On October 31, 2006, the Company acquired Broadspire Management Services, Inc. ("BMSI").
Net income attributable to Crawford & Company was $28.3 million in 2010, compared to a net loss of $(115.7) million in 2009 and net income of $32.3 million in 2008. The net income (loss) included goodwill and intangible asset impairment charges of $10.8 million in 2010 and $140.9 million in 2009. Consolidated net income for 2010 also included restructuring and other costs of $4.7 million, or approximately $2.9 million after tax, consisting of $2.0 million in severance costs for administrative staff reductions and $2.7 million related to the sublease of a Broadspire facility in Plantation, Florida. In 2009, we incurred a loss on the partial sublease of the Broadspire facility in Plantation, Florida and other restructuring costs totaling $4.1 million, or approximately $2.6 million after income tax. The 2009 net loss was reduced by certain foreign tax benefits totaling $5.7 million as a result of an internal restructuring of certain of the Company’s international operations. Operating earnings (a measure of segment operating performance used by our management that is defined and discussed in more detail below) and the related operating margin increased substantially for Legal Settlement Administration in 2010 compared to 2009, with a slight improvement in operating earnings for our International segment, but both measures declined for our U.S. Property & Casualty and Broadspire segments.
In the normal course of business, our operating segments incur certain out-of-pocket expenses that are reimbursed by our clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are required to be included when reporting revenues and expenses in our consolidated results of operations. In some of the segment discussion and analysis that follows, we do not believe it is informative to include the GAAP-required gross up of our segment revenues and expenses for these pass-through reimbursed expenses. The amounts of reimbursed expenses and related revenues offset each other in our results of operations with no impact to our net income or loss. Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses.
International Operations unit volumes by region for 2010 and 2009 were as follows:
Broadspire segment revenues before reimbursements decreased 15.0% to $245.5 million in 2010 compared to $288.7 million in 2009. Unit volumes for the Broadspire segment, measured principally by cases received, increased 0.9% from 2009 to 2010. Offsetting the small increase in unit volumes was a 15.9% decrease from changes in the mix of services provided and in the rates charged for those services. The increase during 2010 of lower severity casualty claims reduced our average fee per claim during 2010. The net result of these factors was a 15.0% decrease in Broadspire segment revenues before reimbursements from 2009 to 2010.
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 $15.7 million, $15.2 million, and $19.6 million for 2010, 2009, and 2008, respectively. The increase in interest expense in 2010 compared to 2009 was due primarily to higher levels of outstanding borrowings in 2010. The decrease in interest expense from 2008 to 2009 was due primarily to lower interest rates and lower levels of outstanding borrowings in 2009. Corporate interest income totaled $681,000, $1.1 million, and $2.0 million in 2010, 2009, and 2008, respectively. Corporate interest income decreased in 2010 compared to 2009 and 2008 primarily due to the overall decline in interest rates during 2010 and lower levels of available cash balances for investing during 2010.
We sponsor defined benefit pension plans in the U.S. and U.K. 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 all of our defined benefit pension plans totaled $168.5 million and $216.3 million at the end of 2010 and 2009, respectively. The 2010 decrease in the funding deficit of our defined benefit pension plans primarily resulted from the additional contributions made in 2010. During 2010, we made contributions of $55.3 million and $6.5 million to our U.S. and U.K. defined benefit pension plans, respectively, including $30.0 million of accelerated contributions. In 2011, we made contributions of $20.0 million to our frozen U.S. defined benefit pension plan in January and expect to make contributions of $6.9 million to our U.K. defined benefit pension plan. We currently project no additional funding for our U.S. plan in 2011.
Noncurrent deferred income tax assets increased approximately $22.4 million primarily due to increases in tax credit carryforwards. Current deferred income tax liabilities increased by $17.1 million primarily due to temporary differences in revenue recognition for book and tax purposes.
decrease in claim closing rates for lifetime claims would have resulted in the deferral of additional revenues of approximately $1.7 million, $1.8 million, and $1.8 million for the years ended December 31, 2010, 2009, and 2008, respectively. If our
See Note 1, “Significant Accounting and Reporting Policies,” of our accompanying audited consolidated financial statements in Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements including the dates, or expected dates of adoption and effects, or expected effects on our results of operations and financial condition.
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 receives only 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.
Basic EPS is computed based on the weighted-average number of total common shares outstanding during the respective period, including nonvested shares of issued restricted stock that are entitled to receive dividends should any dividends be declared. Diluted EPS is computed under the “treasury stock” method based on the weighted-average number of total common shares outstanding, including nonvested shares of restricted stock that are entitled to receive dividends should any dividends be declared, plus the dilutive effect of: outstanding stock options, estimated shares issuable under employee stock purchase plans, and nonvested shares under the Company’s Executive Stock Bonus Plan that vest based on service conditions or on performance conditions that have been achieved.
In 2008, the Company’s Netherlands subsidiary sold the capital stock of one of its subsidiaries. The net cash received from the buyer was $4,269,000, which consisted of the cash sale price of $5,256,000, less cash of $987,000 retained in the sold subsidiary. The nontaxable gain recognized on this disposition was $2,512,000, including a cumulative translation adjustment of $344,000 related to this sold entity. In connection with this disposition, the Company derecognized goodwill of $1,437,000 from the Company’s International Operations segment and reporting unit. The revenues and expenses of this sold subsidiary were not material to the consolidated financial statements of the Company or to the operating results of the Company’s International Operations segment. Accordingly, the Company has not reported the disposed business as discontinued operations in its consolidated financial statements.
The 2010 adjustment for prior years' acquisitions is comprised of $14,803,000 paid as additional purchase price consideration for the purchase of Broadspire Management Services, Inc. ("BMSI"), less $4,015,000 recorded as a reduction to an estimated tax payable accrued as part of the BMSI acquisition. Accordingly, the goodwill impairment charge was reduced in 2010 as such amount was not material for prior year restatement. See "Goodwill Impairment Charge" below for further discussion.
In the event of a default by the Company under the Credit Agreement, the lenders may terminate the commitments under the agreement and declare any amounts then outstanding, including all accrued interest and unpaid fees, payable immediately. For events of default relating to insolvency, bankruptcy or receivership, the commitments are automatically terminated and the amounts outstanding become payable immediately.
At December 31, 2010, the fair value of the interest rate swap was a liability of $1,404,000 and the amount expected to be reclassified from accumulated other comprehensive loss into earnings during the next twelve months was approximately $913,000.
No stock options were granted in 2009 or 2010. The intrinsic value of all outstanding stock options at December 31, 2010 and 2009 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 year ended December 31, 2008 was $2.55. The total intrinsic value of stock options exercised during the year ended December 31, 2008 was $611,000. The options exercised in 2009 had no intrinsic value. No options were exercised in 2010. The total fair value of stock options vesting during the years ended December 31, 2010, 2009, and 2008 was $236,000, $484,000, and $365,000, respectively.
At December 31, 2010, there was $72,000 of unrecognized compensation cost related to unvested stock options for employee stock option awards. This cost is being recognized on a straight-line basis and will be fully recognized by April 2011. Directors’ stock options had no unrecognized compensation cost since directors’ options were vested when granted and the grant-date fair values were fully expensed on grant date.
A dividend yield of zero was used in 2008 since the Company had not paid any cash dividends to shareholders since August 2006. 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.
The Company is subject to numerous federal, state, and foreign employment laws, and from time to time the Company faces claims by its employees and former employees under such laws. Such claims or litigation involving the Company or any of the Company’s current or former employees could divert management’s time and attention from the Company’s business operations and could potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on the Company’s results of operations, financial position, and cash flows.
The Company’s independent registered public accounting firm, Ernst & Young LLP, is appointed by the Audit Committee of the Company’s Board of Directors. 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.