revenue was 19.1% for both the years ended December 31, 2009 and December 31, 2008 which declined to $127.8 million in 2009, a decrease of $54.2 million, or 29.8%, from adjusted income before management fees of $182.0 million in 2008. Management fees as a percentage of adjusted income before management fees increased to 59.2% for the year ended December 31, 2009 from 56.5% for the year ended December 31, 2008. The increase in the percentage that management fees represented of the adjusted income before management fees is the result of the revised incentive programs (see “-Incentive Plans” for more detail).
Amortization of intangibles. Amortization expense declined $2.2 million, or 13.9%, to $13.6 million in 2009 compared with $15.8 million in 2008. Amortization expense declined as a result of a 9.6% decrease in amortizing intangible assets resulting primarily from dispositions and impairments.
Loss (gain) on sale of businesses. During the year ended December 31, 2009, the ICG recognized a net gain from the disposition of 20 businesses and the sale of certain assets of 9 more businesses totaling $2.1 million. During the year ended December 31, 2008, the ICG recognized a gain from the sale of 2 businesses and certain assets of 2 other businesses totaling $0.4 million.
Year ended December 31, 2010 compared with the year ended December 31, 2009
Commissions and fees. Commissions and fees expense increased $32.1 million, or 22.1%, to $177.3 million in the year ended December 31, 2010 compared with $145.2 million in 2009. The commission expense ratio was 82.4% in the year ended December 31, 2010 compared with 84.9% in the same period last year. The increase in commissions and fees expense was largely attributable to the increase in revenue. The decrease of the commission expense ratio was driven by lower revenue in 2009 as fees for assets under management declined with declining market values during 2009.
Depreciation. Depreciation expense increased $0.3 million, or 27.3%, to $1.4 million in the year ended December 31, 2010 compared with $1.1 million in 2009. The increase in depreciation resulted from increases in capital expenditures for the ASG due to enhancements in technology offerings provided to advisors. As a percentage of revenue, depreciation expense was less than 1% in both the years ended December 31, 2010 and 2009.
Commissions and fees. Commissions and fees decreased $36.1 million, or 17.4%, to $171.0 million in the year ended December 31, 2009 from $207.1 million in the year ended December 31, 2008. Results in the ASG were driven by declining market values during 2009 as compared to 2008 despite an increase in assets under management for the ASG of 18.5%, to $7.9 billion for year ended December 31, 2009 compared to $6.6 billion for the year ended December 31, 2008.
Commissions and fees. Commissions and fees expense decreased $31.3 million, or 17.7%, to $145.2 million in the year ended December 31, 2009 compared with $176.5 million in 2008. The commission expense ratio was 84.9% in the year ended December 31, 2009 compared with 85.2% in 2008. The decrease in commissions and fees expense was largely attributable to the decrease in revenue.
Compensation expense. Compensation expense decreased $6.6 million, or 29.2%, to $16.0 million in 2009 compared with $22.6 million in 2008. The compensation expense ratio was 9.4% for the year ended December 31, 2009 compared with 10.9% in the year ended December 31, 2008. Compensation expense declined commensurate with headcount reductions in 2009.
Depreciation. Depreciation expense increased $0.2 million, or 22.2%, to $1.1 million in the year ended December 31, 2009 compared with $0.9 million in 2008. As a percentage of revenue, depreciation expense was less than 1% in both the years ended December 31, 2009 and 2008.
Interest income. Interest income increased $0.7 million, or 22.6%, to $3.8 million in the year ended December 31, 2010 compared with $3.1 million in the year ended December 31, 2009. Interest income increased mainly due to interest income from an increase in promissory notes entered into by NFP with its principals that were not in place during the corresponding prior year period. The notes were primarily related to dispositions.
Interest expense. Interest expense decreased $1.2 million, or 5.5%, to $20.6 million in 2009 compared with $21.8 million in 2008. Interest expense declined largely due to the combined impact of the lower interest rate environment in 2009 as compared to 2008 on the Company’s 2006 Credit Facility, as well as its lower average balance for 2009, offset against higher fees associated with the Company’s 2006 Credit Facility and an increase in the interest expense relating to the 2007 Notes.
During the year ended December 31, 2010, cash used in investing activities was $9.7 million, which was primarily due to contingent consideration payments of $13.3 million and $12.4 million paid for purchases of property and equipment. These amounts were offset by $5.7 million in proceeds from the sale of businesses and NFPSI’s release of $10.0 million in restricted cash, which was no longer required upon termination of the 2006 Credit Facility. During the year ended December 31, 2009, cash used in investing activities was $4.1 million. The Company paid $7.1 million for purchases of property and equipment, and paid $4.3 million in cash in connection with contingent consideration. NFPSI also restricted $10.0 million in cash pursuant to a limited guarantee and security agreement entered into in connection with the 2006 Credit Facility, released in 2010 as mentioned above. These uses were offset by $16.1 million from proceeds received from the disposal of subsidiaries.
During the year ended December 31, 2010, cash used in financing activities was approximately $36.9 million, while cash used in financing activities was $112.4 million during the prior year period. Cash provided by financing activities consisted mainly of $120.3 million in net proceeds from the issuance of the 2010 Notes, $21.0 million in proceeds from the sale of warrants entered into concurrently with NFP’s offering of 2010 Notes, and $125.0 million in proceeds from the issuance of long term debt under the 2010 Credit Facility, offset by the purchase of convertible note hedges of $33.9 million, the purchase of the 2007 Notes of $219.7 million, and repayment of outstanding amounts under the 2006 Credit Facility of $40.0 million. During the year ended December 31, 2009, cash used in financing activities was $112.4 million. During this period, NFP did not borrow any amounts under the 2006 Credit Facility but repaid $108.0 million of its outstanding balance.
Concurrent with the issuance of the 2007 Notes, NFP entered into convertible note hedge and warrant transactions with an affiliate of one of the underwriters for the 2007 Notes. The transactions were expected to reduce the potential dilution to NFP’s common stock upon future conversions of the 2007 Notes. Under the convertible note hedge, NFP purchased 230,000 call options for an aggregate premium of $55.9 million. Each call option entitled NFP to repurchase an equivalent number of shares issued upon conversion of the 2007 Notes at the same strike price (initially $55.62 per share), generally subject to the same adjustments. The call options were scheduled to expire on the maturity date of the 2007 Notes. NFP also sold warrants for an aggregate premium of $34.0 million. The warrants were scheduled to expire ratably over a period of 40 scheduled trading days between May 1, 2012 and June 26, 2012, on which dates, if not previously exercised, the warrants would have been treated as automatically exercised if they were in the money. The warrants provided for net-share settlement.
Securities Act of 1933, as amended (the “Securities Act”). The Initial Purchasers subsequently sold the 2010 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act.
On July 8, 2010, NFP entered into the 2010 Credit Facility. The 2010 Credit Facility is structured as (i) a $100.0 million four-year revolving credit facility that includes a $35.0 million sub-limit for standby letters of credit and a $10.0 million sub-limit for the issuance of swingline loans and (ii) a $125.0 million four-year term loan facility. The term loan facility requires 2.5% quarterly principal amortization payments, beginning on September 30, 2010, with the remaining balance of the term loan facility payable on the maturity date of the 2010 Credit Facility, which is July 8, 2014.
Under the terms of the 2010 Credit Facility, NFP’s leverage ratio will be calculated, commencing with the first fiscal quarter ended September 30, 2010, as follows: as at the last day of any period, the ratio of (a) total debt on such day to (b) trailing twelve months EBITDA (as defined in the 2010 Credit Facility) for such period.
On November 5, 2008, NFP’s Board of Directors suspended NFP’s quarterly cash dividend. Previously, NFP paid a quarterly cash dividend of $0.21 per share of common stock on January 7, 2008, April 7, 2008, July 7, 2008 and October 7, 2008. The declaration and payment of future dividends to holders of NFP’s common stock will be at the discretion of NFP’s Board of Directors and will depend upon many factors, including the Company’s financial condition, earnings, legal requirements, and other factors as NFP’s Board of Directors deems relevant. Additionally, the 2010 Credit Facility contains customary covenants that require NFP to meet certain conditions before making restricted payments such as dividends.
In accordance with GAAP, long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company generally performs its recoverability test for its long-lived asset groups whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Company establishes an internal financial plan for its individual business lines and measures the actual performance of its business lines against this financial plan. These events or changes in circumstances include, but are not limited to, when a business line experiences a significant deterioration in its operating cash flow compared to its financial plan or prior year performance, a change in the extent or manner in which the long lived asset is being used, or a current expectation that, more likely than not, a long lived asset will be sold or otherwise disposed of before the end of its previously estimated useful life. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted cash flows expected to be generated by the asset and by the eventual disposition of the asset. If the estimated undiscounted cash flows
are less than the carrying amount of the underlying asset, an impairment may exist. The Company measures impairments on identifiable intangible assets subject to amortization by comparing the fair value of the asset to the carrying amount of the asset. In the event that the discounted cash flows are less than the carrying amount, an impairment charge will be recognized for the difference in the consolidated statements of operations.
For the years ended December 31, 2009 and 2008, the Company recorded impairment losses of $591.5 million, and $35.0 million, respectively, related to goodwill and trade name, which is reflected in the consolidated statements of operations. For the year ended December 31, 2010, no such impairment was recorded. See “Note 15-Goodwill and Other Intangible Assets-Impairment of goodwill and intangible assets to the Company’s Consolidated Financial Statements contained in this report.”
Effective January 1, 2007, the Company adopted guidance which clarified the accounting for uncertain tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company’s liability for unrecognized tax benefits (decreased) increased by $(1.8) million, $(0.2) million, and $3.3 million during the years ended December 31, 2010, December 31, 2009, and December 31, 2008, respectively. Estimated interest and penalties related to the underpayment of income taxes and reported in income tax expense totaled $0.4 million in 2010, $0.9 million in 2009, and $1.3 million in 2008.
As of December 31, 2010, the Company is subject to U.S. federal income tax examinations for the tax years 2007 through 2009, and to various state and local income tax examinations for the tax years 2001 through 2009. The Company believes that it is reasonably possible that the total amounts of unrecognized tax benefits could significantly decrease within the next twelve months due to the settlement of state income tax audits and expiration of statutes of limitations in various state and local jurisdictions in an amount ranging from $2.9 million to $3.3 million based on current estimates.
See Financial Statements and Financial Statement Index commencing on page hereof.