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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - NATIONAL FINANCIAL PARTNERS CORPd234451dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM            TO            

Commission File Number: 001-31781

 

 

NATIONAL FINANCIAL PARTNERS CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-4029115

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

340 Madison Avenue, 20th Floor

New York, New York

  10173
(Address of principal executive offices)   (Zip Code)

(212) 301-4000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s Common Stock, $0.10 par value, as of October 27, 2011 was 41,373,510.

 

 

 


Table of Contents

National Financial Partners Corp. and Subsidiaries

Form 10-Q

INDEX

 

          Page  

Part I Financial Information:

  
   Item 1.   

Financial Statements (Unaudited):

     4   
     

Consolidated Statements of Financial Condition as of September 30, 2011 and December 31, 2010

     4   
     

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010

     5   
     

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010

     6   
     

Notes to Consolidated Financial Statements

     7   
   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   
   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     48   
   Item 4.   

Controls and Procedures

     49   

Part II Other Information:

  
   Item 1.   

Legal Proceedings

     49   
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     49   
   Item 6.   

Exhibits

     50   
  

Signatures

     51   

 

2


Table of Contents

Forward-Looking Statements

National Financial Partners Corp. (“NFP”) and its subsidiaries (together with NFP, the “Company”) and their representatives may from time to time make verbal or written statements, including certain statements in this report, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “anticipate,” “expect,” “intend,” “plan,” “believe,” “estimate,” “may,” “project,” “will,” “continue” and similar expressions of a future or forward-looking nature. Forward-looking statements may include discussions concerning revenue, expenses, earnings, cash flow, impairments, losses, dividends, capital structure, market and industry conditions, premium and commission rates, interest rates, contingencies, the direction or outcome of regulatory investigations and litigation, income taxes and the Company’s operations or strategy.

These forward-looking statements are based on management’s current views with respect to future results. Forward-looking statements are based on beliefs and assumptions made by management using currently-available information, such as market and industry materials, experts’ reports and opinions, and current financial trends. These statements are only predictions and are not guarantees of future performance. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include, without limitation: (1) NFP’s ability, through its operating structure, to respond quickly to operational, financial or regulatory situations impacting its businesses; (2) the ability of the Company’s businesses to perform successfully following acquisition, including through the diversification of product and service offerings, and NFP’s ability to manage its business effectively and profitably through its principals and the Company’s reportable segments; (3) the ability of the Company to execute on its strategy of increasing recurring revenue; (4) any losses that NFP may take with respect to dispositions, restructures or otherwise; (5) seasonality or an economic environment that results in fewer sales of financial products or services; (6) the impact of the adoption or change in interpretation of certain accounting treatments or policies and changes in underlying assumptions relating to such treatments or policies, which may lead to adverse financial statement results; (7) NFP’s success in acquiring and retaining high-quality independent financial services businesses; (8) the effectiveness or financial impact of NFP’s incentive plans; (9) adverse results or other consequences from matters including litigation, arbitration, settlements, regulatory investigations or compliance initiatives, such as those related to business practices, compensation agreements with insurance companies, policy rescissions or chargebacks, or activities within the life settlements industry; (10) adverse developments in the Company’s markets, such as those related to compensation agreements with insurance companies or activities within the life settlements industry, which could result in decreased sales of financial products or services; (11) NFP’s ability to operate effectively within the restrictive covenants of its credit facility; (12) changes that adversely affect NFP’s ability to manage its indebtedness or capital structure, including changes in interest rates or credit market conditions; (13) the impact of capital markets behavior, such as fluctuations in the price of NFP’s common stock, the dilutive impact of capital raising efforts or the impact of refinancing transactions; (14) the impact of legislation or regulations on NFP’s businesses, such as the possible adoption of exclusive federal regulation over interstate insurers, the uncertain impact of legislation regulating the financial services industry, such as the recent Dodd-Frank Wall Street Reform and Consumer Protection Act, the impact of newly-adopted healthcare legislation and resulting changes in business practices, or changes in regulations affecting the value or use of benefits programs, any of which may adversely affect the demand for or profitability of the Company’s services; (15) developments in the availability, pricing, design, tax treatment or underwriting of insurance products, revisions in mortality tables by life expectancy underwriters or changes in the Company’s relationships with insurance companies; (16) changes in premiums and commission rates or the rates of other fees paid to the Company’s businesses; (17) the reduction of the Company’s revenue and earnings due to the elimination or modification of compensation arrangements, including contingent compensation arrangements and the adoption of internal initiatives to enhance compensation transparency, including the transparency of fees paid for life settlements transactions; (18) the occurrence of adverse economic conditions or an adverse regulatory climate in New York, Florida or California; (19) the loss of services of key members of senior management; (20) the Company’s ability to compete against competitors with greater resources, such as those with greater name recognition; and (21) the Company’s ability to effect smooth succession planning.

Additional factors are set forth in NFP’s filings with the Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 10, 2011.

Forward-looking statements speak only as of the date on which they are made. NFP expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

3


Table of Contents

Part I – Financial Information

Item 1. Financial Statements (Unaudited)

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

(in thousands, except per share amounts)

 

     September 30,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 115,998      $ 128,830   

Fiduciary funds - restricted related to premium trust accounts

     79,552        82,647   

Commissions, fees, and premiums receivable, net

     91,283        120,572   

Due from principals and/or certain entities they own

     11,442        7,981   

Notes receivable, net

     4,454        6,128   

Deferred tax assets

     13,865        13,865   

Other current assets

     17,491        17,442   
  

 

 

   

 

 

 

Total current assets

     334,085        377,465   

Property and equipment, net

     34,778        37,359   

Deferred tax assets

     3,520        5,836   

Intangibles, net

     337,746        337,833   

Goodwill, net

     96,587        60,894   

Notes receivable, net

     26,021        30,724   

Other non-current assets

     41,465        42,952   
  

 

 

   

 

 

 

Total assets

   $ 874,202      $ 893,063   
  

 

 

   

 

 

 
LIABILITIES     

Current liabilities:

    

Premiums payable to insurance carriers

   $ 83,417      $ 83,091   

Current portion of long term debt

     12,500        12,500   

Income taxes payable

     1,537        —     

Due to principals and/or certain entities they own

     25,606        37,406   

Accounts payable

     18,425        36,213   

Accrued liabilities

     60,119        55,673   
  

 

 

   

 

 

 

Total current liabilities

     201,604        224,883   

Long term debt

     96,875        106,250   

Deferred tax liabilities

     1,552        1,552   

Convertible senior notes

     90,778        87,581   

Other non-current liabilities

     75,189        64,585   
  

 

 

   

 

 

 

Total liabilities

     465,998        484,851   
  

 

 

   

 

 

 
STOCKHOLDERS’ EQUITY     

Preferred stock, $0.01 par value: Authorized 200,000 shares; none issued

     —          —     

Common stock, $0.10 par value: Authorized 180,000 shares; 46,559 and 45,963 issued and 41,704 and 43,502 outstanding, respectively

     4,656        4,596   

Additional paid-in capital

     905,800        902,153   

Accumulated deficit

     (401,562     (425,063

Treasury stock, 4,855 and 2,461 shares, respectively, at cost

     (99,632     (73,458

Accumulated other comprehensive loss

     (1,058     (16
  

 

 

   

 

 

 

Total stockholders’ equity

     408,204        408,212   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 874,202      $ 893,063   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue:

        

Commissions and fees

   $ 251,531      $ 237,478      $ 724,230      $ 697,641   

Operating expenses:

        

Commissions and fees

     80,297        70,731        236,283        212,458   

Compensation expense

     66,601        62,081        197,119        191,071   

Non-compensation expense

     39,252        37,784        114,832        117,147   

Management fees

     33,201        53,466        89,709        109,650   

Amortization of intangibles

     8,348        8,258        24,207        24,802   

Depreciation

     3,126        3,017        9,240        9,028   

Impairment of goodwill and intangible assets

     2,466        —          3,386        2,901   

Loss (gain) on sale of businesses, net

     40        (100     53        (10,021

Change in estimated acquisition earn-out payables

     53        —          53        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     233,384        235,237        674,882        657,036   

Income from operations

     18,147        2,241        49,348        40,605   

Non-operating income and expenses

        

Interest income

     700        869        2,600        2,645   

Interest expense

     (4,006     (4,990     (11,751     (14,449

Gain on early extinguishment of debt

     —          9,711        —          9,711   

Other, net

     1,303        2,845        5,818        5,516   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income and expenses, net

     (2,003     8,435        (3,333     3,423   

Income before income taxes

     16,144        10,676        46,015        44,028   

Income tax expense

     6,823        2,446        20,328        16,739   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9,321      $ 8,230      $ 25,687      $ 27,289   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.22      $ 0.19      $ 0.59      $ 0.65   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.21      $ 0.19      $ 0.58      $ 0.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     42,480        42,839        43,384        42,302   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     43,476        44,316        44,375        43,831   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - in thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flow from operating activities:

    

Net income

   $ 25,687      $ 27,289   
Adjustments to reconcile net income to net cash provided by operating activities:     

Deferred taxes

     —          284   

Stock-based compensation

     4,130        15,676   

Impairment of goodwill and intangible assets

     3,386        2,901   

Amortization of intangibles

     24,207        24,802   

Depreciation

     9,240        9,028   

Accretion of senior convertible notes discount

     3,197        7,027   

Loss (gain) on sale of businesses, net

     53        (10,021

Change in estimated acquisition earn-out payables

     53        —     

Loss on sublease

     —          1,766   

Bad debt expense

     2,349        2,697   

Gain on early extinguishment of debt

     —          (9,711

Other, net

     (1,515     (1,493

(Increase) decrease in operating assets:

    

Fiduciary funds-restricted related to premium trust accounts

     7,687        (15,181

Commissions, fees and premiums receivable, net

     29,859        28,744   

Due from principals and/or certain entities they own

     (3,425     (1,839

Notes receivable, net – current

     1,537        1,719   

Other current assets

     48        (7,657

Notes receivable, net – non-current

     1,916        (7,745

Other non-current assets

     2,830        680   

Increase (decrease) in operating liabilities:

    

Premiums payable to insurance carriers

     (3,753     18,415   

Income taxes payable

     1,552        2,474   

Due to principals and/or certain entities they own

     (12,113     (8,507

Accounts payable

     (18,152     (4,013

Accrued liabilities

     200        1,905   

Other non-current liabilities

     797        (2,868
  

 

 

   

 

 

 

Total adjustments

     54,083        49,083   
  

 

 

   

 

 

 

Net cash provided by operating activities

     79,770        76,372   
  

 

 

   

 

 

 

Cash flow from investing activities:

    

Proceeds from disposal of businesses

     738        5,673   

Purchases of property and equipment, net

     (6,368     (9,284

Payments for acquired firms, net of cash

     (48,535     661   

Payments for contingent consideration

     (80     (10,784

Change in restricted cash

     —          10,000   
  

 

 

   

 

 

 

Net cash used in investing activities

     (54,245     (3,734
  

 

 

   

 

 

 

Cash flow from financing activities:

    

Repayments of short term debt

     —          (40,000

Proceeds from long term debt

     —          125,000   

Repayment of long term debt

     (9,375     (3,125

Long term debt costs

     —          (3,923

Proceeds from issuance of senior convertible notes

     —          125,000   

Senior convertible notes issuance costs

     —          (4,129

Repayment of senior convertible notes

     —          (219,650

Senior convertible notes tender offer costs

     —          (800

Purchase of call options

     —          (33,913

Sale of warrants

     —          21,025   

Proceeds from stock-based awards, including tax benefit

     2,603        2,891   

Shares cancelled to pay withholding taxes

     (3,021     (2,056

Repurchase of common stock

     (28,563     —     

Dividends paid

     (1     (67
  

 

 

   

 

 

 

Net cash used in financing activities

     (38,357     (33,747
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (12,832     38,891   

Cash and cash equivalents, beginning of the period

     128,830        55,994   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 115,998      $ 94,885   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for income taxes

   $ 15,812      $ 26,100   
  

 

 

   

 

 

 

Cash paid for interest

   $ 5,361      $ 3,281   
  

 

 

   

 

 

 

Non-cash transactions:

    

See Note 10

    

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

Note 1—Nature of Operations

National Financial Partners Corp. (“NFP”), a Delaware corporation, was formed on August 27, 1998, but did not commence operations until January 1, 1999. NFP and its benefits, insurance and wealth management businesses (together with NFP, the “Company”), provide a full range of advisory and brokerage services to the Company’s clients. NFP serves corporate and high net worth individual clients throughout the United States and in Canada, with a focus on the middle market and entrepreneurs. As of September 30, 2011, the Company operated over 140 businesses.

The Company has grown organically and through acquisitions, operating in the independent distribution channel. This distribution channel offers independent advisors the flexibility to sell products and services from multiple non-affiliated providers to deliver objective and comprehensive solutions. The number of products and services available to independent advisors is large and can lead to a fragmented marketplace. NFP facilitates the efficient sale of products and services in this marketplace by using its scale and market position to contract with leading product providers. These relationships foster access to a broad array of insurance and financial products and services as well as better underwriting support and operational services.

Note 2—Summary of Significant Accounting Policies

Basis of presentation

The unaudited interim consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which are of normal and recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year’s results.

The consolidated financial statements include the accounts of NFP and its majority-owned subsidiaries, its controlled subsidiaries and variable interest entities (“VIEs”) for which NFP is considered to be the primary beneficiary. All material intercompany balances and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2010, included in NFP’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on February 10, 2011 (the “2010 10-K”).

All dollar amounts, except per share data in the text and tables herein, are stated in thousands unless otherwise indicated.

Use of estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Recently adopted accounting guidance

In April 2011, the FASB issued new guidance for disclosures relating to troubled debt restructurings. This update also provides clarifying guidance on a creditor’s evaluation of the following: (1) how a restructuring constitutes a concession; and (2) if the debtor is experiencing financial difficulties. The amendments in this update were effective beginning the quarter ended June 30, 2011, and were applied retrospectively to January 1, 2011, the beginning of the annual period of adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this new guidance in the first quarter of 2012 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

7


Table of Contents

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company does not expect the guidance to impact its consolidated financial statements, as it only requires a change in the format of presentation.

In September 2011, the FASB issued new guidance on testing goodwill for impairment. Pursuant to the new guidance an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss. Under the new guidance, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The new guidance does not change the current guidance for testing other indefinite lived intangible assets for impairment. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011. As of September 30, 2011, the Company has not elected to adopt the new guidance early, and when adopted, this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

Business Segments

NFP has three reportable segments: the Corporate Client Group (the “CCG”), the Individual Client Group (the “ICG”) and the Advisor Services Group (the “ASG”). The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits, and property and casualty insurance. The ICG is a leader in the delivery of independent life insurance, annuities, long term care and wealth transfer solutions for high net worth individuals, and includes wholesale life brokerage, retail life and wealth management services. The ASG, including NFP Securities, Inc. (“NFPSI”), a leading independent broker-dealer and corporate registered investment advisor, serves independent financial advisors whose clients are high net worth individuals and companies by offering broker-dealer and asset management products and services. See “Note 12—Business Segments” for further detail.

Impairment of goodwill and other intangible assets

The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with GAAP.

In accordance with GAAP, long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company establishes an internal financial plan for each of its business lines and measures the actual performance of its business lines against these financial plans. Events or changes in circumstances include, but are not limited to, when a business line experiences a significant deterioration in its operating cash flow compared to the financial plan or prior year performance, a change in the extent or manner in which the long-lived asset is being used, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

In accordance with GAAP, goodwill and intangible assets not subject to amortization are tested at least annually for impairment, and are tested for impairment more frequently if events or changes in circumstances indicate that the intangible asset might be impaired. Indicators at the business line level, which is considered a reporting unit for this analysis, include, but are not limited to, a significant deterioration in its operating cash flow compared to the reportable segment’s financial plan or prior year performance, loss of key personnel, a decrease in NFP’s market capitalization below its book value, and an expectation that a reporting unit will be sold or otherwise disposed of. If one or more indicators of impairment exist, NFP performs an evaluation to identify potential impairments. If an impairment is identified, NFP measures and records the amount of impairment loss.

See “Note 5—Goodwill and Other Intangible Assets—Impairment of goodwill and intangible assets.”

 

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Consolidation of Variable Interest Entities

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and its controlled subsidiaries. The Company consolidates all investments in affiliates in which the Company’s ownership exceeds 50 percent or where the Company has control. In addition, the Company consolidates any VIE for which the Company is considered the primary beneficiary. The primary beneficiary is the party that has a controlling financial interest in an entity. In order for a party to have a controlling financial interest in an entity it must have (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance (the “power criterion”) and (2) the obligation to absorb losses of an entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE (the “losses/benefits criterion”).

NFP performed a qualitative and quantitative assessment as to whether its wholly-owned subsidiaries (“Operating Companies”) are considered VIEs, and whether or not NFP is considered the primary beneficiary. In applying these assessments NFP identified its Operating Companies as VIEs and concluded that NFP is the primary beneficiary for those Operating Companies. Operating Companies that are not majority-owned or controlled by NFP are accounted for under the equity method. Additionally, the equity method of accounting is used for investments in non-controlled affiliates in which the Company’s ownership ranges from 20 to 50 percent, or in instances in which the Company is able to exercise significant influence but not control (such as representation on the investee’s board of directors).

Derivative Instruments

The Company has limited involvement with derivative financial instruments, and does not use financial instruments or derivatives for any trading or other speculative purposes. As of September 30, 2011, in connection with its credit facility, the Company had one interest rate swap agreement designated as a hedging instrument in a cash flow hedge. See “Note 8—Derivative Instruments and Hedging Activities.”

The Company recognizes derivative instruments as either assets or liabilities at fair value, and recognizes the changes in fair value of the derivative instruments based on the designation of the derivative. For derivative instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge. As of September 30, 2011, the Company does not have any outstanding derivative instruments designated as a hedging instrument in fair value hedges. The effective portion of the changes in fair value of the derivative that is designated as a hedging instrument in a cash flow hedge is recorded as a component of accumulated other comprehensive loss. The ineffective portion of changes in the fair value of derivatives designated as cash flow hedges would be recorded in earnings. The Company reviews the effectiveness of its hedging instruments on a quarterly basis, and recognizes the current period hedge ineffectiveness immediately in earnings.

The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the change in fair value of the derivative instrument is reflected in its consolidated financial statements. A derivative qualifies for hedge accounting if, at inception, the Company expects the derivative to be highly effective in offsetting the underlying hedged cash flows or fair value and the Company fulfills the hedge documentation standards at the time the Company enters into the derivative contract. The asset or liability value of the derivative will change in tandem with its fair value. The Company records changes in fair value, for the qualifying cash flow hedge, in accumulated other comprehensive loss (“OCL”). The Company releases the derivative’s gain or loss from OCL to match the timing of the underlying hedged item’s effect on earnings.

Income taxes

The Company accounts for income taxes in accordance with standards established by GAAP which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities. Deferred tax assets and liabilities are measured using statutorily-enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized.

The Company accounts for uncertain tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements.

 

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During the three months ended September 30, 2011, the Company’s unrecognized tax benefits decreased by $1.3 million due to the lapse of applicable statutes of limitation. During the nine months ended September 30, 2011, the Company’s unrecognized tax benefits increased by $2.2 million as a result of tax positions taken in the current period and decreased by $1.3 million due to the lapse of applicable statutes of limitation, and the Company’s total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, increased by $0.9 million. The Company believes that it is reasonably possible that the total amounts of unrecognized tax benefits could significantly decrease within the next twelve months due to the settlement of state income tax audits and expiration of statutes of limitation in various federal and state and local jurisdictions, in an amount ranging from $1.9 million to $3.2 million based on current estimates.

Revenue recognition

The Company earns commissions on the sale of insurance policies and fees for the development, implementation and administration of benefits programs. Commissions and fees are generally paid each year as long as the client continues to use the product and maintains its broker of record relationship with NFP’s business. In some cases, fees earned are based on the amount of assets under administration or advisement. Asset-based fees are earned for administrative services or consulting related to certain benefits plans.

Commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, the Company receives renewal commissions for a period following the first year, if the policy remains in force. Insurance commissions are recognized as revenue when the following criteria are met: (1) the policy application and other carrier delivery requirements are substantially complete, (2) the premium is paid, and (3) the insured party is contractually committed to the purchase of the insurance policy. Carrier delivery requirements may include additional supporting documentation, signed amendments and premium payments. Commissions earned on renewal premiums are generally recognized upon receipt from the carrier, since that is typically when the Company is first notified that such commissions have been earned. The Company carries an allowance for policy cancellations, which approximated $1.2 million at both September 30, 2011 and 2010, that is periodically evaluated and adjusted as necessary. Miscellaneous commission adjustments are generally recorded as they occur. Some of the Company’s businesses also receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds received by their clients, and recognized as revenue when the policy is transferred and the rescission period has ended. Contingent commissions are commissions paid by insurance underwriters and are based on the estimated profit and/or overall volume of business placed with the underwriter. Contingent commissions are recorded as revenue after the contractual period or when cash is received.

The Company earns commissions related to the sale of securities and certain investment-related insurance products. The Company also earns fees for offering financial advice and related services. These fees are based on a percentage of assets under management and are generally paid quarterly. In certain cases, incentive fees are earned based on the performance of the assets under management. Some of the Company’s businesses charge flat fees for the development of a financial plan or a flat fee annually for advising clients on asset allocation. Any investment advisory or related fees collected in advance are deferred and recognized as income on a straight-line basis over the period earned. Transaction-based fees, including performance fees, are recognized when all contractual obligations have been satisfied. Securities and mutual fund commission income and related expenses are recorded on a trade date basis.

Some of the Company’s businesses earn additional compensation in the form of incentive and marketing support payments from manufacturers of financial services products, based on the volume, consistency and profitability of business generated by the Company. Incentive and marketing support revenue is recognized at the earlier of notification of a payment or when payment is received, unless historical data or other information exists, which enables management to reasonably estimate the amount earned during the period.

 

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Note 3—Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock.

The Company’s potentially dilutive shares include outstanding stock awards, shares issuable under the employee stock purchase plan, and stock-based contingent consideration. Diluted earnings per share may also reflect shares issuable upon conversion of the 4.0% convertible senior notes due June 15, 2017 (the “2010 Notes”), or an exercise of the warrants relating to the 2010 Notes (see “Note 7—Borrowings”).

Since the principal amount of the 2010 Notes will be settled in cash upon conversion, only the conversion premium relating to the 2010 Notes will be included in the calculation of diluted earnings per share. As such, the 2010 Notes will have no impact on diluted earnings per share until the average market price of NFP’s common stock exceeds the conversion price of $12.87. Similarly, the warrants will not have an impact on diluted earnings per share until the average market price of NFP’s common stock exceeds the exercise price of the warrants of $15.77. If the average market price of NFP’s stock exceeds the conversion or exercise price, the Company will include the effect of the additional shares that may be issued upon conversion of the 2010 Notes or exercise of the warrants using the treasury stock method in the diluted earnings per share calculation.

The call options to purchase NFP’s common stock, which were purchased to hedge against potential dilution upon conversion of the 2010 Notes (see “Note 7—Borrowings”), are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the 2010 Notes.

The computations of basic and diluted earnings per share are as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Basic:

           

Net income

     9,321         8,230         25,687         27,289   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares outstanding

     42,480         42,823         43,384         42,297   

Contingent consideration and incentive payments

     —           16         —           5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     42,480         42,839         43,384         42,302   

Basic earnings per share

   $ 0.22       $ 0.19       $ 0.59       $ 0.65   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income

   $ 9,321       $ 8,230       $ 25,687       $ 27,289   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares outstanding

     42,480         42,823         43,384         42,297   

Contingent consideration and incentive payments

     —           16         —           16   

Stock-based compensation

     991         1,470         978         1,510   

Convertible senior notes

     —           —           8         —     

Other

     5         7         5         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     43,476         44,316         44,375         43,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.21       $ 0.19       $ 0.58       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three and nine months ended September 30, 2011 and 2010, the calculation of diluted earnings per share excluded approximately 0.8 million shares of stock-based awards, because the effect would be anti-dilutive.

 

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Note 4—Acquisitions and Divestitures

Acquisitions

During the nine months ended September 30, 2011, NFP completed two acquisitions, and three sub-acquisitions.

During the nine months ended September 30, 2010, NFP completed one sub-acquisition, acquired the remaining interest in one joint venture for a de minimis amount, and acquired an additional 25% ownership from a previously held 50% interest. This last transaction was accounted for as a step acquisition under FASB’s business combination accounting guidance, which resulted in the entity becoming a consolidated subsidiary of NFP. As a result of obtaining a controlling interest, the previously held 50% interest was remeasured to fair value, resulting in a gain of $0.6 million, which was recognized in other, net under non-operating income and expenses in the consolidated statements of income.

The following table summarizes the consideration transferred to acquire the above entities and the estimated amounts of identifiable assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the non-controlling interest at acquisition date:

 

     Nine Months Ended
September 30,
 
     2011      2010  

Consideration:

     

Cash

   $ 48,993       $ 420   

Recorded earn-out payable

     12,528         —     
  

 

 

    

 

 

 

Total

   $ 61,521       $ 420   
  

 

 

    

 

 

 

Other items to be allocated to identifiable assets acquired and liabilities assumed:

     

Fair value of controlling interest

   $ —         $ 628   

Fair value of non-controlling interest

     —           382   

Gain recognized on step acquisition

     —           564   
  

 

 

    

 

 

 

Total

   $ 61,521       $ 1,994   
  

 

 

    

 

 

 

Allocation of purchase price:

     

Net tangible assets

   $ 844       $ —     

Cost assigned to intangibles:

     

Book of Business

   $ 18,564       $ 38   

Management Contract

     5,395         —     

Non-Compete Agreement

     3,783         —     

Goodwill, net of deferred taxes of $3,028 in 2011

     32,935         1,956   
  

 

 

    

 

 

 

Total

   $ 61,521       $ 1,994   
  

 

 

    

 

 

 

Of the total goodwill of $32.9 million, $20.0 million is currently deductible for income tax purposes and $2.7 million is non-deductible. The remaining $10.2 million relates to the earn-out payables and will not be deductible until it is earned and paid.

For acquisitions consummated prior to January 1, 2009, contingent consideration is recorded as an adjustment to purchase price when the contingencies are settled. For the nine months ended September 30, 2011, the additional consideration paid by the Company as a result of these adjustments was less than $0.1 million, all of which was allocated to goodwill and paid in cash. For the nine months ended September 30, 2010, the additional consideration paid by the Company as a result of these adjustments totaled $15.8 million, all of which was allocated to goodwill. Of the $15.8 million additional consideration paid, $10.8 million was paid in cash, and $5.0 million was paid through the issuance of 648,394 shares of common stock.

 

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For acquisitions completed after January 1, 2009, earn-out payables are recorded at fair value at the acquisition date and are included on that basis in the purchase price consideration at the time of the acquisition with subsequent adjustments recorded in the consolidated statements of income. The estimated initial earn-out payable included in the purchase price was based on NFP’s probability assessment at the time of closing of earnings achievements during the earn-out period. In developing these estimates, the Company considered earnings projections, historical results, the general macroeconomic environment and industry trends. This fair value measurement is based on significant inputs not observed in the market and represents a Level 3 measurement. For the nine months ended September 30, 2011, the Company paid $0.2 million in cash in connection with earn-out payables, whereas for the nine months ended September 30, 2010, there were no payments made in connection with earn-out payables.

The results of operations for the acquisitions completed during 2011 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as of the beginning of the respective periods, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Total revenues

   $ 253,574       $ 244,172       $ 743,694       $ 718,414   

Income before income taxes

     16,593         11,945         50,523         47,835   

Net income

     9,494         9,208         27,418         29,648   

Net income per share:

           

Basic

   $ 0.22       $ 0.21       $ 0.63       $ 0.70   

Diluted

   $ 0.21       $ 0.21       $ 0.62       $ 0.68   

Weighted average number of shares outstanding:

           

Basic

     42,480         42,839         43,384         42,302   

Diluted

     43,476         44,316         44,375         43,831   

Divestitures

During the nine months ended September 30, 2011, the Company disposed of one business, receiving an aggregate consideration of $0.2 million in cash and 766 shares of NFP common stock with a value of less than $0.1 million, which resulted in a loss on sale of businesses, net in the Company’s consolidated statements of income. The Company also reduced its minority interest in an equity investment, receiving an aggregate consideration of $0.5 million in cash, and recognizing a net gain of $0.3 million, which is reflected in other, net under non-operating income and expenses in the Company’s consolidated statements of income. During the third quarter of 2011, the Company also entered into an agreement to dispose of one business, which is expected to close in the fourth quarter of 2011.

During the nine months ended September 30, 2010, the Company sold 10 subsidiaries and certain assets of two subsidiaries, receiving aggregate consideration of $5.7 million in cash, $1.1 million in promissory notes and 36,196 shares of NFP common stock with a value of $0.5 million. The Company recognized a net gain from these transactions of $10.4 million and a net loss of $0.4 million related to adjustments from prior year divestures for the nine months ended September 30, 2010. Of the $10.4 million gain, $9.2 million was related to the remeasurement of a non-controlling interest in a joint venture which was formed with the contribution of assets of a subsidiary.

 

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Note 5—Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2011 are as follows:

 

     Corporate
Client  Group
    Individual
Client  Group
    Total  

Balance as of January 1, 2011

      

Goodwill, net of accumulated amortization

   $ 388,305      $ 319,069      $ 707,374   

Prior years accumulated impairments

     (351,442     (295,038     (646,480
  

 

 

   

 

 

   

 

 

 
     36,863        24,031        60,894   

Goodwill acquired during the year, including goodwill related to deferred tax liability of $3,028

     35,963        —          35,963   

Contingent consideration accrual, firm disposals, firm restructures and other

     (350     80        (270

Impairments of goodwill for the period

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total as of September 30, 2011

   $ 72,476      $ 24,111      $ 96,587   
  

 

 

   

 

 

   

 

 

 

Acquired intangible assets

 

     As of September 30, 2011  
     Corporate
Client Group
    Individual
Client Group
    Total  
     Gross Carrying
Amount
     Accumulated
Amortization
    Gross Carrying
Amount
     Accumulated
Amortization
    Gross Carrying
Amount
     Accumulated
Amortization
 

Amortizing identified intangible assets:

               

Book of Business

   $ 183,283       $ (101,512   $ 45,072       $ (36,902   $ 228,355       $ (138,414

Management Contracts

     150,632         (39,128     176,401         (58,538     327,033         (97,666

Institutional Customer Relationships

     —           —          15,700         (5,670     15,700         (5,670

Non-Compete Agreement

     3,783         (158     —           —          3,783         (158
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 337,698       $ (140,798   $ 237,173       $ (101,110   $ 574,871       $ (241,908
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Non-amortizing intangible assets:

               

Goodwill

   $ 73,061       $ (585   $ 25,511       $ (1,400   $ 98,572       $ (1,985

Trade name

     723         (26     4,118         (32     4,841         (58
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 73,784       $ (611   $ 29,629       $ (1,432   $ 103,413       $ (2,043
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     As of December 31, 2010  
     Corporate
Client Group
    Individual
Client Group
    Total  
     Gross Carrying
Amount
     Accumulated
Amortization
    Gross Carrying
Amount
     Accumulated
Amortization
    Gross Carrying
Amount
     Accumulated
Amortization
 

Amortizing identified intangible assets:

               

Book of Business

   $ 164,719       $ (90,188   $ 45,191       $ (34,758   $ 209,910       $ (124,946

Management Contracts

     145,237         (34,698     180,578         (53,715     325,815         (88,413

Institutional Customer Relationships

     —           —          15,700         (5,016     15,700         (5,016

Non-Compete Agreement

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 309,956       $ (124,886   $ 241,469       $ (93,489   $ 551,425       $ (218,375
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Non-amortizing intangible assets:

               

Goodwill

   $ 37,588       $ (725   $ 25,814       $ (1,783   $ 63,402       $ (2,508

Trade name

     723         (26     4,118         (32     4,841         (58
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 38,311       $ (751   $ 29,932       $ (1,815   $ 68,243       $ (2,566
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Aggregate amortization expense for intangible assets subject to amortization for the nine months ended September 30, 2011 was $24.2 million. Intangibles related to book of business, management contracts, institutional customer relationships and non-compete agreements are amortized over a 10-year, 25-year, 18-year, and 6-year period respectively. Based on the Company’s acquisitions as of September 30, 2011, estimated amortization expense for each of the next five years is $33.6 million per year.

 

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Impairment of goodwill and intangible assets

The Company tests goodwill and intangible assets for impairment at least annually or more often if conditions indicate a possible impairment. During the nine months ended September 30, 2011 and 2010, long-lived assets held and used with a carrying amount of $336.4 million and $344.0 million, respectively, were written down to their respective fair values of $333.0 million and $341.1 million. This resulted in an impairment charge of $3.4 million and $2.9 million for amortizing intangibles, which was included in earnings for the nine months ended September 30, 2011 and 2010, respectively. The impairment in 2011 related to a disposed firm, and a firm that will be disposed of in the fourth quarter of 2011, whereas the impairment in 2010 related to certain intangible assets that were disposed.

Note 6—Notes Receivable, net

Notes receivable consists of the following:

 

     As of
December 31, 2010
    New Notes      Discount      Paid down     Allowance increase
on existing notes
    As of
September 30, 2011
 

Notes receivable from Principals and/or certain entities they own

   $ 32,157      $ 5,762       $ —         $ (7,944   $ —        $ 29,975   

Notes received in connection with dispositions

     12,971        —           —           (1,986     —          10,985   

Other notes receivable

     3,522        1,905         43         (458     —          5,012   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     48,650        7,667         43         (10,388     —          45,972   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Less: allowance for uncollectible notes

     (11,798     —           —           —          (3,699     (15,497
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total notes receivable, net

   $ 36,852      $ 7,667       $ 43       $ (10,388   $ (3,699   $ 30,475   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Notes receivable bear interest at rates typically between 3% and 11% (with a weighted average of 7.1% at September 30, 2011), and 5% and 11% (with a weighted average of 7.0% at December 31, 2010), and mature at various dates through April 1, 2023. Notes receivable from principals and/or certain entities they own are taken on a full recourse basis to the principal and/or such entity.

NFP considers applying a reserve to a promissory note when it becomes apparent that conditions exist that may lead to NFP’s inability to fully collect on outstanding amounts due. Such conditions include delinquent or late payments on loans, deterioration in the credit worthiness of the borrower, and other relevant factors. When such conditions leading to expected losses exist, NFP generally applies a reserve by assigning a loss ratio calculation per loan category to the outstanding loan balance, less the fair value of the collateral. The reserve is generally based on NFP’s payment and collection experience, and whether NFP has an ongoing relationship with the borrower. In instances where the borrower is a principal, NFP has the contractual right to offset management fees earned with any payments due under a promissory note.

An aging of past due notes receivable including interest outstanding at September 30, 2011 is as follows:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past
Due
 

Notes receivable from Principals and/or certain entities they own

   $ 45       $ 38       $ 2,936       $ 3,019   

Notes received in connection with dispositions

     21         28         6,947         6,996   

Other notes receivable

     —           —           2,051         2,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66       $ 66       $ 11,934       $ 12,066   
  

 

 

    

 

 

    

 

 

    

 

 

 

Approximately $11.4 million of total past due balance is included in the allowance for uncollectible notes.

 

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Table of Contents

Note 7—Borrowings

For a detailed discussion of: (i) the termination on July 8, 2010 of the credit agreement among NFP, the lenders party thereto and Bank of America, N.A., as administrative agent, dated as of August 22, 2006 and (ii) the retirement of NFP’s 0.75% convertible senior notes due February 1, 2012 (the “2007 Notes”) pursuant to a cash tender offer and a privately-negotiated transaction, see “Note 7—Borrowings” in the 2010 10-K.

Issuance of 2010 Notes

On June 15, 2010, NFP completed the private placement of $125.0 million aggregate principal amount of the 2010 Notes to Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Initial Purchasers”) pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”). The Initial Purchasers subsequently sold the 2010 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

The 2010 Notes are senior unsecured obligations and rank equally with NFP’s existing or future senior debt and senior to any subordinated debt. The 2010 Notes are structurally subordinated to all existing or future liabilities of NFP’s subsidiaries and will be effectively subordinated to existing or future secured indebtedness to the extent of the value of the collateral. The private placement of the 2010 Notes resulted in proceeds to NFP of $120.3 million, after certain fees and expenses, which was used to pay the net cost of certain convertible note hedge and warrant transactions, as discussed in more detail below, partially fund the purchase of the 2007 Notes accepted for purchase in the tender offer, pay related fees and expenses and for general corporate purposes.

Holders may convert their 2010 Notes at their option on any day prior to the close of business on the scheduled trading day immediately preceding April 15, 2017 only under the following circumstances: (1) during the five business-day period after any five consecutive trading-day period (the “Measurement Period”) in which the price per 2010 Note for each day of that Measurement Period was less than 98% of the product of the last reported sale price of NFP’s common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during such quarter) after the calendar quarter ended June 30, 2010, if the last reported sale price of NFP’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 135% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (3) upon the occurrence of specified corporate events. The 2010 Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, April 15, 2017, through the second scheduled trading day immediately preceding the maturity date of the 2010 Notes. Default under the 2010 Credit Facility (as defined in “—2010 Credit Facility” below) resulting in its acceleration would, subject to a 30-day grace period, trigger a default under the indenture governing the 2010 Notes, in which case the trustee under the 2010 Notes or holders of not less than 25% in principal amount of the outstanding 2010 Notes could accelerate the payment of the notes.

Upon conversion, NFP will pay, at its election, cash or a combination of cash and common stock based on a daily conversion value calculated on a proportionate basis for each trading day of the relevant 60 trading day observation period. The initial conversion rate for the 2010 Notes was 77.6714 shares of common stock per $1,000 principal amount of 2010 Notes, equivalent to a conversion price of approximately $12.87 per share of common stock. The conversion price is subject to adjustment in some events but is not adjusted for accrued interest. In addition, if a “fundamental change” (as defined in the indenture governing the 2010 Notes) occurs prior to the maturity date, NFP will, in some cases and subject to certain limitations, increase the conversion rate for a holder that elects to convert its 2010 Notes in connection with such fundamental change.

Concurrent with the issuance of the 2010 Notes, NFP entered into convertible note hedge and warrant transactions with affiliates of certain of the Initial Purchasers (the “Counterparties”) for the 2010 Notes. A default under the 2010 Credit Facility would trigger a default under each of the convertible note hedge and warrant transactions, in which case the Counterparty could designate early termination under either, or both, of these instruments. The transactions are expected to reduce the potential dilution to NFP’s common stock upon future conversions of the 2010 Notes. Under the convertible note hedge, NFP purchased 125,000 call options for an aggregate premium of $33.9 million. Each call option entitles NFP to repurchase an equivalent number of shares issued upon conversion of the 2010 Notes at the same strike price (initially $12.87 per share), generally subject to the same adjustments. The call options expire on the maturity date of the 2010 Notes. NFP also sold warrants for an aggregate premium of $21.0 million. The warrants expire ratably over a period of 120 scheduled trading days between September 15, 2017 and March 8, 2018, on which dates, if not previously exercised, the warrants will be treated as automatically exercised if they are in the money. The warrants provide for net-share settlement, but NFP may elect cash settlement subject to certain conditions. The net cost of the convertible note hedge and warrants to NFP was $12.9 million. The economic impact of the convertible note hedge and warrants was to increase the conversion price of the 2010 Notes to approximately $15.77.

The convertible note hedges and warrants placed caps on the number of shares issuable under these instruments due to New York Stock Exchange rules, but contractually required NFP to seek stockholder approval to eliminate these caps. NFP obtained stockholder approval to eliminate these caps at its 2011 Annual Meeting of Stockholders.

 

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2010 Credit Facility

On July 8, 2010, NFP entered into a $225.0 million credit agreement, among NFP, the lenders party thereto and Bank of America, N.A., as administrative agent (the “2010 Credit Facility”). The 2010 Credit Facility is structured as (i) a $100.0 million four-year revolving credit facility that includes a $35.0 million sub-limit for standby letters of credit and a $10.0 million sub-limit for the issuance of swingline loans and (ii) a $125.0 million four-year term loan facility. The term loan facility requires 2.5% quarterly principal amortization payments, beginning on September 30, 2010, with the remaining balance of the term loan facility payable on the maturity date of the 2010 Credit Facility, which is July 8, 2014. On April 28, 2011, NFP entered into the First Amendment (the “First Amendment”) to the 2010 Credit Agreement.

The 2010 Credit Facility contains representations, warranties and covenants that are customary for similar credit arrangements, including, among other things, covenants relating to (i) financial reporting and notification, (ii) payment of obligations, (iii) compliance with applicable laws and (iv) notification of certain events. Financial covenants will also require NFP to maintain (i) a leverage ratio of no greater than 2.5:1.0, (ii) an interest coverage ratio of no less than 4.0 to 1.0 and (iii) as amended by the First Amendment, a fixed charge coverage ratio of no less than 1.5 to 1.0. The 2010 Credit Facility contains various customary restrictive covenants, subject to certain exceptions, that prohibit NFP from, among other things, incurring additional indebtedness or guarantees, creating liens or other encumbrances on property or granting negative pledges, entering into merger or similar transactions, selling or transferring certain property, making certain restricted payments, making advances or loans, entering into transactions with affiliates and making payments on conversion of the 2007 Notes or the 2010 Notes under certain circumstances.

Under the terms of the 2010 Credit Facility, NFP’s leverage ratio will be calculated, commencing with the first fiscal quarter ended September 30, 2010, as follows: as at the last day of any period, the ratio of (a) total debt on such day to (b) trailing twelve months EBITDA (as defined in the 2010 Credit Facility) for such period.

Under the terms of the 2010 Credit Facility, NFP’s consolidated fixed charge coverage ratio will be calculated, commencing with the first fiscal quarter ended September 30, 2010. The fixed charge coverage ratio is calculated as the ratio of (a) EBITDA (as defined in the 2010 Credit Facility) to (b) consolidated fixed charges. EBITDA under the 2010 Credit Facility is calculated as follows: EBITDA for the trailing twelve months less (i) certain capital expenditures made in cash by NFP and its subsidiaries during such period and (ii) all federal, state and foreign taxes paid in cash during such period. Consolidated fixed charges under the 2010 Credit Facility consist of: (a) consolidated net interest expense paid in cash for the trailing twelve months (total cash interest expense, net of interest income), (b) scheduled payments of certain indebtedness made during the trailing twelve months such as the scheduled payments on the term loan, (c) trailing twelve month earn-out and other contingent consideration payments made in cash and (d) trailing twelve month restricted payments made in cash, other than common stock repurchases pursuant to the First Amendment.

The failure to comply with the foregoing covenants will constitute an event of default (subject, in the case of certain covenants, to applicable notice and/or cure periods) under the 2010 Credit Facility. Other events of default under the 2010 Credit Facility include, among other things, (i) the failure to timely pay principal, interest, fees or other amounts due and owing, (ii) a cross-default with respect to certain other indebtedness, (iii) the occurrence of certain bankruptcy or insolvency events, (iv) the inaccuracy of representations or warranties in any material respect, (v) the occurrence of a change of control, or other event constituting a “fundamental change” under the indenture governing the 2010 Notes and (vi) the loss of lien perfection or priority. The occurrence and continuance of an event of default could result in, among other things, the acceleration of all amounts owing under the 2010 Credit Facility and the termination of the lenders’ commitments to make loans under the 2010 Credit Facility. NFP’s obligations under the 2010 Credit Facility are guaranteed by certain of NFP’s existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain limitations. In addition, NFP’s obligations under the 2010 Credit Facility, subject to certain exceptions, are secured on a first-priority basis by (i) pledges of all the capital stock of certain of NFP’s direct and indirect domestic subsidiaries and up to 65% of the capital stock of certain of NFP’s foreign subsidiaries and (ii) liens on substantially all of the tangible and intangible assets of NFP and the guarantors.

Under the terms of the 2010 Credit Facility, loans will bear interest at either the London Interbank Offered Rate (“LIBOR”) or the base rate, at NFP’s election, plus an applicable margin, based on NFP’s leverage ratio, as set forth below:

 

Leverage Ratio

   Applicable Margin
for LIBOR Loans
    Applicable Margin
for Base Rate Loans
 

Greater than or equal to 2.0 to 1.0

     3.25 %     2.25 %

Less than 2.0 to 1.0 but greater than or equal to 1.5 to 1.0

     3.00 %     2.00 %

Less than 1.5 to 1.0 but greater than or equal to 1.0 to 1.0

     2.75 %     1.75 %

Less than 1.0 to 1.0

     2.50 %     1.50 %

 

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Mandatory prepayments of the new term loan facility are required upon the occurrence of certain events, including, without limitation, (i) sales of certain assets, (ii) the sale or issuance of capital stock during the continuance of an event of default under the 2010 Credit Facility and (iii) the incurrence of certain additional indebtedness, subject to certain exceptions and reinvestment rights. Voluntary prepayments are permitted, in whole or in part, in minimum amounts without premium or penalty, other than customary breakage costs.

Scheduled long-term debt principal repayments under the 2010 Credit Facility, and total cash obligations under the 2010 Notes consist of the following:

 

     Total      2011      2012      2013      2014      2015      Thereafter
through
2017
 

2010 Credit Facility

   $ 109,375       $ 3,125       $ 12,500       $ 12,500       $ 81,250       $ —         $ —     

2010 Notes

   $ 154,792       $ 2,500       $ 5,000       $ 5,000       $ 5,000       $ 5,000       $ 132,292   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations

   $ 264,167       $ 5,625       $ 17,500       $ 17,500       $ 86,250       $ 5,000       $ 132,292   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The 2010 Credit Facility provides for the issuance of letters of credit of up to $35.0 million on NFP’s behalf, provided that, after giving effect to the letters of credit, NFP’s available borrowing amount was greater than zero. The Company was contingently obligated for letters of credit for less than $0.1 million as of September 30, 2011.

As of September 30, 2011, the year-to-date weighted average interest rate for NFP’s 2010 Credit Facility was 3.24%.

The liability and equity components related to the 2010 Notes consist of the following:

 

     September 30,
2011
 

Principal amount of the liability component

   $ 125,000   

Unamortized debt discount

     (34,222
  

 

 

 

Net carrying amount of the liability component

   $ 90,778   
  

 

 

 

Carrying amount of the equity component

   $ 39,578   
  

 

 

 

The unamortized debt discount will be amortized as additional interest expense through June 15, 2017. The equity component associated with the 2010 Notes was reflected as an increase to additional paid-in capital.

Note 8—Derivative Instrument and Hedging Activities

In connection with the 2010 Credit Facility, NFP is exposed to changes in the benchmark interest rate, which is LIBOR. To reduce this exposure, NFP executed a one-month LIBOR interest rate swap (the “Swap”) on July 14, 2010 to hedge $50.0 million of general corporate variable debt based on one-month LIBOR, beginning on April 14, 2011. Although NFP has the ability to roll the debt over one, two, three, six, nine or twelve months, NFP’s intention is to select one-month LIBOR and to continue rolling $50.0 million of general corporate debt in one-month LIBOR.

The Swap has been designated as a hedging instrument in a cash flow hedge of interest payments on $50.0 million of borrowings under the term loan portion of the 2010 Credit Facility by effectively converting a portion of the variable rate debt to a fixed rate basis. Under the terms of the Swap, NFP has agreed to pay the counterparty a fixed interest rate and the counterparty has agreed to pay NFP a floating interest rate based upon the one-month LIBOR on a notional amount of $50.0 million. The Swap expires concurrently with the term loan facility on July 8, 2014.

At September 30, 2011, the fair value of the Swap liability was approximately $1.9 million, and is included in other long-term liabilities in the consolidated statements of financial condition. The fair value measurement is classified within Level 2 of the hierarchy as an observable market input that was readily available as the basis for the fair value measurement.

The following table provides a summary of the fair value and balance sheet classification of the Swap:

 

     September 30, 2011      December 31, 2010  

Other non-current liabilities

   $ 1,883       $ 425   

Accumulated other comprehensive loss, net of tax of $(776) in 2011 and $(199) in 2010

     1,107         226   

 

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Note 9—Stockholders’ Equity

The changes in stockholders’ equity and comprehensive income during the nine months ended September 30, 2011 are summarized as follows:

 

     Common
shares
outstanding
    Par
value
     Additional
paid-in
capital
    Retained
(deficit)
earnings
    Treasury
stock
    Accumulated
other
comprehensive
income (loss)
    Total  

Balance at December 31, 2010

     43,502      $ 4,596       $ 902,153      $ (425,063   $ (73,458   $ (16   $ 408,212   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     —          —           —          25,687        —          —          25,687   

Translation adjustments, net of tax effect of ($135)

     —          —           —          —          —          (161     (161

Unrealized (loss) on derivative transactions, net of tax effect of ($577)

     —          —           —          —          —          (881     (881
               

 

 

 

Comprehensive Income

     —          —           —          —          —          —          24,645   

Common stock repurchased

     (2,456     —           —          —          (29,016     —          (29,016

Stock issued through Employee Stock Purchase Plan

     62        —           —          (2,186     2,842        —          656   

Stock-based awards exercised/lapsed, including tax benefit

     596        60         2,543        —          —          —          2,603   

Shares cancelled to pay withholding taxes

     —          —           (3,021     —          —          —          (3,021

Amortization of unearned stock-based compensation, net of cancellations

     —          —           4,080        —          —          —          4,080   

Other

     —          —           45        —          —          —          45   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     41,704      $ 4,656       $ 905,800      $ (401,562   $ (99,632   $ (1,058   $ 408,204   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock Repurchases

On April 28, 2011, NFP’s Board of Directors authorized the repurchase of up to $50.0 million of NFP’s common stock on the open market, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors, including capital availability, share price and market conditions. As of September 30, 2011, 2,421,700 shares were repurchased under this program at a weighted average cost of $11.79 per share and a total cost of approximately $28.6 million. At September 30, 2011, there remains an aggregate of approximately $21.4 million available for repurchases under this stock repurchase program. The Company currently intends to hold the repurchased shares as treasury stock.

Stock-based compensation

NFP is authorized under its 2009 Stock Incentive Plan to grant awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance-based awards or other stock-based awards that may be granted to officers, employees, principals, independent contractors and non-employee directors of the Company and/or an entity in which the Company owns a substantial ownership interest (such as a subsidiary of the Company). Any shares covered by outstanding options or other equity awards that are forfeited, cancelled or expire after April 15, 2009 without the delivery of shares under NFP’s Amended and Restated 1998 Stock Incentive Plan, Amended and Restated 2000 Stock Incentive Plan, Amended and Restated 2000 Stock Incentive Plan for Principals and Managers, Amended and Restated 2002 Stock Incentive Plan or Amended and Restated 2002 Stock Incentive Plan for Principals and Managers, may also be issued under the 2009 Stock Incentive Plan.

Stock-based awards issued to the Company’s employees are classified as equity awards. The Company accounts for equity classified stock-based awards issued to its employees based on the fair value of the award on the date of grant and recorded as an expense as part of compensation expense in the consolidated statements of income. The expense is recorded ratably over the service period, which is generally the vesting period. The offsetting entry is to additional paid in capital in stockholders’ equity.

Stock-based awards issued to the Company’s principals are classified as liability awards, as principals are non-employees. The Company measures the fair value of the stock-based awards granted to its principals at the earlier of the date at which performance is completed or a performance commitment has been reached. The Company’s stock-based awards to principals do not have disincentives for non-performance other than forfeiture of the award by the principals and therefore the Company measures the fair value of the award when the performance is completed by the principal, which is the completion of the vesting period. The Company accounts for liability classified stock-based awards issued to its principals as part of management fee expense in the consolidated statements of income. Liability classified stock-based compensation is adjusted each reporting period to account for subsequent changes in the fair value of NFP’s common stock. The offsetting entry is to accrued liabilities.

 

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On September 17, 2010, NFP accelerated the vesting of approximately 1.5 million restricted stock units (“RSUs”) granted to certain principals primarily through the 2009 Stock Incentive Plan, which funded the Long-Term Equity Incentive Plan. There was no acceleration of vesting for RSU awards granted to directors or executive officers of NFP. Payment upon vesting of the RSUs was made 60% in restricted shares and 40% in cash. These actions resulted in a pre-tax charge of $13.4 million in the third quarter of 2010.

The RSUs became fully vested on September 17, 2010 with a fair market value based on the closing price of NFP’s common stock on the same day of $12.61. The restricted shares were primarily subject to liquidity restrictions until November 24, 2012, which is the original vesting date of the RSUs awarded under the Long-Term Equity Incentive Plan.

All stock-based compensation related to firm employees and activities and principals have been included in operating expenses. Summarized below is the amount of stock-based compensation allocated in the consolidated statements of income:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Operating expenses:

           

Compensation expense

   $ 1,350       $ 1,650       $ 4,081       $ 4,862   

Management fees

     20         15,745         49         18,210   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation cost

   $ 1,370       $ 17,395       $ 4,130       $ 23,072   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 10—Non-Cash Transactions

The following non-cash transactions occurred during the periods indicated:

 

     Nine Months Ended
September 30,
 
     2011     2010  

Net assets acquired (liabilities assumed) in connection with acquisitions

   $ 844      $ (427

Stock issued for contingent consideration

     —          5,016   

Stock repurchased, note receivable and satisfaction of an accrued liability in connection with divestitures of acquired firms

     (9     1,206   

Stock repurchased in exchange for satisfaction of a note receivable, due from principals and/or certain entities they own and other assets

     (442     2,353   

Excess/(reduction in) tax benefit from stock-based awards exercised/lapsed, net

     636        (2,169

Stock issued through employee stock purchase plan

     656        649   

Accrued liability for contingent consideration

     (350     3,930   

Estimated acquisition earn-out payables recognized as an increase in goodwill

     12,528        —     

Note 11—Commitments and Contingencies

Legal matters

In the ordinary course of business, the Company is involved in lawsuits and other claims. Management will continue to respond appropriately to these lawsuits and claims and vigorously defend the Company’s interests. The settlement of these matters, whether leading to gains or losses to the Company, are reflected in other, net under non-operating income and expenses in the Company’s consolidated statements of income. The Company has errors and omissions (E&O) and other insurance to provide protection against certain losses that arise in such matters, although such insurance may not cover the costs or losses incurred by the Company. In addition, the sellers of businesses that the Company acquires typically indemnify the Company for loss or liability resulting from acts or omissions occurring prior to the acquisition, whether or not the sellers were aware of these acts or omissions. Several of the existing lawsuits and claims have triggered these indemnity obligations.

The Company is aware of potential claims by an insurance carrier regarding the placement of insurance policies for which certain Company subsidiaries provided services. The services generated payments of approximately $13.0 million in 2010, the majority of which was paid out to unrelated third parties. The insurance carrier that issued the policies initiated litigation against the policy owner and certain other parties, and in the third quarter, the parties to the litigation agreed to a rescission of the insurance policies. Other claims relating to the litigation remain pending. Although neither NFP nor its subsidiaries are a party to the litigation or any claim associated with the matter at this time, as a result of the rescission of the insurance policies, the insurance carrier may take action against the Company or its subsidiaries for the return of some or all of the payments paid in connection with the placement of the insurance. The ultimate outcome of this potential claim is uncertain as the legal rights of the insurance carrier and the Company are unclear and subject to potential dispute. For the three months ended September 30, 2011, the Company has recorded a provision on a loss contingency relating to

 

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the payments that were not distributed to third parties, which had an immaterial impact to the financial statements. An unfavorable result in such a dispute could lead to further loss contingencies, although such amount is not reasonably estimable at this time.

During 2004, several of NFP’s subsidiaries received subpoenas and other informational requests from governmental authorities, including the New York Attorney General’s Office, seeking information regarding compensation arrangements, any evidence of bid rigging and related matters. The Company has cooperated and will continue to cooperate fully with all governmental agencies. Management continues to believe that the resolution of these governmental inquiries will not have a material adverse impact on the Company’s consolidated financial position.

The Company cannot predict at this time the effect that any other current or future regulatory activity, investigations or litigation will have on its business. Given the current regulatory environment and the number of its subsidiaries operating in local markets throughout the country, it is possible that the Company will become subject to further governmental inquiries and subpoenas and have lawsuits filed against it. The Company’s ultimate liability, if any, in connection with these matters and any possible future such matters is uncertain and subject to contingencies that are not yet known.

Contingent consideration arrangements

As discussed in “Note 4—Acquisitions and Divestitures,” for acquisitions consummated prior to January 1, 2009, contingent consideration is considered to be additional purchase consideration and is accounted for as part of the purchase price of the Company’s acquired businesses when the outcome of the contingency is determined beyond a reasonable doubt. Consequently, contingent consideration paid to the former owners of the businesses is considered to be additional purchase consideration. Given past performance, it is unlikely that the entire contingency listed below will be earned in 2011. However, the maximum contingent payment which could be payable as purchase consideration based on commitments outstanding as of September 30, 2011 is as follows:

 

     2011      2012      2013  

Maximum contingent payments payable as purchase consideration

   $ 65,000       $ 241       $ 400   

For acquisitions completed after January 1, 2009, earn-out payables are recorded at fair value at the acquisition date and are included on that basis in the purchase price consideration at the time of the acquisition, with subsequent adjustments recorded in the consolidated statements of income. As of September 30, 2011, the maximum potential earn-out payable for such transactions is $29.1 million.

Ongoing incentive plan

Effective January 1, 2002, NFP established an ongoing incentive plan for principals having completed their contingent consideration period. Principals of businesses likely to receive an incentive payment under the ongoing incentive plan may have elected to continue to participate in the ongoing incentive plan until the end of their ongoing incentive period. For all other principals, the ongoing incentive plan terminated on September 30, 2009 and was replaced by the Annual Principal Incentive Plan (the “PIP”). See “—Incentive Plans” below for more detail. As of September 30, 2011, one NFP-owned business has elected to continue to participate in the ongoing incentive plan, and the maximum aggregate additional payment will be approximately $1.1 million. Effective December 31, 2008, NFP has elected to pay all incentive awards under this plan in cash.

For the nine months period ended September 30, 2011 and 2010, the Company recorded an ongoing incentive plan expense of less than $0.1 million and an expense reduction of less than $0.1 million, which is included in management fee expense in the consolidated statements of income. Executive officers do not participate in the ongoing incentive plan, which was funded with the Company’s cash flow.

 

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Incentive Plans

NFP currently maintains two incentive plans for principals and key employees of its businesses, the Annual Principal Incentive Plan and the Revised Long-Term Incentive Plan.

Under the previous Long-Term Equity Incentive Plan (the “EIP”), during the fourth quarter of 2009 NFP issued equity awards to principals and key employees of its businesses generally based on each business’s performance over the two-year period that ended on September 30, 2009 (the “Initial EIP Performance Period”). The payments made under the EIP for the Initial EIP Performance Period were in the form of RSUs. The RSUs became fully vested on September 17, 2010 with a fair market value based on the closing price of NFP’s common stock on the same day of $12.61. The restricted shares were primarily subject to liquidity restrictions until November 24, 2012, which is the original vesting date of the RSUs awarded under the EIP. This action resulted in a pre-tax charge of $13.4 million in the third quarter of 2010.

The Annual Principal Incentive Plan

The PIP is designed to reward the annual performance of a business based on the business’s earnings growth. For the initial 12-month performance period of October 1, 2009 through September 30, 2010, a cash incentive payment was made to the extent a business’s earnings exceeded its PIP Performance Target (as defined below). The PIP was established such that the greater a business’s earnings growth rate exceeded its PIP Performance Target rate for the 12-month performance period, the higher the percentage of the business’s earnings growth the Company would pay the principal under the PIP. NFP calculates and includes a PIP accrual in management fees expense. The Company paid $10.7 million, which was included within management fees expense relating to the initial 12-month performance period, which was paid in the fourth quarter of 2010. For this initial 12-month performance period, the incentive target (the “PIP Performance Target”) for each business participating in the PIP was generally set at the lower of (a) such business’s earnings for the 12 months ended September 30, 2009 or (b) such business’s incentive target under the ongoing incentive plan as of September 30, 2009. The initial 12-month performance period used performance targets that rewarded principals for advancing certain corporate goals and initiatives related to the Company’s reorganization and also took the difficult economic environment during the initial 12-month performance period into account. NFP’s Executive Management Committee, in its sole discretion, was able to adjust any PIP Performance Target as necessary to account for changed business circumstances, including, without limitation, sub-acquisitions.

For the initial 12-month performance period, NFP calculated the amount of a business’s PIP accrual in management fees expense based on the business’s earnings growth rate above its PIP Performance Target rate. The PIP Performance Target over the course of the initial 12-month performance period was allocated on a straight line basis. NFP calculated a business’s PIP accrual amount and earnings growth rate on a cumulative basis. For example, for the quarter ended March 31, 2010, the business’s PIP accrual amount and earnings growth rate was calculated for the six months from October 1, 2009 (the first day of the initial 12-month performance period for the PIP) to March 31, 2010; and for the quarter ended September 30, 2010, for the twelve months from October 1, 2009 to September 30, 2010. The amount of management fees expense or benefit the Company took in a particular quarter for a business’s PIP accrual depended on the difference between the business’s cumulative performance against the PIP Performance target and what was accrued on a plan to date basis for the period ended on the last day of that quarter and the business’s cumulative performance for the period ended on the last day of the preceding quarter. The amount of PIP accrual in management fee expense therefore varied from quarter to quarter.

For example, if a business’s earnings growth rate exceeded its PIP Performance Target at the same level each quarter, the amount of management fee expense the Company reflected for the business’s PIP accrual was the same each quarter during the performance period. In contrast, if a business had weaker earnings growth for a quarter compared with stronger earnings growth in the previous quarter, the business would have a lower level of projected payout than it had in the previous quarter, based on the business’s cumulative performance. Because the PIP is accrued on a cumulative basis, for the weaker quarter, the cumulative accrual decreased to account for the lower level of projected payout at the end of the performance period and the Company reported a smaller PIP accrual management fees expense (or in some cases the Company reported a PIP accrual management fees benefit) for the business. Conversely, in a stronger quarter, the cumulative accrual increased sequentially to account for the higher level of projected payout at the end of the performance period and the Company reported a larger PIP accrual in management fees expense for the business.

 

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A new PIP is in place for the 15-month performance period of October 1, 2010 through December 31, 2011 (the “Second PIP”). Management migrated to an incentive program that rewards only incremental growth but still maintains potential for material incentive payments. The Second PIP will be payable in cash beginning in the first quarter of 2012 and, similar to the initial PIP, is based on specific performance criteria for each business. Incentive targets (“Second PIP Performance Targets”) have been set based on the earnings of each business during the last PIP incentive period, with the fourth quarter of 2009 counted twice. The calculation of a business’s Second PIP Performance Target is based on a 15-month period and reflects the fact that the Second PIP will include 2 fourth quarter periods. The 15-month performance period was selected in order to align the plan with the calendar year. It is envisioned that future plans will be 12 months, consistent with the calendar year. NFP’s Executive Management Committee, in its sole discretion, may adjust any Second PIP Performance Target as necessary to account for changed business circumstances, including, without limitation, sub-acquisitions. The Second PIP accrual in management fee expense is based on the business’s earnings growth rate above its Second PIP Performance Target. To measure growth, the target will be allocated on a seasonally adjusted basis, using the seasonal earnings pattern by quarter for the past 2 years. NFP calculates the business’s Second PIP accrual amount and earnings growth rate on a cumulative basis. Overall, the Company has accrued $6.5 million within management fees expense relating to the Second PIP from October 1, 2010 through September 30, 2011, for potential payment in the first quarter of 2012. For the three and nine months ended September 30, 2011, the Company’s accrual was $1.3 million and $2.9 million, respectively.

The Revised Long-Term Incentive Plan

To drive continued economic alignment with shareholders and motivate growth, during the quarter ended September 30, 2010, NFP introduced a revised Long-Term Incentive Plan (the “RTIP”). The RTIP will cover the three-year period from January 1, 2011 through December 31, 2013 and will be based on a modified calculation of adjusted EBITDA growth over this period. Currently envisioned, the RTIP’s calculation of adjusted EBITDA will include no more than $24.0 million in acquired EBITDA earned from new acquisitions at any time during the three-year period and will exclude certain extraordinary items. As currently envisioned, adjusted EBITDA growth of 6% would generate a $5.0 million total payout over three years, and be accrued for on a quarterly basis. The maximum amount payable under the RTIP is anticipated to be $20.0 million over three years, generated by growth in adjusted EBITDA of 12% or higher. NFP’s Executive Management Committee, in its sole discretion, may adjust the calculation of the RTIP as necessary to account for changed business circumstances. Plan participants may be eligible for cash payments in the first quarter of 2014, to the extent incentive targets are achieved. As of September 30, 2011, the Company has not accrued any dollar amount within management fees expense relating to the RTIP, since the applicable adjusted EBITDA growth did not reach its target threshold, during the third quarter.

Note 12—Business Segments

The Company’s three reportable segments provide distinct products and services to different client bases. The Company’s main source of revenue from its reportable segments is commissions and fees revenue from the sale of products and services. Each reportable segment is separately managed and has separate financial information evaluated regularly by the Company’s chief operating decision maker in determining resource allocation and assessing performance. The Company’s three reportable segments are the CCG, the ICG, and the ASG.

 

   

The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits, and property and casualty insurance. The CCG serves corporate clients by providing advisory and brokerage services related to the planning and administration of benefits plans that take into account the overall business profile and needs of the corporate client.

 

   

The ICG is a leader in the delivery of independent life insurance, annuities, long term care, and wealth transfer solutions for high net worth individuals. In evaluating their clients’ near-term and long-term financial goals, the ICG’s advisors serve wealth accumulation, preservation and transfer needs, including estate planning, business succession, charitable giving and financial advisory services.

 

   

The ASG serves independent financial advisors whose clients are high net worth individuals and companies by offering broker-dealer and asset management products and services through NFPSI, NFP’s corporate registered investment advisor and independent broker-dealer. The ASG attracts financial advisors seeking to provide clients with sophisticated resources and an open choice of products.

Expenses associated with NFP’s corporate shared services are allocated to NFP’s three reportable segments largely based on performance by segment and on other reasonable assumptions and estimates as it relates to NFP’s corporate shared services support of the reportable segments.

 

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Financial information relating to NFP’s reportable segments is as follows (in millions):

 

000000 000000 000000 000000
Three Months Ended September 30, 2011    Corporate
Client  Group
     Individual
Client  Group
     Advisor
Services  Group
     Total  

Revenue:

           

Commissions and fees

   $ 105.7       $ 84.8       $ 61.0       $ 251.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Commissions and fees

     11.7         18.6         50.0         80.3   

Compensation expense

     36.0         26.6         4.0         66.6   

Non-compensation expense

     18.6         16.5         4.2         39.3   

Management fees

     19.3         13.9         —           33.2   

Amortization of intangibles

     5.6         2.7         —           8.3   

Depreciation

     1.4         0.9         0.8         3.1   

Impairment of goodwill and intangible assets

     —           2.5         —           2.5   

Gain on sale of businesses, net

     —           —           —           —     

Change in estimated acquisition earn-out payables

     0.1         —           —           0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     92.7         81.7         59.0         233.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

   $ 13.0       $ 3.1       $ 2.0       $ 18.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

000000 000000 000000 000000
Nine Months Ended September 30, 2011    Corporate
Client  Group
     Individual
Client  Group
     Advisor
Services  Group
     Total  

Revenue:

           

Commissions and fees

   $ 295.6       $ 244.4       $ 184.2       $ 724.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Commissions and fees

     31.4         52.8         152.1         236.3   

Compensation expense

     103.6         81.7         11.8         197.1   

Non-compensation expense

     54.6         48.5         11.7         114.8   

Management fees

     51.1         38.6         —           89.7   

Amortization of intangibles

     15.9         8.3         —           24.2   

Depreciation

     4.6         3.2         1.4         9.2   

Impairment of goodwill and intangible assets

     —           3.4         —           3.4   

Gain on sale of businesses, net

     —           0.1         —           0.1   

Change in estimated acquisition earn-out payables

     0.1         —           —           0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     261.3         236.6         177.0         674.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

   $ 34.3       $ 7.8       $ 7.2       $ 49.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

At September 30, 2011    Corporate
Client  Group
     Individual
Client  Group
     Advisor
Services  Group
     Corporate Items
and  Eliminations
     Total  

Intangibles, net

   $ 197.6       $ 140.1       $ —         $ —         $ 337.7   

Goodwill, net

   $ 72.5       $ 24.1       $ —         $ —         $ 96.6   

Total assets

   $ 441.5       $ 212.4       $ 78.0       $ 142.3       $ 874.2   

 

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Table of Contents
Three Months Ended September 30, 2010    Corporate
Client  Group
    Individual
Client  Group
    Advisor
Services  Group
     Total  

Revenue:

         

Commissions and fees

   $ 94.6      $ 91.9      $ 51.0       $ 237.5   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating expenses:

         

Commissions and fees

     9.7        18.8        42.2         70.7   

Compensation expense

     32.1        25.9        4.1         62.1   

Non-compensation expense

     18.4        16.0        3.4         37.8   

Management fees

     24.6        28.9        —           53.5   

Amortization of intangibles

     5.4        2.9        —           8.3   

Depreciation

     1.6        1.0        0.4         3.0   

Impairment of goodwill and intangible assets

     —          —          —           —     

Gain on sale of businesses, net

     (0.1     —          —           (0.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     91.7        93.5        50.1       $ 235.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

   $ 2.9      $ (1.6   $ 0.9       $ 2.2   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

Nine Months Ended September 30, 2010    Corporate
Client  Group
    Individual
Client  Group
    Advisor
Services  Group
     Total  

Revenue:

         

Commissions and fees

   $ 279.3      $ 262.0      $ 156.3       $ 697.6   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating expenses:

         

Commissions and fees

     25.9        57.4        129.2         212.5   

Compensation expense

     97.5        82.0        11.6         191.1   

Non-compensation expense

     56.8        50.4        9.9         117.1   

Management fees

     54.7        54.9        —           109.6   

Amortization of intangibles

     16.0        8.8        —           24.8   

Depreciation

     4.7        3.3        1.0         9.0   

Impairment of goodwill and intangible assets

     1.9        1.0        —           2.9   

Gain on sale of businesses, net

     (8.2     (1.8     —           (10.0
  

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     249.3        256.0        151.7         657.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

   $ 30.0      $ 6.0      $ 4.6       $ 40.6   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

At December 31, 2010    Corporate
Client  Group
     Individual
Client  Group
     Advisor
Services  Group
     Corporate Items
and  Eliminations
     Total  

Intangibles, net

   $ 185.7       $ 152.1       $ —         $ —         $ 337.8   

Goodwill, net

   $ 36.9       $ 24.0       $ —         $ —         $ 60.9   

Total assets

   $ 403.9       $ 261.5       $ 98.9       $ 128.8       $ 893.1   

Note 13—Subsequent Events

Subsequent to September 30, 2011, the Company disposed of a firm and received consideration of $1.6 million in cash and 26,494 shares of NFP common stock.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements of National Financial Partners Corp. (“NFP”) and its subsidiaries (together with NFP, the “Company”) and the related notes included elsewhere in this report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management’s expectations. See “Forward-Looking Statements” included elsewhere in this report.

NFP’s principal and executive offices are located at 340 Madison Avenue, 20th Floor, New York, New York, 10173 and the telephone number is (212) 301-4000. On NFP’s Web site, www.nfp.com, NFP posts the following filings as soon as reasonably practicable after they are electronically filed or furnished with the Securities and Exchange Commission (the “SEC”): NFP’s annual reports on Form 10-K, NFP’s quarterly reports on Form 10-Q, NFP’s current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such filings on NFP’s Web site are available free of charge. Information on NFP’s Web site does not constitute part of this report.

Executive Overview

NFP and its benefits, insurance and wealth management businesses provide a full range of advisory and brokerage services to the Company’s clients. NFP serves corporate and high net worth individual clients throughout the United States and in Canada, with a focus on the middle market and entrepreneurs. As of September 30, 2011, the Company operated over 140 businesses.

Founded in 1998, the Company has grown organically and through acquisitions, operating in the independent distribution channel. This distribution channel offers independent advisors the flexibility to sell products and services from multiple non-affiliated providers to deliver objective and comprehensive solutions. The number of products and services available to independent advisors is large and can lead to a fragmented marketplace. NFP facilitates the efficient sale of products and services in this marketplace by using its scale and market position to contract with leading product providers. These relationships foster access to a broad array of insurance and financial products and services as well as better underwriting support and operational services. In addition, the Company is able to operate effectively in this distribution channel by leveraging financial and intellectual capital, technology solutions, cross-selling, and regulatory compliance support across the Company. The Company’s marketing and wholesale organizations also provide an independent distribution channel for benefits, insurance and investment products and services, serving both third-party affiliates as well as member NFP-owned businesses.

NFP has organized its businesses into three reportable segments: the Corporate Client Group (the “CCG”), the Individual Client Group (the “ICG”) and the Advisor Services Group (the “ASG”). The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits, and property and casualty insurance. The ICG is a leader in the delivery of independent life insurance, annuities, long term care and wealth transfer solutions for high net worth individuals and includes wholesale life brokerage, retail life and wealth management services. The ASG, including NFP Securities, Inc. (“NFPSI”), a leading independent broker-dealer and corporate registered investment advisor, serves independent financial advisors whose clients are high net worth individuals and companies by offering broker-dealer and asset management products and services. The ASG attracts financial advisors seeking to provide clients with sophisticated resources and an open choice of products. NFP promotes collaboration among its business lines to provide its clients the advantages of a single coordinated resource to address their corporate and individual benefits, insurance and wealth management planning needs.

NFP enhances its competitive position by offering its clients a broad array of insurance and financial solutions. NFP’s continued investments in marketing, compliance and product support provide its independent advisors with the resources to deliver strong client service. NFP believes its operating structure allows its businesses to effectively and objectively serve clients at the local level while having access to the resources of a national company. NFP’s senior management team is composed of experienced insurance and financial services leaders. The Company’s principals, and in certain instances employees, who manage the day-to-day operations of many of NFP’s subsidiaries, are professionals who are well positioned to understand client needs.

The economic environment remains challenging, and many economic indicators continue to point to a slow and uneven recovery. This uncertain environment has reduced the demand for the Company’s services and the products the Company distributes, particularly in the life insurance market. 2010’s temporary estate tax laws have also had a continuing impact on the high net worth life insurance market. The ICG’s fourth quarter 2011 results are expected to be lower than the ICG’s fourth quarter 2010 results.

 

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Table of Contents

Reportable Segments

Corporate Client Group

The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits, and property and casualty insurance. The CCG serves corporate clients by providing advisory and brokerage services related to the planning and administration of benefits plans that take into account the overall business profile and needs of the corporate client. The CCG accounted for 40.8% of NFP’s revenue for the nine months ended September 30, 2011 and 40.0% of NFP’s revenue for the nine months ended September 30, 2010. The CCG has organized its operations by region in order to facilitate the sharing of resources and investments among its advisors to address clients’ needs.

Effective July 1, 2011, NFP’s property and casualty business is presented as a separate business line. Previously, NFP’s property and casualty business was included within the corporate benefits business line. The CCG now operates primarily through its corporate benefits, executive benefits and property and casualty business lines. Prior periods presented have been conformed to the current period presentation.

The corporate benefits business line accounted for approximately 82.8% of the CCG’s revenue for the nine months ended September 30, 2011 and 83.8% of the CCG’s revenue for the nine months ended September 30, 2010. Generally, corporate benefits are available to a broad base of employees within an organization and include products and services such as group medical and disability insurance, group life insurance and retirement planning. The corporate benefits business line consists of both retail and wholesale benefits operations. These businesses have access to advanced benchmarking and analysis tools and comprehensive support services which are provided to both NFP-owned businesses and non-owned entities that pay membership fees to NFP Benefits Partners. NFP Benefits Partners is a division of NFP Insurance Services, Inc., a licensed insurance agency and an insurance marketing organization wholly-owned by NFP.

The executive benefits business line accounted for approximately 10.2% of the CCG’s revenue for the nine months ended September 30, 2011 and 10.4% of the CCG’s revenue for the nine months ended September 30, 2010. Executive benefits products and services provide employers with the ability to establish plans that create or reinstate benefits for highly-compensated employees, typically through non-qualified plans or disability plans. Clients may utilize a corporate-owned life insurance funding strategy to finance future compensation due under these plans. The executive benefits business line consists of NFP-owned businesses and non-owned entities that pay membership fees for membership in one of NFP’s marketing and wholesale organizations.

The property and casualty business line accounted for approximately 7.0% of the CCG’s revenue for the nine months ended September 30, 2011 and 5.8% of the CCG’s revenue for the nine months ended September 30, 2010. Property and casualty products and services provide risk management capabilities to businesses and individuals by protecting against property damage, the associated interruption of business and related expenses, or against other damages incurred in the normal course of operations. Effective July 1, 2011, NFP Property and Casualty Services, Inc., one of NFP’s wholly-owned businesses, acquired Lapre Scali & Company Insurance Services, LLC (“Lapre Scali”), a property and casualty insurance brokerage. In addition to managing their own operations, NFP’s property and casualty resources are positioned to serve NFP’s businesses and members of NFP’s marketing and wholesale organizations with commercial, personal and surety line capabilities.

The CCG earns commissions on the sale of insurance policies and fees for the development, implementation and administration of corporate and executive benefits programs and property and casualty products and services. In the corporate benefits business line, commissions and fees are generally paid each year as long as the client continues to use the product and maintains its broker of record relationship with the Company. Commissions are based on a percentage of revenue but they may also be based on a fee per plan participant. In some cases, such as for the administration of retirement-focused products like 401(k) plans, fees earned are based on the amount of assets under administration or advisement. Generally, in the executive benefits business line, consulting fees are earned relative to the completion of specific client engagements, administration fees are earned throughout the year on policies, and commissions are earned as a calculated percentage of the premium in the year that the policy is originated and during subsequent renewal years, as applicable. Through the property and casualty business line, the CCG offers property and casualty insurance brokerage and consulting services for which it earns commissions and fees. These fees are paid each year as long as the client continues to use the product and maintains its broker of record relationship with the Company.

NFP believes that the corporate benefits business line and the property and casualty business line provides a relatively consistent source of revenue to NFP because recurring revenue is earned each year a policy or service remains in effect. NFP believes that the CCG has a high rate of client retention. NFP estimates that revenue from the executive benefits business line tends to be split between recurring revenue and revenue that is concentrated in the year of sale. Historically, revenue earned by the CCG is weighted towards the fourth quarter.

 

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Table of Contents

Individual Client Group

The ICG is a leader in the delivery of independent life insurance, annuities, long term care and wealth transfer solutions for high net worth individuals. In evaluating their clients’ near-term and long-term financial goals, the ICG’s advisors serve wealth accumulation, preservation and transfer needs, including estate planning, business succession, charitable giving and financial advisory services. The ICG accounted for 33.8% of NFP’s revenue for the nine months ended September 30, 2011 and 37.6% of NFP’s revenue for the nine months ended September 30, 2010. The ICG operates through its marketing organization, PartnersFinancial, its wholesale life brokerage businesses, consisting of Highland Capital Brokerage, Inc. and other NFP-owned brokerage general agencies, as well as through its retail life and wealth management business lines.

The marketing organization and wholesale life brokerage business line accounted for 52.1% of the ICG’s revenue for the nine months ended September 30, 2011 and 54.0% of the ICG’s revenue for the nine months ended September 30, 2010. Annual fees are paid for membership in PartnersFinancial, which develops relationships and contracts with selected preferred insurance carriers, earning override commissions when those contracts are used. The ICG is supported by shared service technology investments, product management department, advanced case design team, underwriting advocacy specialists, training and marketing services. Highland Capital Brokerage, Inc. has a significant focus on financial institutions, providing point of sale and insurance marketing support. Highland Capital Brokerage, Inc. and the ICG’s other wholesale life brokerage businesses operate through a brokerage general agency model that provides brokers, typically either independent life insurance advisors or institutions, support as needed. The independent life insurance advisors or institutions then distribute life insurance products and services directly to individual clients. The support provided by the wholesale life brokerage businesses may include underwriting, marketing, point of sale, case management, advanced case design, compliance or technical support.

The retail life business line accounted for 28.8% of the ICG’s revenue for the nine months ended September 30, 2011 and 30.0% of the ICG’s revenue for the nine months ended September 30, 2010. The retail life business line provides individual clients with life insurance products and services and consists of NFP-owned businesses.

The ICG’s wealth management business line accounted for 19.1% of the ICG’s revenue for the nine months ended September 30, 2011 and 16.0% of the ICG’s revenue for the nine months ended September 30, 2010. The ICG’s wealth management business line provides retail financial services to individual clients. This business line consists of NFP-owned businesses.

Commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. In the marketing organization and wholesale life brokerage business line, the ICG generally receives commissions paid by the insurance carrier for facilitating the placement of the product. Wholesale life brokerage revenue also includes amounts received by NFP’s life brokerage entities, including its life settlements brokerage entities, which assist advisors with the placement and sale of life insurance. In the retail life business line, commissions are generally calculated as a percentage of premiums, generally paid in the first year. The ICG receives renewal commissions for a period following the first year. The ICG’s wealth management business line earns fees for offering financial advisory and related services. These fees are generally based on a percentage of assets under management and are paid quarterly. In addition, the ICG may earn commissions related to the sale of securities and certain investment-related insurance products.

Many of the NFP-owned businesses comprising the wealth management business line of the ICG conduct securities or investment advisory business through NFPSI. Like the other business lines in the ICG, the wealth management business line generally targets high net worth individuals as clients. In contrast, the ASG’s primary clients are independent investment advisors, who in turn serve high net worth individuals and companies. The ICG’s wealth management business line is composed of NFP-owned businesses. In contrast, the ASG serves independent financial advisors associated with both NFP-owned and non-owned businesses. When independent financial advisors associated with NFP-owned businesses place business through NFPSI, NFPSI receives a commission and the independent financial advisor associated with the NFP-owned business receives the remaining commission. When independent financial advisors associated with non-owned businesses place business through NFPSI, NFPSI receives a commission and the independent financial advisor associated with the non-owned business receives the remaining commission. See also “—Advisor Services Group.”

Revenue generated by the marketing organization and wholesale life brokerage and retail life business lines tends to be concentrated in the year that the policy is originated. Historically, revenue earned by the marketing organization and wholesale life brokerage and retail life business lines is weighted towards the fourth quarter as clients finalize tax planning decisions at year-end. 2010’s temporary estate tax laws have had a continuing impact on the high net worth life insurance market. The ICG’s fourth quarter 2011 results are expected to be lower than the ICG’s fourth quarter 2010 results. Revenue generated by the ICG’s wealth management business line is generally recurring given high client retention rates, and is influenced by the performance of the financial markets and the economy, as well as asset allocation decisions if fees are based on assets under management.

 

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Table of Contents

Advisor Services Group

The ASG serves independent financial advisors whose clients are high net worth individuals and companies by offering broker-dealer and asset management products and services through NFPSI, NFP’s corporate registered investment advisor and independent broker-dealer. The ASG attracts financial advisors seeking to provide clients with sophisticated resources and an open choice of products. The ASG accounted for 25.4% of NFP’s revenue for the nine months ended September 30, 2011 and 22.4% of NFP’s revenue for the nine months ended September 30, 2010.

The ASG earns fees for providing the platform for financial advisors to offer financial advice and execute financial planning strategies. These fees are based on a percentage of assets under management and are generally paid quarterly. The ASG may also earn fees for the development of a financial plan or annual fees for advising clients on asset allocation. The ASG also earns commissions related to the sale of securities and certain investment-related insurance products. Such commission income and related expenses are recorded on a trade date basis. Transaction-based fees, including incentive fees, are recognized when all contractual obligations have been satisfied. Most NFP-owned businesses and members of NFP’s marketing and wholesale organizations conduct securities or investment advisory business through NFPSI.

Independent broker-dealers/corporate registered investment advisors, such as NFPSI, tend to offer extensive product and financial planning services and heavily emphasize investment advisory platforms and packaged products and services such as mutual funds, variable annuities and wrap fee programs. NFP believes that broker-dealers serving the independent channel tend to be more responsive to the product and service requirements of their registered representatives than wire houses or regional brokerage firms. Advisors using the ASG benefit from a compliance program in place at NFPSI, as broker-dealers are subject to regulations which cover all aspects of the securities business.

In February 2010, NFPSI announced the launch of NFP IndeSuiteTM, a wealth management platform designed to bring technology, scale and services to the independent registered investment advisor market.

Revenue generated by the ASG based on assets under management and the volume of securities transactions is influenced by the performance of the financial markets and the economy.

Acquisitions

NFP anticipates continuing acquisitions and sub-acquisitions, in which an existing NFP-owned business acquires a new entity or book of business, focusing on businesses that provide high levels of recurring revenue and strategically complement its existing businesses. Businesses that supplement the Company’s geographic reach and improve product capabilities across business lines are of particular interest to NFP.

As NFP continues its acquisition and sub-acquisition activity, it may also enter into transactions or joint ventures that fall outside its historical acquisition structure in order to address unique opportunities. For instance, NFP has previously purchased a principal’s economic interest in the management agreement, acquiring a greater economic interest in a transaction. NFP may again purchase all or a portion of such economic interest of other principals in the future through a management agreement buyout, generally resulting in an expense to NFP. In addition, the recent acquisition of Lapre Scali was completed through a transaction that did not involve a management agreement. In that transaction, NFP bought 100% of the equity interest in the entity and Mr. Scali became an executive vice president of NFP, with oversight of the property and casualty business line.

While consideration for acquisitions and sub-acquisitions in 2011 has been paid in cash, NFP has historically generally required principals to receive a minimum portion of the acquisition price (typically at least 30%) in the form of NFP common stock. In recent acquisition transactions, the Company has required new employees/principals to purchase shares of NFP common stock on the open market by the end of a certain period of time (the “Purchased Shares”). The Purchased Shares are subject to liquidity restrictions similar to those set forth in the amended and restated stockholders agreement or lock-up agreement, but are not subject to agreements that give such new principals rights as security holders.

Regulation

The Company is subject to extensive regulation in the United States, certain United States territories and Canada. Failure to comply with applicable federal or state law or regulatory requirements could result in actions by regulators, potentially leading to fines and penalties, adverse publicity and damage to the Company’s reputation. The interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact. In extreme cases, revocation of a subsidiary’s authority to do business in one or more jurisdictions could result from failure to comply with regulatory requirements. NFP could also face lawsuits by clients, insureds or other parties for alleged violations of laws and regulations.

 

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The insurance industry continues to be subject to a significant level of scrutiny by various regulatory bodies, including state attorneys general and insurance departments, concerning certain practices within the insurance industry. These practices include, without limitation, conducting stranger-owned life insurance sales in which the policy purchaser may not have a sufficient insurable interest as required by some states’ laws or regulations, the receipt of contingent commissions by insurance brokers and agents from insurance companies and the extent to which such compensation has been disclosed, bid rigging and related matters.

Employees

As of September 30, 2011, the Company had approximately 2,770 employees. NFP believes that its relations with the Company’s employees are generally satisfactory. None of the Company’s employees are represented by a union.

Results of Operations

The Company earns revenue that consists primarily of commissions and fees earned from the sale of financial products and services to the Company’s clients. The Company also incurs commissions and fees expense and compensation and non-compensation expense in the course of earning revenue. NFP pays management fees to non-employee principals and/or certain entities they own based on the financial performance of each respective business. The Company refers to revenue earned by the Company’s businesses less the operating expenses of its businesses and allocated shared expenses associated with shared corporate resources as income (loss) from operations. The Company’s operating expenses include commissions and fees, compensation and non-compensation expense, management fees, amortization, depreciation, impairment of intangible assets and (gain) loss on sale of businesses.

In addition to its evaluation of its reportable segments’ performance, the Company also evaluates the profit it shares with the principals on a reportable segment basis. In order to monitor this, it uses the following non-GAAP financial measures: income before management fees, adjusted income before management fees, management fees as a percentage of adjusted income before management fees, and management fees (excluding accelerated vesting of certain restricted stock units (“RSUs”)). For a reconciliation of these non-GAAP financial measures to their GAAP counterparts, see “—Operating expenses—Management fees.”

Information with respect to all sources of revenue, income from operations, and income before management fees by reportable segment for the three and nine months ended September 30, 2011 and September 30, 2010 is presented below (in millions).

 

    Three Months Ended     Nine Months Ended  
    September 30, 2011     September 30, 2010     September 30, 2011     September 30, 2010  

Revenue

       

Commissions and fees

       

Corporate Client Group

  $ 105.7      $ 94.6      $ 295.6      $ 279.3   

Individual Client Group

    84.8        91.9        244.4        262.0   

Advisor Services Group

    61.0        51.0        184.2        156.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 251.5      $ 237.5      $ 724.2      $ 697.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

       

Corporate Client Group

  $ 13.0      $ 2.9      $ 34.3      $ 30.0   

Individual Client Group

    3.1        (1.6     7.8        6.0   

Advisor Services Group

    2.0        0.9        7.2        4.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 18.1      $ 2.2      $ 49.3      $ 40.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before management fees

       

Corporate Client Group

  $ 39.5      $ 34.4      $ 106.0      $ 99.1   

Individual Client Group

    23.2        31.2        61.4        72.3   

Advisor Services Group

    2.7        1.2        8.5        5.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 65.4      $ 66.8      $ 175.9      $ 177.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Overview of the Nine Months Ended September 30, 2011

During the nine months ended September 30, 2011, revenue increased $26.6 million, or 3.8%, as compared to the nine months ended September 30, 2010. The revenue increase was driven by revenue increases within the CCG and ASG of $16.3 million and $27.9 million, respectively, and offset by a revenue decrease of $17.6 million within the ICG. Results in the CCG included commissions and fees revenue of $8.2 million from acquisitions in 2011 that had no comparable operations in the same period of 2010. After the impact from dispositions of $4.1 million, the remaining net increase of $12.2 million represented growth within existing firms in the CCG, driven by new clients and product sales. ASG revenue benefited from the sale of variable annuity products and a slight increase in assets under management. Results in the ICG were impacted by challenging conditions in the life insurance market, particularly with respect to transactions involving high net worth individuals. Excluding the impact of dispositions, revenue from existing firms within the ICG declined by $16.1 million.

Income from operations increased $8.7 million, or 21.5%, for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. The Company’s income before management fees remained relatively stable, with a slight decrease of $1.0 million, or 0.5%, for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. The increase in income from operations was primarily due to an increase in revenue that outpaced the increase in commission expense, as well as a sharp decline in management fees driven in large part by the charge for the accelerated vesting of approximately 1.5 million RSUs for principals that occurred in the prior year. Compensation expense increased, but was partially offset by decreases in non-compensation expenses. Gain on sale of businesses also decreased, primarily within the CCG, and impairments slightly increased within the ICG.

As of September 30, 2011, the ratio of base earnings to target earnings by segment was 61.7% for the CCG and 46.8% for the ICG. Since the ASG is primarily comprised of NFPSI, NFP’s broker-dealer and corporate registered investment advisor, in this segment no management fees are paid and no earnings are shared with principals. Both the CCG and ICG experienced significant declines in management fees, primarily as a result of the accelerated vesting of RSUs, which resulted in a pre-tax charge of $13.4 million in the third quarter of 2010. Excluding the impact of this accelerated vesting, management fees within the CCG increased generally commensurate with an improvement in firm performance, whereas within the ICG, management fees declined along with firm performance.

Revenue

Many factors affect the Company’s revenue and profitability, including economic and market conditions, legislative and regulatory developments and competition. Because many of these factors are unpredictable and generally beyond the Company’s control, the Company’s revenue and earnings will fluctuate from year to year and quarter to quarter.

The Company generates revenue primarily from the following sources:

 

   

Corporate Client Group. The CCG earns commissions on the sale of insurance policies and fees for the development, implementation and administration of corporate and executive benefits, and property and casualty programs. In the corporate benefits business line, commissions and fees are generally paid each year as long as the client continues to use the product and maintains its broker of record relationship with NFP’s business. Commissions are based on a percentage of insurance premium or are based on a fee per plan participant. In some cases, such as for the administration of retirement-focused products like 401(k) plans, fees earned are based on the value of assets under administration or advisement. Generally, in the executive benefits business line, consulting fees are earned relative to the completion of specific client engagements, administration fees are earned throughout the year on policies, and commissions are earned as a calculated percentage of the premium in the year that the policy is originated and during subsequent renewal years, as applicable. Through the property and casualty business line, the CCG offers property and casualty insurance brokerage and consulting services for which it earns commissions and fees. These fees are paid each year as long as the client continues to use the product and maintains its broker of record relationship with the Company.

 

   

Individual Client Group. Commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. In the marketing organization and wholesale life brokerage business line, the ICG generally receives commissions paid by the insurance carrier for facilitating the placement of the product. Wholesale life brokerage revenue also includes amounts received by NFP’s life brokerage entities, including its life settlements brokerage entities which assist advisors with the placement and sale of life insurance. In the retail life business line, commissions are generally calculated as a percentage of premiums, generally paid in the first year. The ICG receives renewal commissions for a period following the first year. The ICG’s wealth management business line earns fees for offering financial advisory and related services. These fees are generally based on a percentage of assets under management and are paid quarterly. In addition, the ICG may earn commissions related to the sale of securities and certain investment-related insurance products.

 

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Advisor Services Group. The ASG earns fees for providing the platform for financial advisors to offer financial advice and execute financial planning strategies. These fees are based on a percentage of assets under management and are generally paid quarterly. The ASG may also earn fees for the development of a financial plan or annual fees for advising clients on asset allocation. The ASG also earns commissions related to the sale of securities and certain investment-related insurance products. Such commission income and related expenses are recorded on a trade date basis. Transaction-based fees, including incentive fees, are recognized when all contractual obligations have been satisfied. Most NFP-owned businesses and members of NFP’s marketing and wholesale organizations conduct securities or investment advisory business through NFPSI.

Some of the Company’s businesses also earn additional compensation in the form of incentive and marketing support revenue from manufacturers of financial services products, based on the volume, consistency and profitability of business generated by the Company. Incentive and marketing support revenue is recognized at the earlier of notification of a payment or when payment is received, unless historical data or other information exists which enables management to reasonably estimate the amount earned during the period. These forms of payments are earned both with respect to sales by the Company’s businesses and sales by NFP’s third-party affiliates. The vast majority of the Company’s revenue is generated from its United States operations.

From 1999, the year NFP began operations, until 2009, the Company earned approximately 65% to 70% of its revenue in the first three quarters of the year and approximately 30% to 35% of its revenue in the fourth quarter. In 2010 and 2009, NFP earned 29% of its revenue in the fourth quarter. This change resulted primarily from a weaker sales environment for life insurance products in the ICG. Historically, life insurance sales had been concentrated in the fourth quarter as clients finalized their estate and tax planning decisions. Continued relative weakness in this market has meant a change in the revenue patterns for the business. 2010’s temporary estate tax laws have also had a continuing impact on the high net worth life insurance market. The ICG’s fourth quarter 2011 results are expected to be lower than the ICG’s fourth quarter 2010 results.

Operating expenses

In the discussion that follows, NFP provides the following ratios with respect to its operating results: (i) commission expense ratio, (ii) compensation expense ratio and (iii) non-compensation expense ratio. The commission expense ratio is derived by dividing commissions and fee expense by total revenue. The compensation expense ratio is derived by dividing compensation expense by total revenue. The non-compensation expense ratio is derived by dividing non-compensation expense by total revenue. Included within the CCG’s revenue are amounts required to eliminate intercompany revenue recorded between the Company’s corporate benefits, executive benefits, and property and casualty business lines. Included within the ICG’s revenue are amounts required to be recorded to eliminate intercompany revenue recorded between the Company’s marketing organization and wholesale life brokerage, retail life and wealth management business lines. Included within the ASG’s revenue are amounts required to be recorded to eliminate intercompany revenue recorded between NFPSI and the ICG.

Commissions and fees. Commissions and fees are typically paid to third-party producers who are affiliated with the Company’s businesses. Commissions and fees are also paid to producers who utilize the services of one or more of the Company’s life brokerage entities, including the Company’s life settlements brokerage entities. Additionally, commissions and fees are paid to producers who provide referrals and specific product expertise. When earnings are generated solely by a principal, no commission expense is incurred because principals are only paid from a share of the cash flow of the business through management fees. However, when income is generated by a third-party producer, the producer is generally paid a portion of the commission income, which is reflected as commission expense. Rather than collecting the full commission and remitting a portion to a third-party producer, a business may include the third-party producer on the policy application submitted to a carrier. The carrier will, in these instances, directly pay each named producer their respective share of the commissions and fees earned. When this occurs, the business will record only the commissions and fees it receives directly as revenue and have no commission expense. As a result, the business will have lower revenue and commission expense and a higher income from operations as a percentage of revenue. Dollars generated from income from operations will be the same. The transactions in which a business is listed as the sole producer and pays commissions to a third-party producer, compared with transactions in which the carrier pays each producer directly, will cause NFP’s income from operations as a percentage of revenue to fluctuate without affecting income from operations. In addition, within the ASG, NFPSI pays commissions to the Company’s affiliated third-party distributors who transact business through NFPSI.

Wholly-owned businesses that utilize the Company’s marketing organization, wholesale life brokerage, and its broker-dealer receive commissions and fees that are eliminated in consolidation, having no effect on the Company’s net income.

 

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Compensation expense. The Company’s businesses incur operating expenses related to compensating producing and non-producing staff. In addition, NFP allocates compensation expense associated with corporate shared services to NFP’s three reportable segments largely based on performance of the segments and other reasonable assumptions and estimates as it relates to the corporate shared services support of the operating segments. Compensation expense includes both cash and stock-based compensation. NFP records share-based payments related to employees and activities as well as allocated amounts from its corporate shared services to compensation expense as a component of compensation expense.

Non-compensation expense. The Company’s businesses incur operating expenses related to occupancy, professional fees, insurance, promotional, travel and entertainment, telecommunication, technology, legal, internal audit, certain compliance costs and other general expenses. In addition, NFP allocates non-compensation expense associated with NFP’s corporate shared services to NFP’s three reportable segments largely based on performance of the segments and other reasonable assumptions and estimates as it relates to the corporate shared services support of the operating segments.

Management fees. NFP pays management fees to the principals and/or certain entities they own based on the financial performance of the business they manage. From a cash perspective NFP may advance monthly management fees that have not yet been earned due to the seasonality of the earnings of certain subsidiaries, particularly in the life insurance businesses in the ICG. NFP typically pays a portion of the management fees monthly in advance. Once NFP receives its cumulative preferred earnings, or base earnings, the principals and/or entity the principals own will earn management fees equal to earnings above base earnings up to target earnings. An additional management fee is paid in respect of earnings in excess of target earnings based on the ratio of base earnings to target earnings. For example, if base earnings equal 40% of target earnings, NFP receives 40% of earnings in excess of target earnings and the principals and/or the entities they own receives 60%. As of September 30, 2011 the ratio of base earnings to target earnings by segment was 61.7% for the CCG and 46.8% for the ICG. Since the ASG is primarily comprised of NFPSI, NFP’s broker-dealer and corporate registered investment advisor, no management fees are paid and no earnings are shared with principals.

Management fees also include an accrual for certain performance-based incentive amounts payable under NFP’s ongoing incentive plan, the Annual Principal Incentive Plan (the “PIP”), and the revised Long-Term Incentive Plan. For a more detailed discussion of NFP’s incentive plans, see “Note 11—Commitments and Contingencies—Incentive Plans” to the Consolidated Financial Statements (Unaudited) contained in this report.

The Company accounts for stock-based awards to principals as part of management fee expense in the consolidated statements of operations as liability awards. Liability classified stock-based compensation is adjusted each reporting period to account for subsequent changes in the fair value of NFP’s common stock.

Management fees may be offset by amounts paid by the principals and/or certain entities they own under the terms of the management contract for capital expenditures, including sub-acquisitions, in excess of $50,000. These amounts may be paid in full or over a mutually agreeable period of time and are recorded as a “deferred reduction in management fees.” Amounts recorded in deferred reduction in management fees are amortized as a reduction in management fee expense generally over the useful life of the asset.

The ratio of management fees to adjusted income before management fees is dependent on the percentage of total earnings generated by the Company, the performance of the Company’s businesses relative to base earnings and target earnings, the growth of earnings of the Company’s businesses in the periods after their first three years following acquisition, and the impact on income from operations from businesses where no management fees are paid, such as the ASG, NFP P&C, and several other subsidiaries without a principal. Due to NFP’s priority earnings position, if earnings are below target earnings in a given year, NFP’s share of total earnings would be higher for that year for that business. If a business produces earnings at or above target earnings, NFP’s share of total earnings would be equal to the percentage of the earnings acquired by NFP in the initial transaction, less any percentage due to additional management fees earned under the ongoing incentive plan, RTIP, PIP, or due to stock-based compensation awarded to principals.

The table below summarizes the results of operations of NFP’s reportable segments for the periods presented and also uses the following non-GAAP financial measures: (i) income before management fees, (ii) adjusted income before management fees (iii) management fees as a percentage of adjusted income before management fees and (iv) management fees (excluding accelerated vesting of certain RSUs).

 

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The Company defines income before management fees as income from operations excluding management fees, amortization, depreciation, impairment of intangible assets, gain or loss on the sale of businesses and change in estimated acquisition earn-out payables. Income before management fees is a metric management utilizes in its evaluation of the profitability of an NFP-owned business, before principals receive participation in the earnings.

The Company defines adjusted income before management fees as income before management fees excluding corporate income, which is the allocation of corporate revenue and expenses to businesses where management fees are earned by principals/an entity owned by the principals. The CCG and ICG’s corporate income includes revenue and expense allocations from the Company’s corporate shared services. As previously discussed, since the ASG is primarily comprised of NFPSI, an entity for which no management fees are paid and no earnings are shared with principals, all revenue and expenses from the ASG are considered a component of corporate income. The Company does not use these non-GAAP financial measures to evaluate entities for which no management fees are paid, such as NFPSI. Whether or not a principal participates in the earnings of a business is dependent on the specific characteristics and performance of that business.

Management fees as a percentage of adjusted income before management fees represents the percentage of earnings that is not retained by the Company as profit, but is paid out to principals. Management fees as a percentage of adjusted income before management fees may generally be lower for the CCG as compared to the ICG since in the last several years of acquisitions, the Company focused on acquiring larger businesses with a higher level of recurring revenue, such as benefits businesses in the CCG, and retaining a larger preferred position in the earnings of these businesses.

Management fees (excluding accelerated vesting of certain RSUs) shows management fees without the one-time impact of the accelerated vesting of certain RSUs on September 17, 2010. Management fees (excluding accelerated vesting of certain RSUs) as a percentage of adjusted income before management fees is a non-GAAP financial measure useful to investors because it shows the portion of earnings that would have been paid out to principals but for the disproportionate impact of the one-time accelerated vesting of certain RSUs.

 

    Corporate Client  Group
Three Months Ended
September 30,
    Individual Client Group
Three Months Ended

September 30,
    Advisor Services  Group
Three Months Ended
September 30,
    Total
Three Months  Ended
September 30,
 
    2011     2010     2011     2010     2011     2010     2011     2010  

Income from operations

  $ 13,155      $ 2,970      $ 3,094      $ (1,625   $ 1,898      $ 896      $ 18,147      $ 2,241   

Management fees

    19,276        24,600        13,925        28,866        —          —          33,201        53,466   

Amortization of intangibles

    5,622        5,402        2,726        2,856        —          —          8,348        8,258   

Depreciation

    1,363        1,599        927        1,065        836        353        3,126        3,017   

Impairment of goodwill and intangible assets

    —          —          2,466        —          —          —          2,466        —     

Gain on sale of businesses, net

    —          (125     40        25        —          —          40        (100

Change in estimated acquisition earn-out payables

    53        —          —          —          —          —          53        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before management fees

  $ 39,469      $ 34,446      $ 23,178      $ 31,187      $ 2,734      $ 1,249      $ 65,381      $ 66,882   

Corporate income

    5,535        5,848        4,356        3,628        (2,734     (1,249     7,157        8,227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted income before management fees

  $ 45,004      $ 40,294      $ 27,534      $ 34,815      $ —        $ —        $ 72,538      $ 75,109   

Management fees

    19,276        24,600        13,925        28,866        —          —          33,201        53,466   

Portion of management fees attributed to the accelerated vesting of certain RSUs

    —          7,394        —          6,001        —          —          —          13,395   

Management fees as a percentage of adjusted income before management fees

    42.8     61.1     50.6     82.9     N/M        N/M        45.8     71.2

Management fees (excluding accelerated vesting of certain RSUs)

    19,276        17,206        13,925        22,865        —          —          33,201        40,071   

Management fees (excluding accelerated vesting of certain RSUs) as a % of adjusted income before management fees

    42.8     42.7     50.6     65.7     N/M        N/M        45.8     53.4

 

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    Corporate Client  Group
Nine Months Ended
September 30,
    Individual Client  Group
Nine Months Ended
September 30,
    Advisor Services  Group
Nine Months Ended
September 30,
    Total
Nine Months  Ended
September 30,
 
    2011     2010     2011     2010     2011     2010     2011     2010  

Income from operations

  $ 34,388      $ 30,035      $ 7,850      $ 6,013      $ 7,110      $ 4,557      $ 49,348      $ 40,605   

Management fees

    51,136        54,771        38,573        54,879        —          —          89,709        109,650   

Amortization of intangibles

    15,901        16,003        8,306        8,799        —          —          24,207        24,802   

Depreciation

    4,602        4,674        3,209        3,345        1,429        1,009        9,240        9,028   

Impairment of goodwill and intangible assets

    —          1,931        3,386        970        —          —          3,386        2,901   

Gain on sale of businesses, net

    (47     (8,287     100        (1,734     —          —          53        (10,021

Change in estimated acquisition earn-out payables

    53        —          —          —          —          —          53        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before management fees

  $ 106,033      $ 99,127      $ 61,424      $ 72,272      $ 8,539      $ 5,566      $ 175,996      $ 176,965   

Corporate income

    18,892        18,836        12,670        11,928        (8,539     (5,566     23,023        25,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted income before management fees

  $ 124,925      $ 117,963      $ 74,094      $ 84,200      $ —        $ —        $ 199,019      $ 202,163   

Management fees

    51,136        54,771        38,573        54,879        —          —          89,709        109,650   

Portion of management fees attributed to the accelerated vesting of certain RSUs

    —          7,394        —          6,001        —          —          —          13,395   

Management fees as a percentage of adjusted income before management fees

    40.9     46.4     52.1     65.2     N/M        N/M        45.1     54.2

Management fees (excluding accelerated vesting of certain RSUs)

    51,136        47,377        38,573        48,878        —          —          89,709        96,255   

Management fees (excluding accelerated vesting of certain RSUs) as a % of adjusted income before management fees

    40.9     40.2     52.1     58.1     N/M        N/M        45.1     47.6

 

N/M indicates the metric is not meaningful

The Company uses adjusted income before management fees, management fees as a percentage of adjusted income before management fees and management fees (excluding accelerated vesting of certain RSUs) to evaluate how much of the reportable segment’s margin and margin growth is being shared with principals. This management fee percentage is a variable, not a fixed, ratio. Management fees as a percentage of adjusted income before management fees will fluctuate based upon the aggregate mix of earnings performance by individual businesses. It is based on the percentage of the Company’s earnings that are acquired at the time of acquisition (as may be adjusted for restructures), the performance relative to NFP’s preferred position in the earnings and the growth of the individual businesses and in the aggregate. Management fees may be higher during periods of strong growth due to performance that reached target levels and/or the increase in incentive accruals. Where business earnings decrease, management fees and management fees as a percentage of adjusted income before management fees may be lower as a business’s earnings fall below target and incentive accruals are either reduced or eliminated. In addition, because management fees earned are based on a business’s cumulative performance generally through a calendar year, to the extent that a business’s performance improves through the year, whether by revenue growth or expense reductions, the management fee as a percentage of adjusted income before management fees may likewise increase through the year. For example, if a business has base earnings and target earnings of $1.0 million and $2.0 million, respectively, and if the business’s cumulative earnings are $0.7 million for the first nine months of the year, no management fee would be earned because the cumulative earnings were below the pro rata base earnings for the three quarters of $0.75 million and the management fee percentage would be zero. In the remaining fourth quarter, if the business was able to achieve cumulative earnings of $2.0 million, the management fee earned would be $1.0 million and the management fee percentage would be equal to approximately 77% for the quarter, while it would be 50% for the full year. Additionally, management fees for the three and nine months ended September 30, 2010 were disproportionately impacted by the one-time accelerated vesting of certain RSUs on September 17, 2010. Further, since NFP retains a cumulative preferred interest in base earnings, the relative percentage of management fees generally decreases as earnings decline. For businesses that do not achieve base earnings, principals typically earn no management fee. Thus, a principal generally earns more management fees only when business earnings grow and, conversely, principals earn less when business earnings decline. This structure provides the Company with protection against earnings shortfalls through reduced management fee expense; in this manner the interests of the principals and shareholders remain aligned.

Management uses these non-GAAP financial measures, in conjunction with GAAP measures, to evaluate the performance of the CCG and ICG. This cannot be effectively illustrated using the corresponding GAAP measures as management fees, the impact of the accelerated vesting of certain RSUs and corporate income would be included in these GAAP measures and do not show the standalone profitability of the acquired businesses. On a reportable segment and individual subsidiary basis, the Company uses these measures to help the Company determine where to allocate corporate and other resources to assist principals to develop additional sources of revenue and improve their earnings performance. The Company may assist these businesses in expense reductions, cross selling, providing new products or services, technology improvements, providing capital for sub-acquisitions or coordinating internal mergers. On a macro level, the Company uses these measurements to help it evaluate broad performance of products and services which, in turn, helps shape the Company’s acquisition policy. The Company has emphasized acquiring businesses with a higher level of recurring revenue, such as benefits businesses in the CCG, and those which expand the Company’s platform capabilities, such as property and casualty businesses in the CCG. The Company also may use these measures to help it assess the level of economic ownership to retain in new acquisitions or existing businesses. Finally, the Company uses these measures to monitor the effectiveness of its incentive plans.

For the nine months ended September 30, 2011, CCG’s management fees (excluding accelerated vesting of certain RSUs) as a percentage of adjusted income before management fees increased to 40.9% from 40.2% for the nine months ended September 30, 2010. This increase was commensurate with the increase in adjusted income before management fees and higher incentive accruals relating to the improvement in firm performance. For the nine months ended September 30, 2011, ICG’s management fees (excluding accelerated vesting of certain RSUs) as a percentage of adjusted income before management fees declined to 52.1% from 58.1% for the nine months ended September 30, 2010. This decline was commensurate with the decrease in adjusted income before management relating to firm performance.

 

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Amortization of intangibles. The Company incurs amortization expense related to the amortization of certain identifiable intangible assets.

Depreciation. The Company incurs depreciation expense related to capital assets, such as investments in technology, office furniture and equipment, as well as amortization for its leasehold improvements. Depreciation expense related to the Company’s businesses as well as allocated amounts related to corporate shared services are recorded within this line item.

Impairment of goodwill and intangible assets. The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with GAAP. See “Note 2—Summary of Significant Accounting Policies” and “Note 5—Goodwill and Other Intangible Assets” to the Consolidated Financial Statements (Unaudited) contained in this report.

(Gain) loss on sale of businesses. From time to time, NFP has disposed of businesses or certain assets of businesses. In these dispositions, NFP may realize a gain or loss on such sale.

Change in estimated acquisition earn-out payables. The recorded purchase price for all acquisitions consummated after January 1, 2009 includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of these estimated earn-out obligations are recorded in the Consolidated Statements of Income when incurred.

Incentive Plans

NFP views incentive plans as an essential component in compensating principals and as a way to activate growth across the Company. For a more detailed discussion of NFP’s incentive plans, see “Note 11—Commitments and Contingencies—Incentive Plans” to the Consolidated Financial Statements (Unaudited) contained in this report.

Three months ended September 30, 2011 compared with three months ended September 30, 2010

Corporate Client Group

The CCG accounted for 42.0% of NFP’s revenue for the three months ended September 30, 2011. The financial information below relates to the CCG for the periods presented (in millions):

 

     Three Months Ended September 30,  
     2011     2010     $ Change     % Change  

Revenue:

        

Commissions and fees

   $ 105.7      $ 94.6      $ 11.1        11.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Commissions and fees

     11.7        9.7        2.0        20.6

Compensation expense

     36.0        32.1        3.9        12.1

Non-compensation expense

     18.6        18.4        0.2        1.1

Management fees

     19.3        24.6        (5.3     -21.5

Amortization of intangibles

     5.6        5.4        0.2        3.7

Depreciation

     1.4        1.6        (0.2     -12.5

Impairment of goodwill and intangible assets

     —          —          —          N/M   

Gain on sale of businesses, net

     —          (0.1     0.1        -100.0

Change in estimated acquisition earn-out payables

     0.1        —          0.1        N/M   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     92.7        91.7        1.0        1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 13.0      $ 2.9      $ 10.1        348.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Commission expense ratio

     11.1     10.3    

Compensation expense ratio

     34.1     33.9    

Non-compensation expense ratio

     17.6     19.5    

Management fees as a percentage of revenue

     18.3     26.0    

 

N/M indicates the metric is not meaningful

For the three months ended September 30, 2011 and 2010, the corporate benefits business line accounted for approximately 81.8% and 84.5% of the CCG’s revenue, respectively. For the three months ended September 30, 2011 and 2010, the executive benefits business line accounted for approximately 9.4% and 10.6% of the CCG’s revenue, respectively. For the three months ended September 30, 2011 and 2010, the property and casualty business line accounted for approximately 8.8% and 4.9% of the CCG’s revenue, respectively.

 

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Summary

Income from operations. Income from operations increased $10.1 million in the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. Income from operations increased primarily due to an increase in revenue, driven approximately equally by both newly-acquired businesses and growth at existing businesses, and a decrease in management fees, due largely to the expense for last year’s accelerated vesting of RSUs, partially offset by increases in commissions and fees, compensation, and non-compensation expense.

Revenue

Commissions and fees. Commissions and fees revenue for the third quarter of 2011 increased $11.1 million, of which approximately $6.7 million of the total increase represented commissions and fees revenue from acquisitions that had no comparable operations in the same period of 2010. Excluding the impact of these acquisitions, existing firms within the CCG saw an increase in revenue of $4.4 million, driven by new clients and product sales.

Operating expenses

Commissions and fees. Commissions and fees expense increased $2.0 million for the third quarter of 2011, of which approximately $1.0 million of the total increase represented commissions and fees expense from acquisitions that had no comparable operations in the same period of 2010. Excluding the impact of these acquisitions, the percentage increase in commission expense in the CCG was due to the timing of revenue received for businesses with higher payout margins.

Compensation expense. Compensation expense increased $3.9 million in the three months ended September 30, 2011 compared with the same period last year. Approximately $2.5 million of the total increase represented compensation expense from acquisitions that had no comparable operations in the same period of 2010. Excluding these acquisitions, compensation expense increased by $1.4 million, due to increased headcount at existing firms and increases in salaries and wages.

Non-compensation expense. Non-compensation expense remained relatively stable in the three months ended September 30, 2011 compared with the same period last year, with only a slight increase of $0.2 million. Excluding a reduction in corporate overhead of $1.4 million, non-compensation expense increased by $1.7 million, primarily due to acquisitions.

Management fees. Management fees decreased $5.3 million in the three months ended September 30, 2011 compared with the same period last year. Adjusted income before management fees was $45.0 million for the three months ended September 30, 2011, an increase of $4.7 million, or 11.7%, from adjusted income before management fees of $40.3 million in the same period last year. Management fees as a percentage of adjusted income before management fees decreased to 42.8% for the three months ended September 30, 2011 from 61.1% for the three months ended September 30, 2010. Included in CCG management fees for the third quarter of 2010 was $7.4 million of stock-based compensation related to the accelerated vesting of certain RSUs to principals. Excluding the impact of the accelerated vesting of certain RSUs, management fees as percentage of adjusted income before management fees slightly increased from 42.7% for the three months ended September 30, 2010 to 42.8% for the three months ended September 30, 2011. Excluding the impact of this accelerated vesting, the increase in management fees was commensurate with an improvement in adjusted income before management fees.

 

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Individual Client Group

The ICG accounted for 33.7% of NFP’s revenue for the three months ended September 30, 2011. The financial information below relates to the ICG for the periods presented (in millions):

 

     Three Months Ended September 30,  
     2011     2010     $ Change     % Change  

Revenue:

        

Commissions and fees

   $ 84.8      $ 91.9      $ (7.1     -7.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Commissions and fees

     18.6        18.8        (0.2     -1.1

Compensation expense

     26.6        25.9        0.7        2.7

Non-compensation expense

     16.5        16.0        0.5        3.1

Management fees

     13.9        28.9        (15.0     -51.9

Amortization of intangibles

     2.7        2.9        (0.2     -6.9

Depreciation

     0.9        1.0        (0.1     -10.0

Impairment of goodwill and intangible assets

     2.5        —          2.5        N/M   

Gain on sale of businesses, net

     —          —          —          N/M   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     81.7        93.5        (11.8     -12.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 3.1      $ (1.6   $ 4.7        -293.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Commission expense ratio

     21.9     20.5    

Compensation expense ratio

     31.4     28.2    

Non-compensation expense ratio

     19.5     17.4    

Management fees as a percentage of revenue

     16.4     31.4    

 

N/M indicates the metric is not meaningful

Summary

Income (loss) from operations. Income from operations increased $4.7 million in the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. Income from operations increased primarily due to a decrease in management fees, largely from the expense for last year’s accelerated vesting of RSUs, partially offset by a decrease in revenue driven by challenging conditions in the life insurance market, and an increase in impairments.

Revenue

Commissions and fees. Commissions and fees revenue declined $7.1 million in the three months ended September 30, 2011 compared with the same period last year. Results in the ICG were driven by continued marketplace uncertainty facing the life insurance business.

Operating expenses

Commissions and fees. Commissions and fees expense decreased $0.2 million in the three months ended September 30, 2011 compared with the same period last year. Commissions and fees expense decreased due to declines in overall revenue.

Compensation expense. Compensation expense increased $0.7 million in the three months ended September 30, 2011 compared with the same period last year. The increase related to the conversion of several independent producers to employees.

Non-compensation expense. Non-compensation expense increased $0.5 million in the three months ended September 30, 2011 compared with the same period last year. The increase was a result of an increase in a firm’s rent and insurance expense, offset by overall reductions in ICG spending.

 

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Management fees. Management fees decreased $15.0 million in the three months ended September 30, 2011 compared with the same period last year. Adjusted income before management fees was $27.5 million for the three months ended September 30, 2011, a decrease of $7.3 million, or 20.9%, from adjusted income before management fees of $34.8 million in the same period last year. Management fees as a percentage of adjusted income before management fees decreased to 50.6% for the three months ended September 30, 2011 from 82.9% for the three months ended September 30, 2010. Included in management fees for the third quarter of 2010 was $6.0 million of stock-based compensation related to the accelerated vesting of certain RSUs to principals, as well as $2.3 million in incentive accruals. Excluding the impact of the accelerated vesting of certain RSUs, management fees as percentage of adjusted income before management fees declined from 65.7% for the three months ended September 30, 2010 to 50.6% for the three months ended September 30, 2011. Excluding the impact of this accelerated vesting, the percentage decrease in management fees is related to the decline in adjusted income before management fees and a reduction in incentive accruals.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets increased $2.5 million. The impairment in 2011 related to a firm that will be disposed of in the fourth quarter of 2011.

Advisor Services Group

The ASG accounted for 24.3% of NFP’s revenue for the three months ended September 30, 2011. The financial information below relates to the ASG for the periods presented (in millions):

 

     Three Months Ended September 30,  
     2011     2010     $ Change     % Change  

Revenue:

        

Commissions and fees

   $ 61.0      $ 51.0      $ 10.0        19.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Commissions and fees

     50.0        42.2        7.8        18.5

Compensation expense

     4.0        4.1        (0.1     -2.4

Non-compensation expense

     4.2        3.4        0.8        23.5

Management fees

     —          —          —          N/M   

Amortization of intangibles

     —          —          —          N/M   

Depreciation

     0.8        0.4        0.4        100.0

Impairment of goodwill and intangible assets

     —          —          —          N/M   

Gain on sale of businesses, net

     —          —          —          N/M   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     59.0        50.1        8.9        17.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 2.0      $ 0.9      $ 1.1        122.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Commission expense ratio

     82.0     82.7    

Compensation expense ratio

     6.6     8.0    

Non-compensation expense ratio

     6.9     6.7    

Management fees as a percentage of revenue

     N/M        N/M       

 

N/M indicates the metric is not meaningful

Summary

Income from operations. Income from operations increased $1.1 million in the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. Income from operations increased due to an increase in revenue which was partially offset by a commensurate increase in commissions and fees expense, as well as increases in non-compensation and depreciation expense.

Revenue

Commissions and fees. Commissions and fees increased $10.0 million in the three months ended September 30, 2011 compared to the same period last year. Results in the ASG were driven by general improvements in the financial markets, particularly in increased sales of certain variable annuity products and a slight increase in assets under management. Assets under management for the ASG increased 1.3 % to $9.0 billion as of September 30, 2011 compared to $8.9 billion as of September 30, 2010.

 

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Table of Contents

Operating expenses

Commissions and fees. Commissions and fees expense increased $7.8 million in the three months ended September 30, 2011 compared with the same period last year. The increase in commission payouts at the ASG was proportional to the increase in revenue.

Non-compensation expense. Non-compensation expense increased $0.8 million in the three months ended September 30, 2011 compared with the same period last year. The increase primarily relates to increases in professional fees and regulatory-related fees.

Corporate Items

The financial information below relates to items not allocated to any of NFP’s three reportable segments for the periods presented (in millions):

 

     Three Months Ended September 30,  
     2011     2010     $ Change     % Change  

Consolidated income from operations

   $ 18.1      $ 2.2      $ 15.9        722.7

Interest income

     0.7        0.9        (0.2     -22.2

Interest expense

     (4.0     (5.0     1.0        -20.0

Gain on early extinguishment of debt

     —          9.7        (9.7     -100.0

Other, net

     1.3        2.8        (1.5     -53.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income and expenses, net

     (2.0     8.4        (10.4     -123.8

Income before income taxes

     16.1        10.6        5.5        51.9

Income tax expense

     6.8        2.4        4.4        183.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9.3      $ 8.2      $ 1.1        13.4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

N/M indicates the metric is not meaningful

Interest expense. Interest expense decreased $1.0 million in the three months ended September 30, 2011 compared with the same period last year. The decrease was primarily due to NFP’s 2010 refinancing, which involved terminating NFP’s prior credit facility and entering into a new $225.0 million credit facility (the “2010 Credit Facility”), as well as retiring NFP’s 0.75% convertible senior notes due February 1, 2012 (the “2007 Notes”) and issuing new 4.0% convertible senior notes due June 15, 2017 (the “2010 Notes”). The refinancing resulted in a $1.2 million write-off of prepaid expenses relating to the 2006 Credit Facility, during the third quarter of 2010.

Gain on early extinguishment of debt. For the three months ended September 30, 2010, NFP recognized a pre-tax gain of approximately $9.7 million related to the tender offer for its 2007 Notes which expired in July 2010.

Other, net. Other, net income, which primarily consists of income from equity method investments, rental income, and net expenses relating to the settlement of legal matters, decreased $1.5 million in the three months ended September 30, 2011 compared with the same period last year. The decline of other, net relates to increases in losses during the three months ended September 30, 2011 relating primarily to a decline in the cash surrender value relating to the Company’s deferred compensation plan and a provision on a loss contingency. During the three months ended September 30, 2010, the Company recognized a gain in the amount of $0.6 million, relating to a transaction that increased the Company’s equity investment from a non-controlling interest to a controlling interest, and as a result became a consolidated subsidiary of NFP.

Income tax expense. Income tax expense was $6.8 million in the three months ended September 30, 2011 compared with income tax expense of $2.4 million in the same period during the prior year. The effective tax rate for the three months ended September 30, 2011 was 42.3%. This compares with an effective tax rate of 22.9% for the three months ended September 30, 2010. The effective tax rate for the third quarter of 2010 was lower than the effective tax rate for the third quarter of 2011 primarily due to tax deductions relating from dispositions during 2010, a reduction in unrecognized tax benefits due to settlements with tax authorities, and an increase in 2011 in deferred taxes for future repatriation of foreign earnings. The estimated effective tax rate may be affected by future impairments, restructurings, state tax changes and factors which may be recognized as discrete items in the quarters in which they arise and, as a result, may impact income tax expense both in terms of absolute dollars and as a percentage of income before income taxes.

 

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Nine months ended September 30, 2011 compared with nine months ended September 30, 2010

Corporate Client Group

The CCG accounted for 40.8% of NFP’s revenue for the nine months ended September 30, 2011. The financial information below relates to the CCG for the periods presented (in millions):

 

     Nine Months Ended September 30,  
     2011     2010     $ Change     % Change  

Revenue:

        

Commissions and fees

   $ 295.6      $ 279.3      $ 16.3        5.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Commissions and fees

     31.4        25.9        5.5        21.2

Compensation expense

     103.6        97.5        6.1        6.3

Non-compensation expense

     54.6        56.8        (2.2     -3.9

Management fees

     51.1        54.7        (3.6     -6.6

Amortization of intangibles

     15.9        16.0        (0.1     -0.6

Depreciation

     4.6        4.7        (0.1     -2.1

Impairment of goodwill and intangible assets

     —          1.9        (1.9     -100.0

Gain on sale of businesses, net

     —          (8.2     8.2        -100.0

Change in estimated acquisition earn-out payables

     0.1        —          0.1        N/M   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     261.3        249.3        12.0        4.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 34.3      $ 30.0      $ 4.3        14.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Commission expense ratio

     10.6     9.3    

Compensation expense ratio

     35.0     34.9    

Non-compensation operating expense ratio

     18.5     20.3    

Management fees as a percentage of revenue

     17.3     19.6    

Summary

Income from operations. Income from operations increased $4.3 million in the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010. Income from operations increased primarily due to an increase in revenue, driven by both newly-acquired businesses and growth at existing businesses, and a decrease in management fees, due largely to the expense for last year’s accelerated vesting of RSUs, as well as decreases in non-compensation expense, management fees, and impairments, partially offset by increases in commissions and fees and compensation expense and a decrease in gain on sale of businesses, net.

Revenue

Commissions and fees. Commissions and fees revenue for the nine months ended September 30, 2011 increased $16.3 million, of which approximately $8.2 million of the total increase represented commissions and fees revenue from acquisitions that had no comparable operations in the same period of 2010. After the impact from dispositions of $4.1 million, the remaining net increase of $12.2 million represented growth within existing firms in the CCG, driven by new clients and product sales.

Operating expenses

Commissions and fees. Commissions and fees expense increased $5.5 million in the nine months ended September 30, 2011, of which approximately $1.3 million of the total increase represented commissions and fees expense from acquisitions that had no comparable operations in the same period of 2010. The overall increase in commissions and fees expense, excluding the impact of acquisitions, was largely attributable to the growth in one business that is being serviced through an independent contractor whose expense runs through commissions rather than compensation. Excluding the impact of this business, commission expense increased in line with revenue.

Compensation expense. Compensation expense increased $6.1 million in the nine months ended September 30, 2011, of which approximately $2.9 million of the total increase represented compensation expense from acquisitions that had no comparable operations in the same period of 2010. After the impact from dispositions of $1.6 million, compensation expense increased by $4.8 million, due to increased headcount at existing firms and increases in salaries and wages.

 

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Non-compensation expense. Non-compensation expense decreased $2.2 million in the nine months ended September 30, 2011 compared with the same period last year. Excluding dispositions of $1.4 million, non-compensation expense remained relatively flat.

Management fees. Management fees decreased $3.6 million in the nine months ended September 30, 2011 compared with the same period last year. Adjusted income before management fees was $125.0 million for the nine months ended September 30, 2011, an increase of $7.0 million, or 5.9%, from adjusted income before management fees of $118.0 million in the same period last year. Management fees as a percentage of adjusted income before management fees declined to 40.9% for the nine months ended September 30, 2011 from 46.4% for the nine months ended September 30, 2010. Included in CCG management fees for the third quarter of 2010 was $7.4 million of stock-based compensation relating to the accelerated vesting of certain RSUs. Excluding the impact of the accelerated vesting of certain RSUs, management fees as a percentage of adjusted income before management fees increased from 40.2% for the nine months ended September 30, 2010 to 40.9% for the nine months ended September 30, 2011. Excluding the impact of this accelerated vesting, the percentage increase in management fees was commensurate with the increase in adjusted income before management fees and higher incentive accruals relating to the improvement in firm performance.

Gain on sale of businesses. During the nine months ended September 30, 2010, the CCG recognized a gain on sale of businesses totaling $8.2 million. During the nine months ended September 30, 2010, the CCG disposed of three subsidiaries and contributed certain assets of a wholly-owned subsidiary to a newly formed entity in exchange for preferred units. The contribution of assets resulted in a deconsolidation and remeasurement of the Company’s retained investment for an overall gain of $9.2 million. During the nine months ended September 30, 2011, there were no such transactions.

Individual Client Group

The ICG accounted for 33.8 % of NFP’s revenue for the nine months ended September 30, 2011. The financial information below relates to the ICG for the periods presented (in millions):

 

     Nine Months Ended September 30,  
     2011     2010     $ Change     % Change  

Revenue:

        

Commissions and fees

   $ 244.4      $ 262.0      $ (17.6     -6.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Commissions and fees

     52.8        57.4        (4.6     -8.0

Compensation expense

     81.7        82.0        (0.3     -0.4

Non-compensation expense

     48.5        50.4        (1.9     -3.8

Management fees

     38.6        54.9        (16.3     -29.7

Amortization of intangibles

     8.3        8.8        (0.5     -5.7

Depreciation

     3.2        3.3        (0.1     -3.0

Impairment of goodwill and intangible assets

     3.4        1.0        2.4        240.0

Gain on sale of businesses, net

     0.1        (1.8     1.8        -100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     236.6        256.0        (19.5     -7.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 7.8      $ 6.0     $ 1.9        31.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Commission expense ratio

     21.6     21.9    

Compensation expense ratio

     33.4     31.3    

Non-compensation operating expense ratio

     19.8     19.2    

Management fees as a percentage of revenue

     15.8     21.0    

 

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Table of Contents

Summary

Income from operations. Income from operations increased $1.9 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Income from operations increased due to decreases in commissions and fees, compensation, non-compensation, management fees, largely from the expense for last year’s accelerated vesting of RSUs, and a decline in firm performance, amortization, and depreciation expense. These decreases were partially offset by decreases in revenue and gains on sale of businesses, and an increase in impairments.

Revenue

Commissions and fees. Commissions and fees decreased $17.6 million in the nine months ended September 30, 2011 compared with the same period last year. Excluding the impact of dispositions, revenue from existing firms within the ICG declined by $16.1 million. Results in the ICG were driven by marketplace uncertainty facing the life insurance business during 2011.

Operating expenses

Commissions and fees. Commissions and fees expense decreased $4.6 million in the nine months ended September 30, 2011 compared with the same period last year. Commissions and fees expense decreased due to declines in overall revenue.

Non-compensation expense. Non-compensation expense decreased $1.9 million in the nine months ended September 30, 2011 compared with the same period last year. The decline was a result of overall reductions in ICG spending.

Management fees. Management fees decreased $16.3 million in the nine months ended September 30, 2011 compared with the same period last year. Adjusted income before management fees was $74.1 million for the nine months ended September 30, 2011 compared with $84.2 million for the nine months ended September 30, 2010. Management fees as a percentage of adjusted income before management fees decreased to 52.1% for the nine months ended September 30, 2011 from 65.2% for the nine months ended September 30, 2010. Included in ICG management fees for the nine months ended September 30, 2010 was $6.0 million related to the accelerated vesting of certain RSUs as well as $2.3 million in incentive accruals. Excluding the impact of the accelerated vesting of certain RSUs, management fees as percentage of adjusted income before management fees declined from 58.1% for the nine months ended September 30, 2010 to 52.1% for the nine months ended September 30, 2011. Excluding the impact of this accelerated vesting, the percentage decrease in management fees is related to the decline in adjusted income before management fees.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets increased $2.4 million. The impairments in 2011 relate to one firm that was disposed of in the third quarter of 2011, and one firm that will be disposed of in the fourth quarter of 2011.

Gain on sale of businesses. During the nine months ended September 30, 2011, the ICG recognized a net loss of less than $0.1 million, from the disposition of one subsidiary. During the nine months ended September 30, 2010, the ICG recognized a net gain from the disposition of seven subsidiaries and the sale of certain assets of another subsidiary totaling $1.8 million.

 

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Table of Contents

Advisor Services Group

The ASG accounted for 25.4% of NFP’s revenue for the nine months ended September 30, 2011. The financial information below relates to the ASG for the periods presented (in millions):

 

     Nine Months Ended September 30,  
     2011     2010     $ Change      % Change  

Revenue:

         

Commissions and fees

   $ 184.2      $ 156.3      $ 27.9         17.9
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating expenses:

         

Commissions and fees

     152.1        129.2        22.9         17.7

Compensation expense

     11.8        11.6        0.2         1.7

Non-compensation expense

     11.7        9.9        1.8         18.2

Management fees

     —          —          —           N/M   

Amortization of intangibles

     —          —          —           N/M   

Depreciation

     1.4        1.0        0.4         40.0

Impairment of goodwill and intangible assets

     —          —          —           N/M   

Gain on sale of businesses, net

     —          —          —           N/M   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     177.0        151.7        25.3         16.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

   $ 7.2      $ 4.6      $ 2.6         56.5
  

 

 

   

 

 

   

 

 

    

 

 

 

Commission expense ratio

     82.6     82.7     

Compensation expense ratio

     6.4     7.4     

Non-compensation operating expense ratio

     6.4     6.3     

Management fees as a percentage of revenue

     N/M        N/M        

Summary

Income from operations. Income from operations increased $2.6 million in the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010. Income from operations increased due to an increase in revenue which was partially offset by a commensurate increase in commissions and fees expense.

Revenue

Commissions and fees. Commissions and fees increased $27.9 million in the nine months ended September 30, 2011 compared to the same period last year. Results in the ASG were driven by an increase in sales of certain variable annuity products and a slight increase in assets under management. Assets under management for the ASG increased 1.3% to $9.0 billion as of September 30, 2011 compared to $8.9 billion as of September 30, 2010.

Operating expenses

Commissions and fees. Commissions and fees expense increased $22.9 million, in the nine months ended September 30, 2011 compared with the same period last year. The increase in commissions and fees payouts at the ASG was generally commensurate with the increase in revenue.

Non-compensation expense. Non-compensation expense increased $1.8 million in the three months ended September 30, 2011 compared with the same period last year. The increase primarily relates to increases in professional fees and regulatory-related fees.

 

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Corporate Items

The financial information below relates to items not allocated to any of NFP’s three reportable segments for the periods presented (in millions):

 

     Nine Months Ended September 30,  
     2011     2010     $ Change     % Change  

Consolidated income (loss) from operations

   $ 49.3      $ 40.6      $ 8.7        21.4

Interest income

     2.6        2.6        —          0.0

Interest expense

     (11.8     (14.4     2.6        -18.1

Gain on early extinguishment of debt

     —          9.7        (9.7     (1.0 )% 

Other, net

     5.8        5.5        0.3        5.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income and expenses, net

     (3.4     3.4        (6.8     -200.0

Income before income taxes

     46.0        44.0        2.0        4.5

Income tax expense

     20.3        16.7        3.6        21.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 25.7      $ 27.3      $ (1.6     -5.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense. Interest expense decreased $2.6 million in the nine months ended September 30, 2011 compared with the same period last year. The decrease was primarily due to NFP’s 2010 refinancing, which involved terminating NFP’s prior credit facility and entering into the 2010 Credit Facility, as well as retiring NFP’s 2007 Notes and issuing the 2010 Notes. Interest expense accretion declined from $7.0 million during the nine months ended September 30, 2010 to $3.2 million for the nine months ended September 30, 2011. This decline in interest expense accretion was partially offset by an increase of $0.7 million relating to the higher coupon rate on NFP’s 2010 Notes and an increase in the average borrowings relating to the 2010 Credit Facility.

Gain on early extinguishment of debt. For the nine months ended September 30, 2010, NFP recognized a pre-tax gain of approximately $9.7 million related to the tender offer for its 2007 Notes which expired in July 2010.

Other, net. Other, net income, which primarily consists of income from equity method investments, rental income, and net expenses relating to the settlement of legal matters, increased $0.3 million in the nine months ended September 30, 2011 compared with the same period last year. The increase in other, net is due to increases in gains during the nine months ended September 30, 2011 relating to increases in the cash surrender value and depreciation in investment earnings relating to the Company’s deferred compensation plan of $0.6 million, an increase in rental income of $0.6 million, an increase in earnings from non-controlling interest in equity investments of $0.4 million, and $1.0 million relating to the satisfaction of amounts due from a principal. These gains were offset by a provision on a loss contingency, a payment that was attributable to the settlement of a legal matter involving a Company subsidiary, and the recognition of a gain in the third quarter of 2010, relating to a transaction that increased the Company’s equity investment from a non-controlling interest to a controlling interest, and as a result became a consolidated subsidiary of NFP.

Income tax expense. Income tax expense was $20.3 million in the nine months ended September 30, 2011 compared with income tax expense of $16.7 million in the same period during the prior year. The effective tax rate for the nine months ended September 30, 2011 was 44.2%. This compares with an effective tax rate of 38.0% for the nine months ended September 30, 2010. The effective tax rate for the nine months ended September 30, 2010 was lower than the effective tax rate for the nine months ended September 30, 2011, primarily due to tax deductions relating to dispositions during 2010, a reduction in unrecognized tax benefits due to settlements with tax authorities, and an increase in 2011 in deferred taxes for future repatriation of foreign earnings. The estimated effective tax rate may be affected by future impairments, restructurings, state tax changes and factors which may be recognized as discrete items in the quarters in which they arise and, as a result, may impact income tax expense both in terms of absolute dollars and as a percentage of income before income taxes.

 

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Liquidity and Capital Resources

Liquidity refers to the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash. NFP derives liquidity primarily from cash generated by the Company’s businesses and from financing activities. For a detailed discussion of the recapitalization transactions NFP undertook in 2010, see “Note 7—Borrowings” to the Consolidated Financial Statements (Unaudited) contained in this report.

The Company has historically experienced its highest cash usage during the first quarter of each year as balances due to principals and/or certain entities they own for earned management fees above target earnings in the prior year calendar are calculated and paid out, more acquisitions are completed and the Company experiences the seasonal revenue and earnings decline at the beginning of the year. In many prior years this has led to borrowings on NFP’s applicable credit facility in the first quarter. The borrowed amounts are then typically repaid as the year progresses, when operating cash flow typically increases as earnings increase.

However, this pattern has not occurred in 2011, because cash flow was sufficient to fund management fees to principals of firms that performed in excess of target earnings, and acquisitions occurred primarily in the third quarter. In addition, the cash balance on hand at the beginning of the year was higher than it had been in the previous several years. The borrowing pattern could change to the extent acquisitions or sub-acquisitions increase, or as capital is deployed for other uses.

A summary of the changes in cash flow data is provided as follows:

 

     Nine Months Ended September 30,  
(in thousands)    2011     2010  

Net cash flows provided by (used in):

    

Operating activities

   $ 79,770      $ 76,372   

Investing activities

     (54,245     (3,734

Financing activities

     (38,357     (33,747
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     (12,832     38,891   

Cash and cash equivalents - beginning of period

     128,830        55,994   
  

 

 

   

 

 

 

Cash and cash equivalents - end of period

   $ 115,998      $ 94,885   
  

 

 

   

 

 

 

NFP periodically assesses the impact of market developments, including reviewing access to liquidity in the capital and credit markets. Given NFP’s recapitalization transactions, which took place in 2010, the Company anticipates that short/medium-term liquidity and capital needs have currently been addressed, although such needs may change in the future. Further, the Company’s ability to access capital is subject to the restrictions in the 2010 Credit Facility. To the extent that financing needs change due to changing business needs or to the extent the general economic environment changes, an evaluation of access to the credit markets and capital will be performed. Continuing uncertain conditions in these markets may adversely affect the Company. See “Note 7—Borrowings” to the Consolidated Financial Statements (Unaudited) contained in this report for a discussion of the 2010 Credit Facility.

NFP filed a shelf registration statement on Form S-3 with the SEC on August 21, 2009. The shelf registration statement provides NFP with the ability to offer, from time to time and subject to market conditions, debt securities, preferred stock or common stock for proceeds in the aggregate amount of up to $80.0 million. In addition, up to 5,000,000 shares of NFP common stock may be sold pursuant to the registration statement by the selling stockholders described therein. The shelf registration statement is intended to give NFP greater flexibility to efficiently raise capital and put the Company in a position to take advantage of favorable market conditions as they arise.

On April 28, 2011, NFP’s Board of Directors authorized the repurchase of up to $50.0 million of NFP’s common stock on the open market, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors, including capital availability, share price and market conditions. As of September 30, 2011, 2,421,700 shares were repurchased under this program at a weighted average cost of $11.79 per share and a total cost of approximately $28.6 million. See also “Note 9—Stockholders’ Equity—Stock Repurchases” to the Consolidated Financial Statements (Unaudited) contained in this report.

 

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Operating Activities

During the nine months ended September 30, 2011, cash provided by operating activities was approximately $79.8 million compared with cash provided by operating activities of $76.4 million for the nine months ended September 30, 2010. The increase in operating cash flow for the nine months ended September 30, 2011 as compared with the prior period was primarily due to decreases in notes receivable as cash collections for principal balances have increased, and a decrease in other current assets as the Company had a tax refund receivable in the prior period, offset by a decrease in accounts payable related to commission payments on a particularly large transaction that was accrued for at December 31, 2010.

Some of the Company’s businesses maintain premium trust accounts, which represent payments collected from policyholders on behalf of carriers. Funds held in these accounts are invested in cash, cash equivalents and securities purchased under resale agreements overnight. At September 30, 2011, the Company had cash, cash equivalents and securities purchased under resale agreements in premium trust accounts listed as fiduciary funds related to premium trust accounts on its balance sheet of $79.6 million, a decrease of $3.0 million from the balance of $82.6 million from December 31, 2010, offset by a corresponding premium payable to carriers of $83.4 million at September 30, 2011 compared with $96.4 million at September 30, 2010. Changes in these accounts are the result of timing of payments collected from insureds on behalf of insurance carriers.

Investing Activities

During the nine months ended September 30, 2011, cash used in investing activities was $54.2 million, which was primarily due to $6.4 million paid for purchases of property and equipment and approximately $48.5 million paid as payments for businesses. During the nine months ended September 30, 2010, cash used in investing activities was $3.7 million, which was primarily due to contingent consideration payments of $10.8 million and $9.3 million paid for purchases of property and equipment, offset by $5.6 million in proceeds from the sale of businesses and the release of $10.0 million in restricted cash. In connection with NFP’s 2010 Credit Facility, NFPSI was no longer required to reserve such restricted cash.

Financing Activities

During the nine months ended September 30, 2011, cash used in financing activities was approximately $38.4 million compared with cash used in financing activities of approximately $33.8 million for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, the primary uses of cash was the repurchase of common stock of approximately $28.6 million, as well as repayments of $9.4 million under the 2010 Credit Facility. During the nine months ended September 30, 2010, cash provided by financing activities consisted mainly of $120.3 million in net proceeds from the issuance of the 2010 Notes, and $125.0 million in proceeds from the issuance of long term debt, offset by the purchase of convertible note hedges of $33.9 million, the purchase of the 2007 Notes of $219.7 million, and repayment of outstanding under the 2006 Credit Facility of $40.0 million.

For a full description of the 2010 refinancing, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowings” in the 2010 10-K.

 

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Off-Balance Sheet Arrangements

Off-balance sheet arrangements, as defined by the SEC, include certain contractual arrangements pursuant to which a company has an obligation, such as certain contingent obligations, certain guarantee contracts, retained or contingent interest in assets transferred to an unconsolidated entity, certain derivative instruments classified as equity or material variable interests in unconsolidated entities that provide financing, liquidity, market risk or credit risk support. Disclosure is required for any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on the Company’s financial condition, results of operations, liquidity or capital resources. The Company does not generally enter into off-balance sheet arrangements, as defined, other than those described in “Note 11—Commitments and Contingencies” to the Consolidated Financial Statements (Unaudited) contained in this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to various market risks in its daily operations. Changes in interest rates, creditworthiness, the solvency of counterparties, equity securities pricing, or other market conditions could have a material impact on the Company’s results of operations.

In connection with the 2010 Credit Facility, NFP is exposed to changes in the benchmark interest rate, which is the London Interbank Offered Rate (“LIBOR”). To reduce this exposure, NFP executed a one-month LIBOR based interest rate swap (the “Swap”) on July 14, 2010 to hedge $50.0 million of general corporate variable debt based on one-month LIBOR, beginning on April 14, 2011. The Swap has been designated as a hedging instrument in a cash flow hedge of interest payments on $50.0 million of borrowings under the term loan portion of the 2010 Credit Facility by effectively converting a portion of the variable rate debt to a fixed rate basis. The Company manages the Swap’s counterparty exposure by considering the credit rating of the counterparty, the size of the Swap, and other financial commitments and exposures between the Company and the counterparty. The Swap is transacted under International Swaps and Derivatives Association (ISDA) documentation.

Based on the weighted average borrowings under NFP’s 2010 Credit Facility and prior credit agreement among NFP, the lenders party thereto and Bank of America, N.A., as administrative agent, dated as of August 22, 2006 and terminated on July 8, 2010, during the nine months ended September 30, 2011 and 2010, respectively, a change in short-term interest rates of 100 basis points would have affected the Company’s pre-tax income by approximately $1.1 million in 2011 and $1.2 million in 2010.

The Company is further exposed to short-term interest rate risk because it holds cash and cash equivalents. These funds are denoted in fiduciary funds—restricted related to premium trust accounts. These funds cannot be used for general corporate purposes, and should not be considered a source of liquidity for the Company. Based on the weighted average amount of cash, cash equivalents and securities held in fiduciary funds—restricted related to premium trust accounts, a change in short-term interest rates of 100 basis points would have affected the Company’s pre-tax income by approximately $2.0 million in 2011 and $1.6 million in 2010.

The Company is exposed to credit risk from over-advanced management fees paid to principals and promissory notes related thereto. The Company records a reserve for its promissory notes and over-advanced management fees based on historical experience and expected trends. The Company also performs ongoing evaluations of the creditworthiness of its principals based on the firms’ business activities. If the financial condition of the Company’s principals were to deteriorate, resulting in an inability to make payment, additional allowances may be required. See “Note 6—Notes receivable, net” to the Consolidated Financial Statements (Unaudited) contained in this report.

The Company has market risk on the fees it earns that are based on the value of assets under management or the value of assets held in certain mutual fund accounts and variable insurance policies for which ongoing fees or commissions are paid. Movements in equity market prices, interest rates or credit spreads could cause the value of assets under management to decline, which could result in lower fees to the Company. Certain of the Company’s performance-based fees are impacted by fluctuation in the market performance of the assets managed according to such arrangements. Additionally, through the Company’s broker-dealer subsidiaries, it has market risk on buy and sell transactions effected by its customers. The Company is contingently liable to its clearing brokers for margin requirements under customer margin securities transactions, the failure of delivery of securities sold or payment for securities purchased by a customer. If customers do not fulfill their obligations, a gain or loss could be suffered equal to the difference between a customer’s commitment and the market value of the underlying securities. The risk of default depends on the creditworthiness of the customers. The Company assesses the risk of default of each customer accepted to minimize its credit risk.

Finally, in connection with the offering of the 2010 Notes, NFP entered into the convertible note hedge and warrant transactions. Such convertible note hedge and warrant transactions are intended to lessen or eliminate the potential dilutive effect of the conversion feature of the 2010 Notes on NFP’s common stock.

 

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Table of Contents

Item 4. Controls and Procedures

As of the end of the period covered by this report, NFP’s management carried out an evaluation, under the supervision and with the participation of NFP’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of NFP’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based on this evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. There have been no changes in internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

See “Note 11—Commitments and Contingencies—Legal matters” to the Consolidated Financial Statements (Unaudited) contained in this report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Recent Sales of Unregistered Securities

Since July 1, 2011 and through September 30, 2011, NFP has not issued any unregistered securities related to acquisition of firms, contingent consideration and other.

Since October 1, 2011 and through October 31, 2011, NFP did not issue any common stock relating to contingent consideration.

The issuances of common stock described above were made in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), for transactions by an issuer not involving a public offering. The Company did not offer or sell the securities by any form of general solicitation or general advertising, informed each purchaser that the securities had not been registered under the Securities Act and were subject to restrictions on transfer, and made offers only to “accredited investors” within the meaning of Rule 501 of Regulation D and a limited number of sophisticated investors, each of whom the Company believed had the knowledge and experience in financial and business matters to evaluate the merits and risks of an investment in the securities and had access to the kind of information registration would provide.

(c) Issuer Purchases of Equity Securities

 

Period

  Total Number
of Shares
Purchased
    Average Price
Paid per Share
    Total Number of
Shares Purchased

as Part of Publicly
Announced Plans
or Programs
    Approximate Dollar
Value of Shares

that May
Yet Be Purchased Under
the Plans or Programs
 

July 1, 2011 – July 31, 2011

    585,406 (b)    $ 11.79        573,800 (a)    $ 34,432,000   

August 1, 2011 – August 31, 2011

    700,466 (c)      11.58        699,700 (a)      26,328,000   

September 1, 2011 – September 30, 2011

    417,200 (a)      11.72        417,200 (a)      21,437,000   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,703,072        11.69        1,690,700        21,437,000   

 

(a) On April 28, 2011, NFP’s Board of Directors authorized the repurchase of up to $50.0 million of NFP’s common stock on the open market, at times and in such amounts as management deems appropriate.
(b) 11,606 shares were reacquired relating to the satisfaction of a promissory note. There was no gain or loss associated with this transaction. The remaining 573,800 shares were reacquired as part of the stock repurchase program, see note (a).
(c) 766 shares were reacquired relating to the disposal of a business. A loss of less than $0.1 million was recorded on this transaction. The remaining 699,700 shares were reacquired as part of the stock repurchase program, see note (a).

 

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Table of Contents

EXHIBIT INDEX

Item 6. Exhibits

 

Exhibit

No.

 

Description

  10.1*   National Financial Partners Corp. Compensation Recoupment Policy
  12.1*   Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends
  31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase
101.LAB**   XBRL Taxonomy Extension Label Linkbase
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

National Financial Partners Corp.

 

Signature

  

Title

 

Date

/S/ JESSICA M. BIBLIOWICZ

  

Chairman, President and Chief Executive

Officer

  November 1, 2011
Jessica M. Bibliowicz     

/S/ DONNA J. BLANK

  

Executive Vice President and Chief

Financial Officer

  November 1, 2011
Donna J. Blank     

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

No.

 

Description

  10.1*   National Financial Partners Corp. Compensation Recoupment Policy
  12.1*   Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends
  31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase
101.LAB**   XBRL Taxonomy Extension Label Linkbase
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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