Crawford & Co: Form 10-Q for the period ended Mar 31, 2011

Cautionary Statement Concerning Forward-Looking Statements

This report contains and incorporates by reference forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Statements contained in this report that are not statements of historical fact are forward-looking statements made pursuant to the “safe harbor” provisions. These statements are included throughout this report and relate to, among other things, discussions regarding reduction of our operating expenses in our Broadspire segment, anticipated contributions to our underfunded defined benefit pension plans, collectability of our billed and unbilled accounts receivable, projections regarding payments under existing earnout agreements, discussions regarding our continued compliance with the financial and other covenants contained in our financing agreements, and other long-term liquidity requirements. These statements may also relate to our business strategies, goals and expectations concerning our market position, future operations, margins, case and project volumes, profitability, contingencies, and capital resources. The words “anticipate”, “believe”, “could”, “would”, “should”, “estimate”, “expect”, “intend”, “may”, “plan”, “goal”, “strategy”, “predict”, “project”, “will” and similar terms and phrases identify forward-looking statements in this report.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations and the forward-looking statements related to our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our financial condition, results of operations and whether the forward-looking statements ultimately prove to be correct. Included among, but not limited to, the risks and uncertainties we face are:

• declines in the volume of cases referred to us for many of our service lines,
• changes in global economic conditions,
• changes in interest rates,
• changes in foreign currency exchange rates,
• changes in regulations and practices of various governmental authorities,
• changes in our competitive environment,
• changes in the financial condition of our clients,
• the performance of sublessors under certain subleases related to our leased properties,
• regulatory changes related to funding of defined benefit pension plans,
• the fact that our U.S. and U.K. defined benefit pension plans are significantly underfunded and our future funding obligations thereunder,
• changes in the degree to which property and casualty insurance carriers outsource their claims handling functions,
• changes in overall employment levels and associated workplace injury rates in the U.S.,
• unfavorable outcomes in any current or future legal proceedings, including our various arbitration proceedings relating to the acquisition of Broadspire Management Services, Inc,
• our ability to identify new revenue sources not tied to the insurance underwriting cycle,
• our ability to develop or acquire information technology resources to support and grow our business,
• our ability to attract and retain qualified personnel,
• renewal of existing major contracts with clients on satisfactory terms,
• our ability to collect amounts recoverable from our clients and others,
• continued availability of funding under our financing agreements,
• general risks associated with doing business outside the U.S.,
• our ability to comply with any applicable debtor or other covenant in our financing or other agreements,
• possible legislation or changes in market conditions that may curtail or limit growth in product liability and securities class actions,
• changes in the frequency or severity of man-made or natural disasters,
• our failure to complete the implementation of RiskTech on schedule, and
• impairment of goodwill or our other indefinite-lived intangible assets.

As a result, you should not place undue reliance on any forward-looking statements.

Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements. Forward-looking statements speak only as of the date they are made and we undertake no obligation to publicly update any of these forward-looking statements in light of new information or future events.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with 1) our unaudited condensed consolidated financial statements and accompanying notes thereto for the three months ended March 31, 2011 contained in Item 1 of this Quarterly Report on Form 10-Q and 2) our Annual Report on Form 10-K for the year ended December 31, 2010. The financial results of our international subsidiaries comprising our Americas and EMEA/AP segments, other than subsidiaries in Canada and the Caribbean, are included in our consolidated financial statements on a two-month delayed basis as permitted by U.S. generally accepted accounting principles (“GAAP”) in order to provide sufficient time for accumulation of their results.

Business Overview

Based in Atlanta, Georgia, Crawford & Company (www.crawfordandcompany.com (http://www.crawfordandcompany.com)) is the world’s largest independent provider of claims management solutions to the risk management and insurance industry, as well as to self-insured entities, with an expansive global network serving clients in more than 70 countries. The Crawford System of Claims SolutionsSM offers comprehensive, integrated claims services, business process outsourcing and consulting services for major product lines including property and casualty claims management, workers’ compensation claims and medical management, and legal settlement administration. Shares of the Company’s two classes of common stock are traded on the 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: Americas, EMEA/AP, Broadspire, and Legal Settlement Administration. In the first quarter of 2011, the Company realigned two of its reportable segments by moving the Canada and Latin America/Caribbean operations from the former International Operations segment to the new Americas segment. In addition, the Company's former U.S. Property & Casualty segment is now included in the new Americas segment. The results of the former U.S. Property & Casualty segment will no longer be reported separately. The remaining operations in the former International Operations segment will now be called “Europe, Middle East, Africa, Asia Pacific” or “EMEA/AP”. EMEA/AP will continue to include all operations in the U.K., continental Europe, the Middle East, Africa, and Asia Pacific (which includes Australia). The results of the former International Operations segment will no longer be reported separately. The changes were implemented to more closely align the segments with the current management reporting structure. The results of prior periods have been revised to conform to the current presentation of our reportable segments. The change in reporting segments does not have any impact on previously reported consolidated financial results.

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 ("CODM") in deciding how to allocate resources and in assessing operating performance. Americas primarily serves the property and casualty insurance company markets in the U.S., Canada, Latin America, and the Caribbean. EMEA/AP serves the property and casualty insurance company markets in Europe, including the U.K., the Middle East, Africa, and Asia Pacific, including Australia and New Zealand. Broadspire serves the U.S. self-insurance marketplace. 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.

Self-insured entities typically rely on us for a broader range of services. In addition to field investigation and evaluation of their claims, we may also provide initial loss reporting services for their claimants, loss mitigation services such as medical case management and vocational rehabilitation, risk management information services, and administration of trust funds established to pay their claims.

We also perform legal settlement administration services related to securities, product liability, and other class action settlements and bankruptcies, including identifying and qualifying class members, determining and dispensing settlement payments, and administering settlement funds. Such services are generally referred to by us as class action services.

The claims management services market, both in the U.S. and internationally, is highly competitive and comprised of a large number of companies of varying size and offering a varying scope of services. The demand from insurance companies and self-insured entities for services provided by independent claims service firms like us is largely dependent on industry-wide claims volumes, which are affected by, among other things, the insurance underwriting cycle, weather-related events, general economic activity, overall employment levels, and associated workplace injury rates. Accordingly, we are limited in our ability to predict case volumes that may be referred to us in the future. In addition, our ability to retain clients and maintain and increase case referrals is also dependent in part on our ability to continue to provide high-quality, competitively priced services.

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 generated by a specific claim assignment will be earned in subsequent periods. Industry-wide claims volume in general will vary depending upon the insurance underwriting cycle.

In the insurance industry, the underwriting cycle is often said to be in either a “soft” or “hard” market. A soft market generally results when insurance companies focus more on increasing their premium income and focus less on controlling underwriting risks. A soft market often occurs in conjunction with strong financial markets or in a period with a lack of catastrophe losses. Insurance companies often attempt to derive a significant portion of their earnings from their investment portfolios, and their focus may turn to collecting more premium income to invest under the assumption that increased investment income and gains will offset higher claim costs that usually result from relaxed underwriting standards. Due to competition in the industry during a soft market, insurance companies usually concentrate on growing their premium base by increasing the number of policies in-force instead of raising individual policy premiums. When the insurance underwriting market is soft, insurance companies are generally more aggressive in the risks they underwrite, and insurance premiums and policy deductibles typically decline. This usually results in an increase in industry-wide claim referrals which generally will increase claim referrals to us provided that we are able to maintain our existing market share. However, if a soft market coincides with a period of low catastrophic claims activity, industry-wide claim volumes may not increase.

A transition from a soft to a hard market is usually caused by one or two key factors, or sometimes a combination of both: weak financial markets or unacceptable losses from policy holders. When investments held by insurance companies begin to perform poorly, insurance companies typically turn their focus to attempting to better control underwriting risks and claim costs. However, even if financial markets perform well, the relaxed underwriting standards in a soft market can lead to unacceptable increases in the frequency and cost of claims, especially in geographic areas that are prone to frequent weather-related catastrophes. Either of these factors will usually lead the insurance industry to transition to a hard market. During a hard insurance underwriting market, insurance companies generally become more selective in the risks they underwrite, and insurance premiums and policy deductibles typically increase, sometimes quite dramatically. This usually results in a reduction in industry-wide claim volumes, which generally reduces claim referrals to us unless we are able to offset the decline in claim referrals with growth in our market share. During 2010 and into 2011, the insurance industry underwriting cycle could be characterized as a soft market. Because the underwriting cycle can change suddenly due to unforeseen events in the financial markets and catastrophic claims activity, we cannot predict what impact the current soft market may have on us in the future.

We are also impacted by decisions insurance companies and other clients may make to change the level of claims outsourced to independent claim service firms as opposed to those handled by their own in-house claims adjusters or contracted to other third party administrators, whether or not associated with insurance companies. Our ability to grow our market share in a highly fragmented and competitive market is primarily dependent on the delivery of superior quality service and effective sales efforts.

The legal settlement administration market is also highly competitive but comprised of a smaller number of specialized entities. The demand for legal settlement administration services is generally not directly tied to or affected by the insurance underwriting cycle. The demand for these services is largely dependent on the volume of securities and product liability class action settlements, the volume of Chapter 11 bankruptcy filings and the resulting settlements, and general economic conditions. Our revenues from legal settlement administration services are generally project-based and we earn these revenues as we perform individual tasks and deliver the outputs as outlined in each project.

Results of Operations

Executive Summary

Consolidated revenues before reimbursements increased 20.6% for the three months ended March 31, 2011 compared with the same period of 2010. The increase in revenues for the quarter was primarily due to increases in our Legal Settlement Administration and EMEA/AP segments. The increases in these segments were partially offset by a revenue decline in our Broadspire segment.

Excluding the impact of foreign currency translation, consolidated revenues before reimbursements during the first quarter of 2011 were 19.8% higher than revenues in the first quarter of 2010. Revenues in our Americas segment decreased by 2.1% on a constant dollar basis in the first quarter of 2011 compared with the first quarter of 2010. Revenues in our EMEA/AP segment increased by 16.4% on a constant dollar basis in the first quarter of 2011 compared with the first quarter of 2010.

Consolidated net income for the three months ended March 31, 2010 included a pretax charge of $2.7 million, or $2.0 million after income tax, for the loss incurred on the sublease of the Broadspire facility in Plantation, Florida and the relocation of those operations to Sunrise, Florida.

Selling, General, and Administrative (“SG&A”) expenses were 14.4% higher in the quarter ended March 31, 2011 compared with the same period of 2010. The increase was due primarily to $1.9 million in higher expenses associated with our professional indemnity self-insured risks, a $1.5 million increase in bad debt expense, a $1.4 million increase in professional fees, the majority of which was associated with the implementation of Broadspire's RiskTech claims system, severance costs in Canada and Brazil and higher incentive compensation costs.

Operating Earnings (Loss) of our Operating Segments

We believe that a discussion and analysis of the operating earnings of our four operating segments is helpful in understanding the results of our operations. Operating earnings is the primary financial performance measure used by our senior management and CODM to evaluate the financial performance of our operating segments and make resource allocation decisions. Unlike net income, our operating earnings measure is not a standard performance measure found in GAAP. However, since it is our segment measure of profitability presented in conformity with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting,” it is not considered a non-GAAP financial measure requiring reconciliation pursuant to Securities and Exchange Commission (“SEC”) guidance contained in Regulation G and Item 10(e) of Regulation S-K. We believe this measure is useful to others in that it allows them to evaluate segment operating performance using the same criteria our management and CODM use. Operating earnings represent segment earnings excluding 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–all for reasons described below. Net income or loss attributable to noncontrolling interests has also 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 capital structure decisions made by senior management and affecting the Company as a whole. 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.

Unallocated corporate and shared costs represent expenses and credits related to our CEO and Board of Directors, certain provisions for bad debt allowances or subsequent recoveries such as those related to bankrupt clients, defined benefit pension costs or credits for our frozen U.S. pension plan, and certain self-insurance costs and recoveries that are not allocated to our individual operating segments.

Additional discussion and analysis of our income taxes, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, unallocated corporate and shared costs, and other gains and expenses follows the discussion and analysis of the results of operations of our four operating segments.

Segment Revenues

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 the following discussion and analysis of segment results of operations, we do not include a gross-up of 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 (loss) or operating earnings (loss). A reconciliation of revenues before reimbursements to consolidated revenues determined in accordance with GAAP is self-evident from the face of the accompanying unaudited condensed consolidated statements of operations. Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses.

Segment Expenses

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 with direct compensation and fringe benefits. Expense amounts in the following discussion and analysis exclude out-of-pocket expenses.

Allocated corporate and shared costs are allocated to our four operating segments based primarily on usage. These allocated costs are included in the determination of segment operating earnings. If we change our allocation methods or change the types of costs that are allocated to our four operating segments, prior period results are adjusted to reflect the current allocation process.

Operating results for our Americas, EMEA/AP, Broadspire, and Legal Settlement Administration segments reconciled to pretax income attributable to Crawford & Company and net income attributable to Crawford & Company, were as follows:

(in thousands, except percentages)

nm = not meaningful

AMERICAS

Operating earnings for our Americas segment decreased from $6.8 million, or 8.1% of revenues before reimbursements, in the first quarter of 2010, to $3.1 million, or 3.6% of revenues before reimbursements, in the first quarter of 2011. The decline in Americas operating earnings was primarily due to lower revenue in U.S. claim field operations and in Brazil, higher costs in the U.S. due to the increased use of outside contractors and higher bad debt expense.

Revenues before Reimbursements

Americas revenues are primarily generated from the property and casualty insurance company markets in the U.S., Canada, Latin America and the Caribbean, with additional revenues generated from our Contractor Connection direct repair network, technical services, and catastrophe services. Americas revenues before reimbursements by major service line in the U.S. and by area for other regions for the three months ended March 31, 2011 and 2010 were as follows:

( in thousands, except percentages)

The overall revenue decrease in the first quarter of 2011 in U.S. Property & Casualty was due to a decline in Claims Field Operations revenues caused by reduced property, casualty, vehicle and warranty services claims. These reductions were partially offset by increases in revenues from our direct repair network, Contractor Connection, and in Technical Services and Catastrophe Services. Technical Services revenues increased as a result of an increase in the number of cases received and an increase in the severity and difficulty of the cases currently being handled. Catastrophe revenues increased due primarily to increased revenues from U.S. catastrophe adjusters working weather related claims in Australia and from assistance provided to our Legal Settlement Administration segment in connection with a special project.

The overall revenue increase in the first quarter of 2011 in Canada was due to the net positive impact of changes in currency exchange rates as revenue in local currency was flat compared to 2010. The mix of cases received also changed in the quarter resulting in flat revenue growth in local currency despite an increase in the number of cases received compared to 2010. The change in mix is the result of a decline in volume of certain higher margin claims resulting from certain legislative changes implemented in Canada last year, offset by increases in lower margin weather-related claims.

Revenue in Latin America and the Caribbean decreased in the first quarter of 2011 primarily due to a decline in revenues in Brazil as a result of the turnover in key management personnel. The turnover in key management personnel resulted in fewer cases referred to us during the transition.

For the three months ended March 31, 2011 compared to the same period during 2010, the U.S. dollar weakened against most foreign currencies in Canada, Latin America and the Caribbean, increasing revenues before reimbursements by 2.7%. Also contributing to the overall 0.5% revenue increase in the first quarter of 2011 compared with the same period in 2010 was an overall slightly favorable change in the mix of services provided and in the rates charged for those services, despite the unfavorable change in mix in Canada, which we believe increased revenues by approximately 0.3%. The favorable impact of the weakened U.S dollar and change in mix was offset by a 2.5% decline in segment unit volume, measured principally by cases received.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for our Americas segment increased to $3.8 million for the three months ended March 31, 2011, from $3.4 million for the three months ended March 31, 2010.

Case Volume Analysis

Americas unit volumes by underlying case category, as measured by cases received, for the three months ended March 31, 2011 and 2010 were as follows:

(whole numbers, except percentages )

The 2011 decrease in claims from Claims Field Operations was due primarily to lower industry-wide claims volumes, which have resulted in fewer claims referred to us from our clients and the trend for insurance companies to use Contractor Connection for high-frequency, low-severity claims and Technical Services for high-severity claims. The 2011 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 2011 decrease in catastrophe services was due to a reduction in weather-related events in the U.S. Technical Services claims increased in 2011 due primarily to an increase in adjusters, new accounts and a shift of high-severity claims from Claims Field Operations.

The 2011 increase in cases in Canada was due to an increase in weather-related activity. The 2011 decrease in cases in Latin America and the Caribbean was due primarily to the turnover of key management personnel and pricing constraints in Brazil.

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.

Direct Compensation and Fringe Benefits

The most significant expense in our Americas segment is the compensation of employees, including related payroll taxes and fringe benefits. Americas direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, increased to 65.6% in the first quarter of 2011 compared with 63.6% in the comparable 2010 quarter.

These percentage increases were primarily due to lower utilization of our employees in the first three months of 2011 compared with the comparable period of 2010. There was an average of 2,813 full-time equivalent employees (including 92 catastrophe adjusters) in this segment during the first three months of 2011, compared with an average of 3,038 employees (including 72 catastrophe adjusters) during the comparable 2010 period.

Americas salaries and wages totaled $46.3 million and $44.5 million for the three months ended March 31, 2011 and 2010, respectively. The overall increase in the 2011 first quarter compared with the same period in 2010 was primarily a result of severance costs in Brazil and Canada as well as a weaker U.S. dollar in the 2011 quarter compared to 2010. Payroll taxes and fringe benefits for Americas totaled $9.7 million and $9.5 million in the first quarter of 2011 and 2010, respectively. The overall increase was due to a weaker U.S. dollar in 2011 compared to 2010.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Americas expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits were $26.2 million, or 30.8% of segment revenues before reimbursements, for the quarter ended March 31, 2011, compared to $24.1 million, or 28.3% of segment revenues before reimbursements, for the comparable quarter of 2010. This increase was primarily due to the increased use of outside contractors and higher bad debt expense in the U.S. and a weaker U.S. dollar in 2011 compared to 2010.

EMEA/AP

Operating earnings in our EMEA/AP segment increased to $7.2 million, or 9.0% of revenues before reimbursements, for the three months ended March 31, 2011, compared with 2010’s first quarter operating earnings of $4.8 million, or 7.0% of revenues before reimbursements.

Revenues before Reimbursements

Substantially all EMEA/AP revenues are derived from the property and casualty insurance company market. Revenues before reimbursements by major region for the three months ended March 31, 2011 and 2010 were as follows:

( in thousands, except percentages)

For the three months ended March 31, 2011 compared to the same period during 2010, the U.S. dollar was slightly stronger against most other major EMEA/AP foreign currencies, reducing revenues before reimbursements by 0.4%. EMEA/AP unit volume, measured by cases received, increased 26.5% in the quarter ended March 31, 2011 compared with the same period in 2010. The overall increase for the quarter was primarily due to increases in case referrals during 2011 in the U.K., CEMEA and Asia/Pacific. Average revenue per claim decreased 10.1% during the three months ended March 31, 2011, due to changes in the mix of services provided and in the rates charged for those services.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for our EMEA/AP segment increased to $6.8 million for the three months ended March 31, 2011, from $5.1 million in the comparable 2010 period. The increase was primarily due to increased expenses incurred to handle the increase in weather-related events, primarily in the U.K. and Australia.

Case Volume Analysis

EMEA/AP unit volumes by region, measured by cases received, for the three months ended March 31, 2011 and 2010 were as follows:

(whole numbers, except percentages)

Overall, claims volume remained high around the world. The 2011 increase in the U.K. was due primarily to an increase in weather-related activity.

The 2011 increase in CEMEA resulted primarily from growth in our claims management business in Belgium, Germany, Italy, South Africa, and Scandinavia.

The increase in Asia/Pacific was due to an increase in high-frequency, low-value claims in China, Singapore, and Malaysia, and a significant increase in weather-related claims in Australia and Thailand.

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 significant sources of claims for us and are generally not subject to accurate forecasting.

Direct Compensation and Fringe Benefits

As a percentage of revenues before reimbursements, direct compensation expenses, including related payroll taxes and fringe benefits, were 66.0% for the three months ended March 31, 2011, compared with 69.9% for the comparable period in 2010. This percentage decrease primarily reflected increased utilization of our staff as a result of the increase in the number of cases received. The dollar amount of these expenses increased for the three-months ended March 31, 2011 to $52.6 million, from $48.1 million in the same period in 2010. The increase in the dollar amount was primarily due to an increase in the number of full-time equivalent employees. There was an average of 3,019 full-time equivalent employees in this segment in the first three months of 2011 compared with an average of 2,655 in the comparable 2010 period.

Salaries and wages of EMEA/AP segment personnel increased to $44.2 million for the three months ended March 31, 2011, from $39.4 million in the comparable 2010 period, primarily resulting from the increase in the average number of full-time equivalent employees. Payroll taxes and fringe benefits for the EMEA/AP segment totaled $8.4 million for the first quarter ended March 31, 2011, respectively, compared with $8.7 million for the same period in 2010. This year-to-date decrease was primarily due to reduced U.K. pension expense.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits were 25.0% of EMEA/AP revenues before reimbursements for the three months ended March 31, 2011, up from 23.1% for the comparable period in 2010. The dollar amount of these expenses increased in the 2011 quarter to $20.0 million from $15.9 million in the first quarter of 2010 primarily due to the increased use of temporary assistance during the 2011 quarter as a result of the increase in the number of cases received.

BROADSPIRE

Our Broadspire segment reported an operating loss of $3.2 million for the first quarter of 2011, compared with an operating loss of $2.3 million in the first quarter of 2010. This decline was primarily due to lower revenues resulting from lower U.S. employment levels.

Revenues before Reimbursements

Broadspire segment revenues are primarily derived from workers’ compensation and liability claims management, medical management for workers’ compensation, vocational rehabilitation, and risk management information services provided to the U.S. self-insured market place. Broadspire revenues before reimbursements by major service line for the three months ended March 31, 2011 and 2010 were as follows:

( in thousands, except percentages)

Unit volumes for the Broadspire segment, measured principally by cases received, increased 16.3% from the 2010 first quarter to the 2011 first quarter. The increase in cases received in the first quarter of 2011 compared to the same period in 2010 is due to services provided in connection with a special project for one of our clients. Revenues for the special project are at a much lower rate than some of our other service lines. As a result, the increase in cases received has been more than offset by a shift in mix of services provided. The combined result of these factors was a 3.5% decrease in Broadspire segment revenues before reimbursements for the first quarter of 2011 compared with the comparable period of 2010.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for the Broadspire segment were $0.9 million for the three months ended March 31, 2011, increasing from $0.7 million in the comparable 2010 period.

Case Volume Analysis

Broadspire unit volumes by major underlying case category, as measured by cases received, for the three months ended March 31, 2011 and 2010 were as follows:

(whole numbers, except percentages)

The 2011 decline in workers’ compensation claims reflected a continuing decline in reported workplace injuries in the U.S., primarily as a result of the continued overall lower level of employment due to the current economic climate, as well as the loss of a significant client. 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. While U.S. employment levels are improving, the improvement has not yet translated into higher claim volumes. The significant increase in casualty claims in the first quarter of 2011 over the same period of 2010 is due to services provided in connection with a special project for one of our clients. The 2011 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. 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.

Direct Compensation and Fringe Benefits

Our most significant expense in our Broadspire segment is the compensation of employees, including related payroll taxes and fringe benefits. Broadspire’s direct compensation and fringe benefits expense, as a percent of the related revenues before reimbursements, decreased from 60.0% for the quarter ended March 31, 2010 to 58.1% in the 2011 first quarter. This percentage decrease primarily resulted from a reduction in the average number of full-time equivalent employees. Average full-time equivalent employees in this segment totaled 1,862 in the first three months of 2011, down from 2,062 in the comparable 2010 period, due to reduced claims volume.

Broadspire segment salaries and wages totaled $28.1 million for the three months ended March 31, 2011, decreasing 7.6% from $30.4 million in the comparable 2010 period. Payroll taxes and fringe benefits for the Broadspire segment totaled $6.6 million in the three months ended March 31, 2011, decreasing 2.9% from 2010 expenses of $6.8 million for the same comparable period. These 2011 decreases were primarily the result of the reduction in the number of full-time equivalent employees.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Broadspire segment expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits as a percent of revenues before reimbursements were 47.2% for the three months ended March 31, 2011, compared with 43.8% in the comparable 2010 period. The amount of these expenses increased 4.1% for the three months ended March 31, 2011, respectively, compared with the same period in 2010. The increase in 2011 is due to the increased use of outside contractors in connection with the special project discussed above, the use of outside consultants in connection with the implementation of Broadspire's new claims system and increased vendor fees for Medical Management Services.

LEGAL SETTLEMENT ADMINISTRATION

Our Legal Settlement Administration segment reported operating earnings of $17.0 million for the three months ended March 31, 2011, increasing from $3.3 million in the comparable 2010 period. The related segment operating margin increased from 15.9% for the three months ended March 31, 2010 to 28.3% in the comparable 2011 period. While the core businesses of this segment continued to perform well, the revenue increases described above were primarily the result of a special project that began in the summer of 2010. It is our expectation that we will continue work on this special project until the expected end date of August 2013. We expect the special project to remain active through the remainder of 2011, but not at the same level as we experienced in the 2011 first quarter.

Revenues before Reimbursements

Legal Settlement Administration revenues are primarily derived from securities, product liability and other legal settlement services, and bankruptcy administration. Legal Settlement Administration revenues before reimbursements increased 191.2% to $60.2 million for the three months ended March 31, 2011 compared with $20.7 million for the comparable 2010 period. Legal Settlement Administration revenues are project-based and can fluctuate significantly in any period. At March 31, 2011, we had a backlog of projects awarded totaling approximately $110.0 million, compared with $50.7 million at March 31, 2010. Of the $110.0 million backlog at March 31, 2011, an estimated $84.0 million is expected to be recognized as revenues over the remainder of 2011.

Reimbursed Expenses included in Total Revenues

The nature and volume of work performed in our Legal Settlement Administration segment typically requires more reimbursable out-of-pocket expenditures than our other operating segments. Reimbursements for out-of-pocket expenses included in total revenues for Legal Settlement Administration in the first quarter were $7.6 million in 2011 and $6.6 million in 2010.

Transaction Volume

Legal Settlement Administration services are generally project based and not denominated by individual claims. Depending upon the nature of projects and their respective stages of completion, the volume of transactions or tasks performed by us in any period can vary, sometimes significantly.

Direct Compensation and Fringe Benefits

Legal Settlement Administration’s direct compensation expense, including related payroll taxes and fringe benefits, as a percent of revenues before reimbursements, was 32.7% in the three months ended March 31, 2011 compared with 48.8% in the comparable 2010 period. The dollar amount of these expenses increased to $19.6 million for the first quarter of 2011 compared with $10.1 million for the comparable 2010 period, due primarily to increases in incentive compensation and commission expenses, merit pay increases and an increase in the number of full-time equivalent employees in 2011. There was an average of 516 full-time equivalent employees in this segment in the first three months of 2011, compared with an average of 351 in the comparable 2010 period.

Legal Settlement Administration salaries and wages totaled $17.3 million for the quarter ended March 31, 2011, increasing 103.5%, from $8.5 million in the comparable 2010 period. Payroll taxes and fringe benefits for Legal Settlement Administration totaled $2.3 million for the three months ended March 31, 2011, compared with $1.6 million for the comparable 2010 period.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

One of our most significant expenses in Legal Settlement Administration is outsourced services due to the variable, project-based nature of our work. Legal Settlement Administration expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits increased as a percent of related revenues before reimbursements to 39.0% for the three months ended March 31, 2011 from 35.3% for the comparable 2010 period. The dollar amount of these expenses increased to $23.5 million for the first quarter of 2011 compared with $7.3 million for the comparable 2010 period, due primarily to the need for outsourced service providers to assist with the special project in 2011.

EXPENSES AND CREDITS EXCLUDED FROM SEGMENT OPERATING EARNINGS

Income Taxes

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 are subject to income taxes at varied rates, our ability to utilize net operating loss and tax credit carryforwards, and amounts related to uncertain income tax positions. At March 31, 2011, we estimate that our effective annual income tax rate for 2011 will be approximately 28% to 30% before considering discrete items.

The provision for income taxes on consolidated income totaled $6.0 million and $0.9 million for the three months ended March 31, 2011 and 2010, respectively. The increase in 2011 compared with 2010 was due primarily to to the overall increase in income, fluctuations in the mix of income earned in the jurisdictions in which the Company operates, and discrete items.

Net Corporate Interest Expense

Net corporate interest expense consists 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, interest rate swaps, and the amounts of invested cash and investments. Corporate interest expense totaled $4.4 million and $4.2 million for the three months ended March 31, 2011 and 2010, respectively. Interest income totaled $219,000 and $103,000 for the three months ended March 31, 2011 and 2010, respectively.

Amortization of Customer-Relationship Intangible Assets

Amortization of customer-relationship intangible assets represents the non-cash amortization expense for customer-relationship intangible assets acquired as part of our 2006 acquisitions of Broadspire Management Services, Inc. (“BMSI”) and Specialty Liability Services, Ltd. (“SLS”). Amortization expense associated with these intangible assets totaled approximately $1.5 million for the first quarter of each of 2011 and 2010. This amortization is included in SG&A expenses in our unaudited Condensed Consolidated Statements of Operations.

Stock Option Expense

Stock option expense, a component of stock-based compensation, is comprised of non-cash expenses related to stock options granted under our various stock option and employee stock purchase plans. Stock option expense is not allocated to our operating segments. Other stock-based compensation expense related to our executive stock bonus plan (performance shares and restricted shares) is charged to our operating segments and included in the determination of segment operating earnings or loss. Stock option expense of $155,000 was recognized during the three months ended March 31, 2011, compared with $204,000 for the comparable period in 2010.

Unallocated Corporate and Shared Costs

Certain unallocated costs and credits are excluded from the determination of segment operating earnings. For the three months ended March 31, 2011 and 2010, unallocated corporate and shared costs primarily represented costs of our frozen U.S. defined benefit pension plan, expenses for our CEO and our Board of Directors, certain adjustments to our self-insured liabilities, and certain adjustments and recoveries to our allowances for doubtful accounts receivable. Unallocated corporate and shared costs were $350,000 for the three months ended March 31, 2011 and $155,000 for the comparable period in 2010. Our U.S. defined benefit pension plan expense was $804,000 for the three months ended March 31, 2011, compared with $1.8 million for the same period of 2010. In addition, unallocated self-insurance expenses were $567,000 higher in the three months ended March 31, 2011 compared with the same period in 2010, due primarily to higher professional indemnity expenses in 2011 compared with 2010.

Loss on Sublease

During the first three months of 2010, the Company recorded a pretax charge of $2.7 million for a loss incurred on the sublease of the Broadspire facility in Plantation, Florida and the relocation of those operations to Sunrise, Florida, as described in more detail in Note 11 to the accompanying unaudited condensed consolidated financial statements.

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

At March 31, 2011, our working capital balance (current assets less current liabilities) was approximately $87.5 million, an increase of $4.9 million from the working capital balance at December 31, 2010. Our cash and cash equivalents were $46.7 million at March 31, 2011, compared with $93.5 million at December 31, 2010.

Cash Used in Operating Activities

Cash used in operating activities was $50.2 million for the three months ended March 31, 2011, compared with $23.8 million for the comparable period of 2010. During the first three months of 2011, we made cash contributions of $20 million and $1.7 million, respectively, to our U.S. and U.K. defined benefit pension plans, compared with $10.0 million and $1.2 million, respectively, for the same period in 2010. Also contributing to the increase in cash used in operating activities in the 2011 period was a $30.7 million increase in accounts receivable and unbilled revenue due to the increases in revenue in our Legal Settlement Administration and EMEA/AP segments. The Company's operating cash needs typically peak during the first quarter and decline during the balance of the year, due in part to annual payments made in the first quarter of each year to fund defined contribution retirement plans and incentive compensation plans.

Cash Used in Investing Activities

Cash used in investing activities, primarily for acquisitions of property and equipment and for capitalized software, was $8.9 million in the three months ended March 31, 2011, compared with cash used in investing activities of $5.7 million in the comparable period of 2010. In addition, we paid $2.6 million to acquire the net assets of two companies in the first quarter of 2011.

Cash Provided by Financing Activities

Cash provided by financing activities was $12.6 million for the three months ended March 31, 2011, compared with $8.5 million for the comparable period of 2010. In the first quarter of 2011, we reinstated a quarterly dividend of $0.02 per common share, for a total of $1.1 million paid during the first quarter. Over the first quarter of 2011, we increased our short-term borrowings and book overdraft by $16.0 million, made our quarterly payment on our long-term debt of $650,000 and paid $1,652,000 of statutory employee withholding taxes on behalf of certain employees who elected to reduce the number of shares of common stock that would have otherwise been issued to them under employee stock-based compensation plans. During 2010, we made a mandatory excess cash flow payment of $5.9 million to reduce the balance outstanding on our term note payable, and paid $700,000 of statutory employee withholding taxes on behalf of certain employees who elected to reduce the number of shares of common stock that would have otherwise been issued to them under employee stock-based compensation plans.

The Company may be required to make additional debt repayments if the Company generates excess cash flows or fails to meet certain leverage ratios as defined in the credit agreement. The Company is not required to make any excess cash flow payments in 2011.

Other Matters Concerning Liquidity and Capital Resources

As a component of our Credit Agreement, we maintain a committed $100.0 million revolving credit line with a syndicate of lenders in order to meet seasonal working capital requirements and other financing needs that may arise. This revolving credit line expires on October 30, 2013. As a component of this credit line, we maintain a letter of credit facility to satisfy certain contractual obligations. Including $20.3 million of undrawn letters of credit issued under the letter of credit facility, the balance of our unused line of credit totaled $65.7 million at March 31, 2011. Our short-term debt obligations typically peak during the first quarter of each year due to the annual payment of incentive compensation, contributions to retirement plans, and certain other recurring payments, and generally decline during the balance of the year. At March 31, 2011 and 2010, the outstanding balances under our revolving line of credit facility were $14.0 million and $13.9 million, respectively. Long-term borrowings outstanding, including current installments and capital leases, totaled $222.6 million as of March 31, 2011, compared with $223.3 million at December 31, 2010. We have historically used the proceeds from our long-term borrowings to finance, among other things, business acquisitions.

We believe our current financial resources, together with funds expected to be generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations for the next 12 months.

Future Dividend Payments

Our Board of Directors makes dividend decisions each quarter based in part on an assessment of current and projected earnings and cash flows. Our ability to pay future dividends could be impacted by many factors including the funding requirements for our defined benefit pension plans, repayments of outstanding borrowings, future levels of cash generated by our operating activities, and restrictions related to the covenants contained in our credit agreement. The covenants in our credit agreement limit dividend payments to shareholders.

Financial Condition

Other significant changes in our unaudited Condensed Consolidated Balance Sheet as of March 31, 2011, compared with our Consolidated Balance Sheet as of December 31, 2010, were as follows:

• Cash and cash equivalents decreased $46.8 million, or $46.6 million net of currency exchange.
• Accounts receivable and unbilled revenues increased $32.0 million, or $30.7 million net of currency exchange impacts. This increase was primarily due to the revenue increases in our Legal Settlement Administration and EMEA/AP segments.
• Short-term borrowings increased $14.0 million.
• Accrued compensation and related costs decreased by $18.2 million due to the payment of annual incentive compensation and the funding of various defined contribution retirement plans.

Off-Balance Sheet Arrangements

At March 31, 2011, we were not a party to any off-balance sheet arrangements, other than operating leases, which we believe could materially impact our operations, financial condition, or cash flows.

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, we have certain material obligations under operating lease agreements to which we are a party. In accordance with GAAP, these operating lease obligations and the related leased assets are not reported on our consolidated balance sheet. Other than reductions to the lease obligations resulting from scheduled lease payments, our obligations under these operating lease agreements have not changed materially since December 31, 2010.

We maintain funds in various trust accounts to administer claims for certain clients. These funds are not available for our general operating activities and, as such, have not been recorded in the accompanying unaudited condensed consolidated balance sheets. We have concluded that we do not have a material off-balance sheet risk related to these funds.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

New Accounting Standards Adopted

Additional information related to new accounting standards adopted during 2011 is provided in Note 2 to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Pending Adoption of New Accounting Standards

None as of the date hereof.

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2010. Our exposures to market risk have not changed materially since December 31, 2010.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and not be detected.

As of the end of the period covered by this report, we performed an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at providing reasonable assurance that all information relating to the Company (including its consolidated subsidiaries) required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported in a timely manner.

Changes in Internal Control over Financial Reporting

We have identified no material changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 could materially affect our business, financial condition, or results of operations. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.