a percentage of any earnings in excess of target earnings generally based on the ratio of base earnings to target earnings.
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.
In accordance with GAAP, goodwill and intangible assets not subject to amortization are tested at least annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the intangible asset might be impaired. The Company generally performs its impairment test on a quarterly basis for each of its acquired firms that may have an indicator of impairment. Indicators at the Company level include but are not limited to: sustained operating losses or a trend of poor operating performance, which may cause the terms of the applicable management contract to be restructured, loss of key personnel, a decrease in NFP’s market capitalization below its book value, and an expectation that a reporting unit will be sold or otherwise disposed of. Indicators of impairment at the reporting unit level may be due to the failure of the firms the Company acquires to perform as expected after the acquisition for various reasons, including legislative or regulatory changes that affect the products and services in which a firm specializes, the loss of key clients after acquisition, general economic factors that impact a firm in a direct way, and the death or disability of significant principals. If one or more indicators of impairment exist, NFP performs an evaluation to identify potential impairments. If an impairment is identified, NFP measures and records the amount of impairment loss.
Net (loss) income. The company recorded a net loss of $493.4 million for the year ended December 31, 2009, compared with net income of $8.5 million in 2008. The net loss was mainly due to an increase in the level of impairments of goodwill and intangible assets from $41.3 million in 2008 to $618.5 million in 2009. Excluding the after-tax impact of impairments, the net income decline was a result of lower revenue partially offset by declines in cost of services and general and administrative expense.
Net income. Net income decreased $40.3 million, or 82.6%, to $8.5 million in 2008 compared with $48.8 million in 2007. Net income as a percentage of revenue was less than 1.0% for the year ended December 31, 2008 compared with 4.1% for the year ended December 31, 2007. The decrease in net income was mainly due to an increase in the level of impairments of goodwill and intangible assets from $7.9 million in 2007 to $41.3 million in 2008. In addition, gross margin declined and corporate and other expenses and net interest and other increased, which was partially offset by a decline in income taxes.
Interest and other expense. Interest and other expense increased $2.7 million, or 14.1%, to $21.9 million in 2008 compared with $19.2 million in 2007. The increase was primarily due to higher average borrowings under NFP’s line of credit and from the increase in accretion of the non-cash interest component of the convertible senior notes, partially offset by the lower interest rate environment.
The increase in cash usage during the first quarter of the year generally requires increased borrowings under NFP’s credit facility, but this did not occur for the year ending December 31, 2009. As the year progresses, cash flow typically improves as earnings increase and acquisition activities moderate. NFP generally reduces the borrowings under its credit facility by using this increased cash flow. However, because the Company suspended the majority of acquisition activity in the latter portion of 2008, the historical pattern of an increase in cash usage during the first half of the year changed. For the year ended December 31, 2009 the Company utilized cash flow from operations to reduce indebtedness, paying down $108.0 million of its outstanding credit facility balance.
NFP had a balance of $40.0 million outstanding under its credit facility as of December 31, 2009, below the maximum allowable balance of $200.0 million. At December 31, 2008, outstanding borrowings were $148.0 million.
As of December 31, 2009 the net carrying amount of the notes was $204.5 million and the unamortized discount of the notes within additional paid-in capital was $25.5 million. As of December 31, 2008 the net carrying amount of the notes was $193.5 million and the unamortized discount was $36.5 million. As of December 31, 2009 and December 31, 2008 the principal amount of the notes was $230.0 million. The discount on the notes is being amortized over the life of the notes. The effective interest rate on the notes is 6.62%. For the year ended December 31, 2009, the amount of interest expense incurred by NFP relating to the notes for cash interest paid and for the amortization of the discount is approximately $12.8 million.
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.
In June 1997, the FASB issued guidance relating to disclosures about enterprise segments and related information. This guidance established standards for the way companies report information about operating segments in financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In accordance with GAAP, the Company has determined that it operates in a single segment within the financial services industry entirely within the United States of America, its territories and Canada.
A two-step impairment test is performed on goodwill. In the first step, NFP compares the fair value of each reporting unit to the carrying value of the net assets assigned to that reporting unit. NFP determines the fair value of its reporting units by blending two valuation approaches: the income approach and a market value approach. In order to determine the relative fair value of each of the reporting units the income approach is conducted first. These relative values are then scaled to the estimated market value of NFP.
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 increased (decreased) by $(0.7) million, $3.3 million and $5.1 million during the years ended December 31, 2009, December 31, 2008 and December 31, 2007, respectively. Estimated interest and penalties related to the underpayment of income taxes and reported in income tax expense totaled $0.9 million in 2009, $1.3 million in 2008 and $1.3 million in 2007.