Crawford & Co: Form 10-Q for the period ended Sep 30, 2009

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 Exchange Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Statements contained in this report that are not historical in nature are forward-looking statements made pursuant to the “safe harbor” provisions thereof. These statements are included throughout this report and relate to, among other things, discussions regarding reductions of our operating expenses in our Broadspire segment, anticipated contributions to our underfunded defined benefit pension plans, collectibility 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 also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, case 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 certain 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. These forward-looking statements 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, cash flows or 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.,
• 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,
• our ability to retain clients and renew existing major contracts with clients on satisfactory financial terms,

29

• our ability to collect accounts receivable from our clients and others,
• continued availability of funding and compliance with the covenants 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,
• man-made disasters and natural disasters,
• our failure to complete the implementation of RiskTech on schedule, and
• further impairments 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.

Business Overview

Based in Atlanta, Georgia, Crawford & Company is the world’s largest independent provider of claims management solutions to insurance companies and self-insured entities, with a global network of more than 700 locations in 63 countries. Our major service lines include property and casualty claims management, integrated claims and medical management for workers’ compensation, legal settlement administration including class action and bankruptcy claims administration, warranty inspections, and risk management information services. We have two classes of common stock traded on the New York Stock Exchange, Class A Common Stock and Class B Common Stock, which trade under the symbols CRDA and CRDB, respectively.

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 the 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 varied 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, although sometimes a portion or substantially all of the revenue will be earned in periods after a claim is initially referred to us. 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. Insurance companies can derive a significant portion of their earnings from their investment portfolios, and when financial markets are strong, 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.

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.

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. 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 for 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 Consolidated Operations and Noncash Charges for Goodwill and Intangible Asset

Consolidated net loss attributable to Crawford & Company for the three months and nine months ended September 30, 2009 was $(39.5 million), or loss per share of $(0.76), and $(124.6 million), or loss per share of $(2.41), respectively. Excluding a noncash goodwill and an intangible asset impairment charge totaling $46.9 million ($46.7 million after tax), or $(0.90) per share, in the third quarter of 2009 and $140.9 million, or $(2.72) per share, for the nine months ended September 30, 2009, net income attributable to Crawford & Company was $7.2 million and $6.9 million for the three months ended September 30, 2009 and 2008, respectively, and $16.2 million and $23.9 million for the nine months ended September 30, 2009 and 2008, respectively. Consolidated net loss for the nine months ended September 30, 2009 also included a pre-tax charge of $1.8 million, or $1.2 million after income tax, for professional fees incurred in connection with the previously announced realignment of certain of our legal entities in the U.S. and internationally.

In addition to the goodwill and intangible asset impairment charges, the decrease in our consolidated results of operations during the three months and nine months ended September 30, 2009 compared to the same periods in 2008 was driven primarily by lower revenues in our Broadspire segment, higher costs for our defined benefit pension plans, the negative impact from a stronger U.S. dollar on the results of our International Operations segment, and the restructuring costs incurred in the first quarter of 2009. In addition, results for the three months ended September 30, 2009 were also negatively impacted by lower revenues in our U.S. Property & Casualty segment compared to the same period in 2008.

As previously disclosed, due to declines in current and forecasted operating results for our Broadspire reportable segment and reporting unit, the impact that declining U.S. employment levels have had on Broadspire’s revenue, and the weakness in our stock prices, we recorded a preliminary noncash goodwill impairment charge of $94.0 million in connection with the preparation of our unaudited condensed consolidated financial statements for the three months and six months ended June 30, 2009. In connection with the preparation of our unaudited condensed consolidated financial statements for the three months and nine months ended September 30, 2009, we completed this interim goodwill impairment analysis and determined that all of Broadspire’s remaining goodwill was impaired, resulting in an additional noncash goodwill impairment charge of $46.3 million. These goodwill impairment charges are not deductible for income tax purposes. Also, it was determined during the quarter ended September 30, 2009 that the value of a trade name indefinite-lived intangible asset used in a small portion of the Broadspire reporting unit was totally impaired. Accordingly, we recorded a pre-tax impairment charge of $600,000, or approximately $383,000 after tax, to recognize the impairment of the trade name intangible asset. These impairment charges are not reflected in Broadspire’s segment operating loss.

The goodwill and intangible asset impairment charges described above did not result in the violation of any covenants in our Credit Agreement.

Use of Non-GAAP Financial Performance Measure

Operating earnings is our segment measure of profit required to be disclosed by Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting,” as discussed in Note 11 to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Operating earnings is the primary financial performance measure used by our senior management and chief operating decision maker to evaluate the financial performance of our operating segments and make resource allocation decisions. We believe this measure is useful to others in that it allows them to evaluate segment operating performance using the same criteria our management uses. Operating earnings represent earnings attributable to Crawford & Company 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.

Income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, and stock option expense are recurring components of our net (loss) income, but they are not considered part of our segment operating earnings because they are managed on a corporate-wide basis. Income taxes are based on statutory rates in effect in each of the jurisdictions where we provide services, and vary throughout the world. Net corporate interest expense results from company-wide capital structure decisions made by management. Amortization expense relates to non-cash amortization expense of customer-relationship intangible assets resulting from business combinations. Stock option expense is the non-cash cost generally related to historically granted stock options and costs related to our employee stock purchase plans. None of these costs relates 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 our segment operating activities on a consistent basis.

Certain other gains and expenses arise from events (such as restructuring costs or a goodwill impairment charge) that are not considered part of our segment operating earnings 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 for the three-month and nine-month periods ended September 30, 2009 and 2008 primarily represented expenses 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 for our frozen U.S. pension plan, and certain self-insurance costs and recoveries that are not allocated to our individual operating segments.

With the exception of income taxes, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, unallocated corporate and shared costs, and certain other gains and expenses, our results of operations are discussed and analyzed by our four operating segments: U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration. The discussion and analysis of the results of our four operating segments follows the sections on income taxes, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, unallocated corporate and shared costs, restructuring costs, and goodwill and intangible asset impairment charges.

Income Taxes

Our consolidated effective income tax rate for financial reporting purposes changes periodically due to changes in enacted tax rates, fluctuations in the mix of taxable income earned from our various domestic and international operations, our ability to utilize net operating loss carryforwards in certain of our subsidiaries, and amounts related to uncertain income tax positions. At September 30, 2009, we estimate that our effective annual income tax rate for 2009 will be approximately 23%, excluding the nondeductible noncash goodwill impairment charge of $140.3 million.

Income tax expense totaled $4.6 million and $12.0 million for the nine months ended September 30, 2009 and 2008, respectively. As a percentage of pre-tax income, excluding the noncash goodwill impairment charge, income tax expense including discrete items was 22.2% and 33.4% for the nine months ended September 30, 2009 and 2008, respectively. The percentage decrease in 2009 was due primarily to changes in the mix of taxable income earned from our domestic and international operations and enacted tax legislation impacting the current year. For the nine months ended September 30, 2009 and 2008, discrete items of $492,000 and $655,000, respectively, decreased our effective income tax rate by 2.3% and 1.8%, respectively.

Net Corporate Interest Expense

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 and cash equivalents. These amounts vary based on interest rates, borrowings outstanding, and the amounts of invested cash and cash equivalents. Interest expense is also impacted by our interest rate swap agreement that we entered into in May 2007. Corporate interest expense totaled $3.3 million and $4.9 million for the three months ended September 30, 2009 and 2008, respectively, and $11.5 million and $14.8 million for the nine months ended September 30, 2009 and 2008, respectively. Interest income totaled $142,000 and $551,000 for the three months ended September 30, 2009 and 2008, respectively, and $1.2 million and $1.4 million for the nine months ended September 30, 2009 and 2008, 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. and Specialty Liability Services, Ltd. Amortization expense associated with these intangible assets totaled approximately $1.5 million for each of the three-month periods ended September 30, 2009 and 2008, and $4.5 million for each of the nine-month periods ended September 30, 2009 and 2008. 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 $266,000 and $243,000 was recognized during the three months ended September 30, 2009 and 2008, respectively, and $696,000 and $717,000 was recognized for the nine months ended September 30, 2009 and 2008, respectively.

Unallocated Corporate and Shared Costs

Certain unallocated costs and credits are excluded from the determination of segment operating earnings. For the three months ended September 30, 2009 and 2008, unallocated corporate and shared costs primarily represented costs or credits related to 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 $878,000 and $3.7 million for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, unallocated corporate and shared costs were $8.1 million and $5.1 million, respectively. The 2009 overall decrease in the quarter-over-quarter expenses was due primarily to favorable adjustments to the accruals for certain of our self-insured liabilities, offset partially by higher 2009 cost for our frozen U.S. defined benefit pension plan. The 2009 overall increase for the year-to-date period was due primarily to higher costs associated with our frozen U.S. defined benefit pension plan, offset partially by favorable adjustments to the accruals for certain self-insured liabilities. Pension cost for our frozen U.S. defined benefit plan was $3.1 million and $9.3 million higher for the quarter and nine months ended September 30, 2009, respectively, than the comparable periods in 2008.

Restructuring Costs

In the nine months ended September 30, 2009, we recorded pretax expenses totaling $1.8 million for professional fees incurred in connection with an internal realignment of certain of our legal entities in the U.S. and internationally. This realignment did not impact our segment financial reporting. The realignment activities commenced in the fourth quarter of 2008.

Goodwill and Intangible Asset Impairment Charges

As discussed above, during the third quarter of 2009 and the nine months ended September 30, 2009, we recorded a noncash goodwill and an intangible asset impairment charge totaling $46.9 million, or $(0.90) per share, and $140.9 million, or $(2.72) per share, respectively, related to our Broadspire reportable segment and reporting unit. Only $600,000 of this charge is deductible by us for income tax purposes. These impairment charges are not reflected in Broadspire’s segment operating loss.

SEGMENT OPERATING RESULTS

As previously described, we evaluate our four operating segments primarily by use of a non-GAAP financial measurement referred to by us as segment operating earnings. Segment operating earnings represent earnings attributable to Crawford & Company excluding income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, certain other expenses, and certain unallocated corporate and shared costs.

Our four operating segments, U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration, represent components of our company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing operating performance. U.S. Property & Casualty serves the U.S. property and casualty insurance company market, including the product warranties and inspections marketplace. International Operations serves the property and casualty insurance company markets outside of the U.S. Broadspire serves the U.S. self- insurance marketplace. Legal Settlement Administration serves the securities, bankruptcy, and other legal settlements markets primarily in the U.S.

In the normal course of our business, we sometimes incur certain out-of-pocket expenses that are thereafter reimbursed by our clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are reported as revenues and expenses in our Consolidated Statement of Operations. In some of the discussion and analysis that follows, we do not believe it is informative to include the GAAP-required gross up of our revenues and expenses for these pass-through reimbursed expenses. The amounts of reimbursed expenses and related revenues offset each other in our Consolidated Statement of Operations with no impact to our net (loss) income. Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses, and expense amounts exclude reimbursed out-of-pocket expenses, income taxes, net corporate interest expense, amortization expense for customer-relationship intangible assets, stock option expense, certain other expenses, and unallocated corporate and shared costs.

Our discussion and analysis of the operating expenses included in our segment operating earnings 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.

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 periods are adjusted to reflect the current allocation process.

As disclosed in Note 1 of our accompanying unaudited condensed consolidated financial statements, the financial statements of our International Operations segment, other than subsidiaries in Canada and the Caribbean, are included in our consolidated financial statements on a two-month delayed basis as permitted by GAAP in order to provide sufficient time for accumulation of their results.

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q.

Operating results, excluding noncontrolling interests, for our U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration segments reconciled to net (loss) income attributable to Crawford & Company, were as follows:

(in thousands)

37

U.S. PROPERTY & CASUALTY

Segment operating earnings for our U.S. Property & Casualty segment decreased from $6.8 million in the third quarter of 2008 to $4.9 million in the third quarter of 2009. For the nine months ended September 30, segment operating earnings decreased from $17.8 million in 2008 to $17.3 million in 2009. Operating margin decreased from 12.1% in the third quarter of 2008 to 9.3% in the third quarter of 2009. For the first nine months of the year, operating margin decreased from 11.4% in 2008 to 10.7% in 2009.

Revenues before Reimbursements

U.S. Property & Casualty revenues are primarily generated from the property and casualty insurance company markets, with additional revenues generated from the warranties and inspections marketplace.

U.S. Property & Casualty revenues before reimbursements decreased 7.1% to $52.3 million for the quarter ended September 30, 2009, compared to $56.2 million in the comparable 2008 quarter. The quarter-over-quarter decline was due primarily to a reduction in the number of claims received in the 2009 third quarter. Revenues increased 3.1% to $161.9 million for the nine months ended September 30, 2009, compared to $156.9 million in the comparable 2008 period. This year-over-year increase in 2009 was primarily due to higher revenues from catastrophe services. Revenues generated by our catastrophe services group were $6.3 million for the quarters ended September 30, 2009 and 2008, respectively. For the nine month periods ended September 30, 2009 and 2008, revenues generated by our catastrophe services group were $18.4 million and $11.6 million, respectively.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for our U.S. Property & Casualty segment were $2.5 million and $7.8 million for the quarter and nine months ended September 30, 2009, respectively, decreasing from $2.9 million and $8.4 million in the comparable 2008 periods. These 2009 decreases were due primarily to lower vehicle fuel costs and mileage reimbursements.

Case Volume Analysis

U.S. Property & Casualty revenues before reimbursements decreased 7.1% in the third quarter of 2009 compared to the third quarter of 2008. This 7.1% quarter-over-quarter revenue decrease was due to a 15.4% decrease in cases received, offset partially by a 8.3% revenue increase due to changes in the mix of services provided and in the rates charged for those services. The decrease in referrals of high-frequency, low-severity vehicle claims, catastrophe claims and warranty services claims in 2009 increased our average revenue per claim in the 2009 third quarter.

For the first nine months of 2009 compared to the same period in 2008, revenues before reimbursements increased 3.1% in the current year-to-date period. Revenue in the 2009 year-to-date period increased 6.1% due to changes in the mix of services provided and in the rates charged for those services, offset partially by a 3.0% revenue decrease caused by an overall decrease in claims referred. The decrease in referrals of high-frequency, low-severity vehicle claims and warranty services claims and the increase in referrals of complex property claims increased our average revenue per claim in the 2009 year-to-date period.

U.S. Property & Casualty unit volumes by major service line, as measured by cases received, for the three months and nine months ended September 30, 2009 and 2008 were as follows:

For the nine-month periods, property claims increased in 2009 due primarily to severe weather earlier in the year and due to increases in referrals made to our managed repair network in 2009. The quarter-over-quarter declines in property claims and catastrophe claims in 2009 were due primarily to lower storm-related activity in the third quarter of 2009 compared to the third quarter of 2008 when we were impacted by claims from hurricanes Dolly, Gustav, and Ike. A portion of the revenues related to hurricanes Dolly, Gustav and Ike was earned in the fourth quarter of 2008. The 2009 declines in vehicle claims were due primarily to general economic conditions which have resulted in fewer miles driven and thus fewer claims, and also due to decisions by certain insurance companies to reduce adjuster involvement in handling claims. The 2009 decreases in warranty services claims were primarily due to a reduction in claims from our existing clients as several large warranty programs concluded, partially offset by claims from new clients.

Direct Compensation and Fringe Benefits

The most significant expense in our U.S. Property & Casualty segment is the compensation of employees, including related payroll taxes and fringe benefits. U.S. Property & Casualty direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, was 61.2% in the third quarter of 2009, increasing from 60.7% in the comparable 2008 quarter. For the nine-month period ended September 30, 2009, U.S. Property & Casualty direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, was 59.9%, decreasing from 61.3% in the comparable 2008 period. These percentage changes in 2009 were due primarily to changes in revenues and the resulting impact on operating efficiencies. There was an average of 1,625 full-time equivalent employees (including 95 catastrophe adjusters) in the first nine months of 2009, compared to an average of 1,630 full-time equivalent employees (including 108 catastrophe adjusters) in the same period of 2008. The average number of full-time equivalent catastrophe adjusters for third quarter 2009 and third quarter 2008 was 92 and 200, respectively.

U.S. Property & Casualty salaries and wages totaled $27.5 million and $28.6 million for the three months ended September 30, 2009 and 2008, respectively. For the first nine months of 2009 and 2008, U.S. Property & Casualty salaries and wages totaled $81.3 million and $79.6 million, respectively. The changes in salaries and wages during 2009 in this segment correlated with the changes in revenues. Payroll taxes and fringe benefits for U.S. Property & Casualty totaled $4.5 million and $5.5 million in the third quarter of 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, payroll taxes and fringe benefits for U.S. Property and Casualty totaled $15.7 million and $16.7 million, respectively. The decreases in 2009 compared to 2008 were due primarily to lower costs related to temporary reductions in planned contributions to defined contribution retirement plans.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

U.S. Property & Casualty expenses other than reimbursements, direct compensation, payroll taxes, and fringe benefits were $15.4 million, or 29.5% of segment revenues before reimbursements, for the quarter ended September 30, 2009, increasing slightly from $15.3 million, or 27.2% of segment revenues before reimbursements, for the comparable quarter of 2008. For the nine-month period ended September 30, 2009, these expenses were $47.6 million, or 29.4% of segment revenues before reimbursements, increasing from $42.8 million, or 27.3% of segment revenues before reimbursements, in the comparable 2008 period. These increases in 2009 were primarily due to higher fixed overhead costs. In addition, during the first quarter of 2008, the segment recovered a previously written off account receivable.

INTERNATIONAL OPERATIONS

Segment operating earnings in our International Operations segment declined to $7.3 million and $22.9 million in the three months and nine months ended September 30, 2009, respectively, from $8.6 million and $28.0 million for the comparable periods in 2008, respectively. The operating margin decreased from 7.4% and 8.4% in the three months and nine months ended September 30, 2008, respectively, to 7.1% and 7.9% in the comparable 2009 periods. Due to an overall stronger U.S. dollar during 2009 compared to 2008, the 2009 financial results of our International Operations segment were negatively impacted overall by the translation of foreign currencies into U.S. dollars.

Revenues before Reimbursements

Substantially all International Operations revenues are derived from the property and casualty insurance company market.

In U.S. dollars, revenues before reimbursements from our International Operations segment decreased 11.8% from $115.4 million in the third quarter of 2008 to $101.7 million in the 2009 third quarter. For the first nine months of 2009, revenues before reimbursements in this segment in U.S. dollars totaled $288.7 million, a 13.9% decrease from the $335.5 million reported in the first nine months of 2008. Compared to the 2008 periods, during the 2009 third quarter and year-to-date periods, the U.S. dollar was stronger against most major foreign currencies, resulting in a negative impact from exchange rate movements in the 2009 periods. Excluding the negative impact of exchange rate fluctuations, international revenues would have been $116.4 million and $350.9 million in the three months and nine months ended September 30, 2009, respectively, reflecting growth in revenues on a constant dollar basis of 0.9% and 4.6%, respectively. A business disposition in the fourth quarter of 2008 caused revenues in the three months and nine months ended September 30, 2009 to decrease by 1.8% and 1.7%, respectively. Average revenue per claim increased 10.5% and 11.6% during the three months and nine months ended September 30, 2009, respectively, due to changes in the mix of services provided and in the rates charged for those services. Decreases in 2009 of high-frequency, low-severity claims raised the average revenue per claim in 2009.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for our International Operations segment decreased to $7.9 million and $22.0 million for the three months and nine months ended September 30, 2009, respectively, from $11.5 million and $32.4 million in the comparable 2008 periods, respectively. These decreases in 2009 were due primarily to a stronger U.S. dollar during 2009 and to less out-of-pocket expenses related to the 2009 declines in the volumes and types of claims.

Case Volume Analysis

International Operations unit volumes, as measured by cases received, by region for the three months and nine months ended September 30, 2009 and 2008, adjusted for a 2008 disposition, were as follows:

The 2009 decreases in the U.K. were due primarily to a reduction of storm-related claims in the current year periods. The 2009 decreases in Canada were due primarily to a reduction in high-frequency, low severity claims. The 2009 increases in CEMEA were due primarily to increases in high-frequency, low severity claims in Scandinavia. The changes in Asia-Pacific volumes were primarily due to high frequency, low severity claims activity in China and Singapore and an increase in weather-related activity in Australia earlier in 2009. The increase in the third quarter of 2009 in the Americas compared to the third quarter of 2008 was due primarily to an increase in high frequency, low severity claims in Brazil.

Direct Compensation and Fringe Benefits

As a percentage of segment revenues before reimbursements, direct compensation expense, including related payroll taxes and fringe benefits, was 69.2% for the quarter ended September 30, 2009, increasing slightly from 69.0% for the comparable quarter in 2008. For the nine-month period ended September 30, 2009, these expenses increased as a percentage of segment revenues before reimbursements to 69.4% from 68.6% in the comparable 2008 period. These percentage increases in 2009 were primarily due to lower utilization of staff and higher costs related to defined benefit retirement plans in 2009. There was an average of 4,297 full-time equivalent employees in this segment in the first nine months of 2009 compared to an average of 4,203 in the same 2008 period.

Salaries and wages of International Operations segment personnel decreased to $59.4 million for the quarter ended September 30, 2009, from $68.3 million in the comparable 2008 quarter. For the nine-month periods, salaries and wages of International Operations segment personnel decreased to $168.3 million in 2009 from $196.9 million in 2008. These decreases were primarily related to the stronger U.S. dollar during the 2009 periods. Payroll taxes and fringe benefits for the International Operations segment totaled $11.0 million and $32.2 million for the three months and nine months ended September 30, 2009, respectively, compared to $11.4 million and $33.1 million for the same periods in 2008, The decreases in 2009 were primarily due to the stronger U.S. dollar during the 2009 periods, partially offset by higher costs in 2009 related to defined benefit retirement plans.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Expenses other than reimbursements, direct compensation, payroll taxes, and fringe benefits were 23.7% and 23.6% of International Operations revenues before reimbursements for the three-month periods ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, expenses other than reimbursements, direct compensation, payroll taxes, and fringe benefits were 22.7% and 23.0% of International Operations revenues before reimbursements, respectively. Due primarily to a stronger U.S. dollar during 2009, these expenses in translated U.S. dollars decreased from $27.1 million in the third quarter of 2008 to $24.0 million in the third quarter of 2009, and from $77.5 million in the nine-month period ended September 30, 2008 to $65.3 million for the comparable period in 2009.

BROADSPIRE

As previously disclosed above and in Note 2, “Impairment Testing and Noncash Charges for Goodwill and Intangible Asset,” to the accompanying unaudited condensed consolidated financial statements, we recorded a noncash goodwill and intangible asset impairment charge totaling $46.9 million related to our Broadspire segment during the quarter ended September 30, 2009. This goodwill impairment charge has been excluded from Broadspire’s segment operating earnings (loss) and is not included in the following discussion and analysis of Broadspire’s segment operating results.

For the third quarter of 2009, our Broadspire segment had an operating loss of $(1.2) million, or (1.7%) of revenues before reimbursements, compared to operating earnings of $1.1 million, or 1.4% of revenues before reimbursements, for the third quarter of 2008. For the nine months ended September 30, 2009, Broadspire had an operating loss of $(3.7) million, or (1.7%) of revenues before reimbursements, compared to operating earnings of $5.4 million, or 2.3% of segment revenues before reimbursements, for the comparable nine-month period in 2008. Declining case volumes in 2009 and the weakened labor market in the U.S. have negatively impacted Broadspire’s operating results.

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 marketplace.

Broadspire segment revenues before reimbursements decreased 8.4% and 7.7% to $70.4 million and $218.1 million for the quarter and nine months ended September 30, 2009, respectively, compared to $76.9 million and $236.3 million for the comparable 2008 periods. These 2009 decreases in revenues before reimbursements were primarily the result of 2009 declines in case volumes, as described below.

Reimbursed Expenses included in Total Revenues

Reimbursed expenses included in total revenues for the Broadspire segment were $1.3 million and $1.4 million for the three-month periods ended September 30, 2009 and 2008, respectively. For the nine-month periods ended September 30, 2009 and 2008, these expenses were $3.9 million and $4.0 million, respectively.

Case Volume Analysis

Unit volumes for the Broadspire segment, measured principally by cases received, decreased 10.1% and 13.2% for the three months and the nine months ended September 30, 2009, respectively, compared to the same periods in 2008. Changes in the mix of services provided and in the rates charged for those services increased revenues by 1.7% and 5.5% for the three months and nine months ended September 30, 2009, respectively, compared to the comparable periods in 2008.

Broadspire unit volumes by major service line, as measured by cases received, for the three months and nine months ended September 30, 2009 and 2008 were as follows:

The 2009 declines in workers’ compensation claims reflected a continuing decline in reported workplace injuries in the U.S primarily as a result of the overall decline in employment due to the current economic climate. The 2009 declines in casualty claims were primarily due to reductions in claims from our existing clients, partially offset by net new business gains. The 2009 increases in Other claims were primarily due to increases in health management services resulting from employers that added such services to their employee benefits programs.

During the third quarter of 2009, we were notified by a major client of our Broadspire segment that the client does not intend to renew its existing contract with us upon the scheduled expiration of that contract in December 2009. For the three months and nine months ended September 30, 2009, revenues related to this client totaled approximately $5.5 million and $16.1 million, respectively.

Direct Compensation and Fringe Benefits

The 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 revenues before reimbursements, decreased slightly from 56.6% for the quarter ended September 30, 2008 to 55.8% in the 2009 third quarter. For the nine months ended September 30, direct compensation and fringe benefits, as a percent of revenues before reimbursements, increased slightly from 56.1% in 2008 to 56.4% in 2009. The dollar amount of these expenses decreased $4.3 million for the third quarter of 2009 and $9.6 million for the nine months ended September 30, 2009, compared to the same periods in 2008. These 2009 dollar amount decreases were due to the reduced number of employees, lower incentive compensation expense, and lower costs related to temporary reductions in planned contributions to defined contribution retirement plans. Average full-time equivalent employees totaled 2,264 in the first nine months of 2009, down from 2,370 in the same 2008 period.

Broadspire segment salaries and wages totaled $33.2 million and $102.0 million for the three months and nine months ended September 30, 2009, respectively, decreasing 8.5% and 6.7%, from $36.3 million and $109.3 million in the comparable 2008 periods. Payroll taxes and fringe benefits for the Broadspire segment totaled $6.1 million and $21.1 million for the third quarter and nine months ended September 30, 2009, respectively, decreasing 16.4% and 9.8%, respectively, from 2008 expenses of $7.3 million and $23.4 million for the same comparable periods. These 2009 decreases were primarily the result of the reduction in the number of full-time equivalent employees, lower incentive compensation expenses, and lower costs related to temporary reductions in planned contributions to defined contribution retirement plans.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Broadspire segment expenses other than reimbursements, direct compensation, payroll taxes, and fringe benefits increased as a percent of segment revenues before reimbursements to 45.9% and 45.3% for the three months and nine months ended September 30, 2009, respectively, from 42.0% and 41.6% for comparable periods in 2008. Although the dollar amount of these expenses increased only slightly for the quarter and year-to-date periods in 2009, the reduced revenue in 2009 caused these expenses to increase in 2009 as a percent of revenues before reimbursements.

LEGAL SETTLEMENT ADMINISTRATION

Our Legal Settlement Administration segment reported segment operating earnings of $4.1 million and $9.9 million for the three months and nine months ended September 30, 2009, respectively, compared to $2.9 million and $8.5 million in the comparable 2008 periods. The related segment operating margin increased from 15.5% and 14.9% for the three months and nine months ended September 30, 2008 to 19.2% and 15.5%, respectively, in the comparable 2009 periods.

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 15.9% to $21.3 million and 10.3% to $62.8 million for the three months and nine months ended September 30, 2009, respectively, compared to $18.4 million and $57.0 million in the comparable 2008 periods. Legal Settlement Administration revenues are project-based, and 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. The increases in 2009 revenues over the same periods in 2008 were due primarily to the positive impact of major bankruptcy and securities class action administration projects awarded to us during 2009. During the three months and nine months ended September 30, 2009, we were awarded 72 and 212 new assignments, respectively, compared to 50 and 132 during the same periods in 2008. At September 30, 2009 we had a backlog of projects awarded totaling approximately $55.4 million, compared to $43.5 million at September 30, 2008. Of the $55.4 million backlog at September 30, 2009, an estimated $15.9 million is expected to be recognized as revenues over the remainder of 2009.

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 were $11.4 million and $25.6 million for the three months and nine months ended September 30, 2009, respectively, compared to $8.6 million and $24.8 million in the comparable 2008 periods. The increases in 2009 were due primarily to the nature of the work performed for new projects.

Direct Compensation and Fringe Benefits

Legal Settlement Administration’s direct compensation expense, including related payroll taxes and fringe benefits, as a percent of segment revenues before reimbursements, was 44.2% in the third quarter of 2009, compared to 46.1% in the comparable 2008 quarter. For the nine-month period ended September 30, 2009, these expenses as a percent of segment revenues before reimbursements were 43.4%, compared to 46.6% in the same 2008 period. These 2009 percentage decreases were primarily due to higher revenues in 2009. There was an average of 345 full-time equivalent employees in the first nine months of 2009, compared to an average of 337 in the same 2008 period.

Legal Settlement Administration salaries and wages totaled $8.3 million for the quarter ended September 30, 2009, increasing 10.7% from $7.5 million in the comparable 2008 period. For the nine months ended September 30, 2009, Legal Settlement Administration salaries and wages totaled $23.7 million, increasing 2.2% from $23.2 million from the comparable 2008 period. These increases in 2009 were due primarily to servicing the increased revenues. Payroll taxes and fringe benefits for Legal Settlement Administration totaled $1.1 million and $3.5 million for the quarter and nine months ended September 30, 2009, respectively, compared to $1.0 million and $3.4 million in the comparable 2008 periods. These 2009 increases were due primarily to the associated increases in salaries and wages in 2009.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Legal Settlement Administration expenses other than reimbursements, direct compensation, related payroll taxes, and fringe benefits as a percent of segment revenues before reimbursements decreased from 38.4% in the third quarter of 2008 to 36.6% in the third quarter of 2009. For the nine-month period ended September 30, 2009, these expenses as a percentage of segment revenues before reimbursements increased to 40.8%, from 38.5% in the same 2008 period. These 2009 changes were primarily due to changes in the utilization of outsourced service providers.

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

We continue to evaluate current and forecasted economic conditions and their potential implications for us, including, among other things, estimating the fair value of our financial instruments, asset impairments, liquidity, compliance with our debt covenants, and relationships with our customers.

Currently, we believe that all of our material financial assets subject to fair value accounting have readily observable market prices. Most of our liquid assets are invested in cash and cash equivalents consisting of payable-on-demand bank deposit accounts and short-term money market funds. However, the recent financial crisis affecting the banking system and financial markets and the going-concern threats to banks and other financial institutions have resulted in significant market volatility. As a result, we intend to continue to monitor these assets for any changes in marketability. While we are not aware of any losses, or expected losses, related to these bank deposits or money market funds, in the U.S. or abroad, we cannot provide any assurances that future market events will not materially adversely impact the values of any such assets.

We are not aware of any additional restrictions placed on us, or being considered to be placed on us, related to our ability to access capital, such as borrowing against the revolving credit portion of our Credit Agreement. We do not rely on repurchase agreements or the commercial paper market to meet our short-term or long-term funding needs. At September 30, 2009, we were in compliance with all of the covenants in our Credit Agreement. The previously discussed noncash impairment charges for goodwill and an intangible asset in 2009 did not impact this covenant compliance. As described below, subsequent to September 30, 2009, we amended our Credit Agreement in order to extend the maturity date of the revolving credit facility and to obtain certain additional operational and financing flexibility.

In May 2007, we entered into a three-year interest rate swap agreement that effectively converts the LIBOR-based portion of the interest rate under our Credit Agreement for a portion of our floating-rate debt to a fixed rate of 5.25%. The notional amount was $80.0 million at September 30, 2009. We are exposed to counterparty credit risk for nonperformance and, in the event of nonperformance by the counterparty, to market risk for changes in interest rates. In 2008, this counterparty was acquired by another entity. We have evaluated the credit worthiness of the acquirer and we do not anticipate that the acquisition will negatively impact the creditworthiness of the counterparty.

We continue the ongoing monitoring of our customers’ ability to pay us for the services that we render to them. However, we have not experienced recent increases in bad-debt-related charge-offs of our accounts receivable. Based on historical results, we currently believe there is a low likelihood that writeoffs of our accounts receivable will have a material impact on our financial results. However, if one or more of our key customers files bankruptcy or otherwise becomes unable to make required payments to us, or if overall economic conditions continue to deteriorate, we may need to make material provisions in the future to increase our allowance for accounts receivable.

Our International Operations segment exposes us to foreign currency exchange rate changes that can impact translations of foreign-denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results. Increases in the value of the U.S. dollar compared to the other functional currencies in the locations in which we do business have negatively impacted our revenues and operating earnings in 2009 compared to recent years. We can not predict the impact that foreign currency exchanges rates may have on our future revenues or operating earnings in our International Operations segment.

Rising unemployment levels in the United States, particularly in late 2008 and 2009, have resulted in an industry-wide reduction in the number of employment-related claim referrals, such as workers’ compensation claims. Our Broadspire segment has been negatively impacted by this, resulting in a 14.3% decrease in workers’ compensation claim referrals in the 2009 year-to-date compared to the same period in 2008. This trend may continue or stabilize depending on future employment levels, which we cannot predict. As previously discussed, we recorded noncash goodwill and intangible asset impairment charges totaling $140.9 million in the nine months ended September 30, 2009 related to our Broadspire segment.

Liquidity and Capital Resources

At September 30, 2009, our working capital balance (current assets less current liabilities) was approximately $85.9 million, an increase of $16.3 million from the working capital balance at December 31, 2008. During the three months and nine months ended September 30, 2009, $3.8 million and $11.2 million of cash was used to fund our U.S. and U.K. defined benefit pension plans, respectively, compared to $13.6 million and $19.9 million for the same periods in 2008, respectively. The liabilities on our consolidated balance sheet for the underfunded portions of these pension plans are reported as noncurrent liabilities, thus any cash contributions to these pension plans will reduce current assets with no corresponding reduction in current liabilities. Cash and cash equivalents at September 30, 2009 totaled $55.1 million, decreasing $18.0 million from $73.1 million at the end of 2008.

Cash Provided By Operating Activities

Net cash provided by operating activities was $9.8 million in the nine months ended September 30, 2009 compared to net cash provided by operating activities of $33.4 million in the same period of 2008. This decrease in cash from operations in 2009 was primarily due to lower net income in 2009 before consideration of the noncash goodwill and intangible asset impairment charges and due to higher working capital needs in 2009. Our 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. During the first nine months of 2009, we made cash contributions of $7.7 million and $3.5 million, respectively, to our U.S. and U.K. defined benefit pension plans, compared to $14.9 million and $5.0 million, respectively, for the same periods in 2008.

Cash Used in Investing Activities

Net cash used in investing activities was $18.2 million in the nine months ended September 30, 2009 compared to $21.5 million in the same period of 2008. Net capital spending decreased $4.1 million in the first nine months of 2009 compared to the same period in 2008.

Cash Used in Financing Activities

Net cash used in financing activities increased by $5.3 million, from $6.1 million in the nine months ended September 30, 2008 to $11.5 million in the same period of 2009. Net reductions in our short-term borrowings used $7.0 million of cash in the nine-month period ended September 30, 2009, compared to net use of $5.9 million in the comparable 2008 period. During the 2009 period, cash of $1.9 million was used to settle withholding and payroll taxes associated with stock-based compensation plans and $944,000 of costs were paid in connection with the amendment to our Credit Agreement in the first quarter of 2009.

During the three-month and nine-month periods ended September 30, 2009 and 2008, we did not repurchase any shares of our Class A or Class B Common Stock under our discretionary 1999 share repurchase program authorized by the Board of Directors. As of September 30, 2009, we have the availability to purchase up to 705,863 additional shares under the program. We believe it is unlikely that we will repurchase shares under this program in the foreseeable future due to, among other things, the underfunded status of our defined benefit pension plans and the covenants and related restrictions contained in our Credit Agreement.

Our Credit Agreement provides a committed $100.0 million revolving credit line with a syndicate of lenders to meet seasonal working capital requirements and other financing needs that may arise. This revolving credit line expires on October 30, 2013, as recently amended. As a component of this revolving credit line, we maintain a $50 million letter of credit subfacility to satisfy certain of our contractual obligations. Including $19.6 million of issued but undrawn letters of credit under the letter of credit facility, the balance of our unused line of credit under our Credit Agreement totaled $69.1 million at September 30, 2009. Short-term borrowings outstanding, including bank overdraft facilities, as of September 30, 2009 totaled $11.3 million, decreasing from $13.4 million at the end of 2008.

As disclosed in Note 15, “Subsequent Events,” to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, on October 27, 2009 we entered into a fifth amendment (“ Fifth Amendment”) to our Credit Agreement. Changes to the Credit Agreement in the Fifth Amendment related to, among other things, the method of computing the interest rates that we pay on our outstanding borrowings under the term and revolver portions of our Credit Agreement, which changes are expected to increase our pre-tax interest expense in future periods.

The following table updates the estimated interest payments previously provided in our “Contractual Obligations” table contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2008. For periods after September 30, 2009, amounts in the table below are estimates of future interest payments through the October 30, 2013 maturity date. The estimated amounts of future interest payments are based on outstanding borrowings at September 30, 2009 and interest rates modified by the Fifth Amendment to our Credit Agreement dated October 27, 2009:

(in thousands)

The actual amounts of interest that we will ultimately pay for periods after September 30, 2009 will likely differ from the estimated amounts presented in the above table due to unpredictable changes in interest rates, changes in the amounts outstanding under our revolving credit facility, and possibly due to interest rate hedges and any accelerated principal payments that we may voluntarily make.

In connection with the Fifth Amendment, our current interest rate swap agreement is no longer designated as a cash flow hedge of exposure to changes in cash flows due to change in interest rates. Accordingly, future changes in the fair value of this interest rate swap agreement will be recorded as an expense adjustment rather than a component of our accumulated other comprehensive loss.

Long-term borrowings outstanding, including current installments and capital leases, totaled $181.8 million as of September 30, 2009, compared to $183.5 million at December 31, 2008. We have historically used the proceeds from our long-term borrowings to finance business acquisitions.

Under the “Contractual Obligations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008, we noted that approximately $10.5 million of our obligations under certain existing operating leases were expected to be funded by sublessors under existing sublease agreements. As a result of a new sublease agreement entered into in October 2009 (see Note 15, “Subsequent Events” to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q), we anticipate that an additional $5.6 million of these existing obligations will be funded by this new sublessor.

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

Financial Condition

Significant changes in our consolidated balance sheet as of September 30, 2009, compared to our consolidated balance sheet as of December 31, 2008, are as follows:

• In addition to the noncash goodwill impairment charge of $140.3 million related to Broadspire, goodwill increased $8.2 million in our International Operations segment. Earnout payments recorded in goodwill during the first nine months of 2009 totaled $1.7 million. Currency translation accounted for substantially all of the remaining change.
• Deferred revenues decreased by $7.3 million, or $7.8 million net of currency exchange. Deferred revenues in our Broadspire segment decreased $12.2 million due to the ongoing completion of open claims assumed in our 2006 acquisition of Broadspire Management Services, Inc., net of additional deferred revenues generated by new claims in the current year. Deferred revenues in our Legal Settlement Administration segment increased $3.5 million due mainly to new projects awarded in 2009.
• Accrued compensation and related costs decreased $8.6 million, due to annual payments under incentive compensation plans in the first quarter of 2009 and due to decreased expense accruals in 2009 under these incentive compensation plans. The stronger U.S. dollar in 2009 also reduced the translation of these accruals into U.S. dollars for our International Operations segment.

Defined Benefit Pension Plan Funding

In 2006, the Pension Protection Act of 2006 (“PPA”) was signed into U.S. law. The PPA, among others things, established new funding requirements for defined benefit pension plans such as our frozen U.S. defined benefit pension plan, and impacted financial reporting for such plans. The requirements of the PPA became effective for plan years beginning after December 31, 2007. The PPA was subsequently amended by the Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”) and then by the U.S. Department of the Treasury in October 2009. Our frozen U.S. defined benefit pension plan was underfunded by $151.1 million at December 31, 2008 based on an accumulated benefit obligation of $377.5 million. The table below contains the estimated annual minimum contributions that we will need to make to our frozen U.S. defined benefit pension plan during the eight years after 2009 in order to meet the funding requirements under PPA and WRERA. These estimates were calculated using expected returns on assets ranging from 8.50% to 7.02%, and discount rates of 6.58% for 2010, 6.11% for 2011, and 5.64% for 2012 through 2017.

(in thousands)

During the fourth quarter of 2009, we will contribute $2.6 million in cash to our frozen U.S. defined benefit pension plan in order to meet the remaining funding requirements for 2009 under PPA and WRERA.

Off-Balance Sheet Arrangements

At September 30, 2009, we were not 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, 2008, 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, 2008.

We maintain funds in various trusts 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

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these interim financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments based upon historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates since December 31, 2008, except as described in the paragraph that follows relating to “Valuation of Goodwill, Indefinite-Lived Intangible Assets, and Other Long-Lived Assets.” For additional discussion regarding the application of our critical accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission, under the heading “Critical Accounting Policies and Estimates” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Due to declines in then-current and forecasted operating results for our Broadspire reportable segment and reporting unit (“Broadspire”), the impact that declining U.S. employment levels have had on Broadspire’s revenue, and the weakness in the prices of our common stock, we recorded a preliminary noncash goodwill impairment charge of $94,000,000 in connection with the preparation of our unaudited condensed consolidated financial statements for the three months and six months ended June 30, 2009, as previously disclosed. In connection with the preparation of our unaudited condensed consolidated financial statements for the three months and nine months ended September 30, 2009, we completed this goodwill impairment analysis for Broadspire and determined, for the reasons described below, that all of Broadspire’s remaining goodwill was impaired, resulting in an additional noncash goodwill impairment charge of $46,345,000. The additional charge resulted from finalizing the fair values assigned to other assets and liabilities in order to determine the implied fair value of goodwill, and from a further reduction in the future forecasted cash flows of Broadspire from the forecasts used to determine the preliminary impairment charge. These goodwill impairment charges are not deductible for income tax purposes. Also, it was determined during the quarter ended September 30, 2009 that the value of a trade name indefinite-lived intangible asset used in a small portion of the Broadspire reporting unit was totally impaired. Accordingly, we recorded a pre-tax impairment charge of $600,000, or approximately $382,500 after tax, to recognize the impairment of this trade name intangible asset.

The first step of the goodwill impairment testing and measurement process involved estimating the fair value of the reporting unit using an internally prepared discounted cash flow analysis. The discount rate utilized in estimating the fair value of Broadspire was 14%, reflecting our assessment of a market participant’s view of the risks associated with the projected cash flows. The terminal growth rate used in the analysis was 3%. The results of Step 1 of the process indicated potential impairment of the goodwill balance, as the carrying value of Broadspire exceeded its estimated fair value. As a result, we performed Step 2 of the process to quantify the amount of the goodwill impairment. In this step, the estimated fair value of Broadspire was allocated among its respective assets and liabilities in order to determine an implied value of goodwill, in a manner similar to the calculations performed in the accounting for a business combination. The allocation process was performed only for purposes of measuring goodwill impairment, and not to adjust the carrying values of recognized tangible assets or liabilities. Accordingly, no impairment charge or carrying value adjustments were made to the basis of any tangible asset or liability as a result of this process. We also updated our impairment review of other intangible assets, which identified no additional impairments at that time.

New Accounting Standards Adopted

Additional information related to new accounting standards adopted during 2009 is provided in Notes 3, 7, and 8 to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. Also, as disclosed in Note 1 to the aforementioned financial statements, we adopted the FASB’s Accounting Standards Codification on July 1, 2009.

On August 18, 2009, the SEC issued interpretive guidance FR-80, “Commission Guidance Regarding the Financial Accounting Standards Board’s Accounting Standards Codification” (“FR-80”). With the issuance of FR-80, the SEC formally recognized the FASB’s Codification as the single source of authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the SEC.

Pending Adoption of Recently Issued Accounting Standards

Additional information related to pending adoption of recently issued accounting standards is provided in Note 4 to the accompanying unaudited condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q.

For a discussion of quantitative and qualitative disclosures about market risks affecting our company, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2008. Our exposures to market risk have not changed materially since December 31, 2008.

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 SEC’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 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

There have been 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.

PART II — OTHER INFORMATION

Item. 1 Legal Proceedings

For information on certain legal matters, see Note 12, “Commitments and Contingencies,” to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.