Crawford & Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Crawford provides claims management and outsourcing services to insurers and self-insured entities in more than 70 countries. Figures below are in U.S. dollars; financial statements are unaudited. Certain international results are consolidated on a two-month delay.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue before reimbursements | $320.7m | $293.3m | $633.7m | $572.4m |
| Total revenue | $333.7m | $303.7m | $658.3m | $591.4m |
| Income before taxes | $13.6m | $8.6m | $29.6m | $16.2m |
| Net income attributable to Crawford shareholders | $8.4m | $5.8m | $19.1m | $10.9m |
| Diluted EPS, both share classes | $0.17 | $0.12 | $0.39 | $0.22 |
| Net corporate interest expense | $4.3m | $1.8m | $8.7m | $3.3m |
Revenue before reimbursements increased 9.3% in Q2 and 10.7% year to date; at constant exchange rates, growth was 11.9% and 13.7%, respectively. Foreign exchange reduced reported revenue growth. The effective tax rate was 38.4% in Q2 and 35.5% year to date, versus 32.2% and 32.1% in 2022.
Segment operating earnings improved across all four segments. Q2 / six-month 2023 earnings were: North America Loss Adjusting $3.9m / $12.0m; International Operations $3.7m / $6.8m; Broadspire $8.1m / $16.1m; and Platform Solutions $8.1m / $18.1m. International Operations moved from operating losses in the 2022 comparative periods to profits. Q2 / year-to-date operating margins were 5.1% / 7.8% for North America, 3.9% / 3.6% for International, 9.7% / 9.7% for Broadspire, and 12.3% / 14.1% for Platform Solutions.
Cash flow, debt and liquidity
- Six-month operating cash flow was $27.2m, compared with cash used of $12.8m in 2022. Management attributed the improvement to higher net income and working-capital improvements.
- Investing cash outflow was $17.9m, versus $38.6m; capital expenditures, including capitalized software, totaled $17.9m. The prior-year period included acquisition payments.
- Financing cash outflow was $8.5m, compared with $46.1m of inflow in 2022. The current period included $5.9m of dividends and no share repurchases.
- Cash and cash equivalents were $47.5m at June 30, 2023, versus $46.0m at year-end 2022. Working capital was $85.8m, up $14.0m.
- Short- and long-term borrowings, including current installments and finance leases, totaled $242.8m, compared with $238.9m at year-end. Reported long-term debt and finance leases, excluding current installments, were $212.2m; short-term borrowings were $30.6m.
- Available credit-facility borrowing capacity was $198.3m, including $8.9m of outstanding letters of credit; management reported total liquidity of $245.8m. The credit agreement was amended in May 2023 to replace LIBOR with Term SOFR for U.S. dollar borrowings.
Changes, outlook and risks
- Revenue increased in every segment, led by Platform Solutions (up 22.1% in Q2 and 25.2% year to date) and North America Loss Adjusting. Platform growth included staff-augmentation revenue not measured by case counts. Broadspire growth was driven mainly by Medical Management; International growth included the U.K. and Latin America.
- Total cases received declined 6.9% in both Q2 and the first half. Management said comparisons were affected by prior-year high-frequency, low-severity cases and catastrophe-related volumes that generated limited revenue in the periods received. Revenue growth therefore did not track case counts directly.
- Higher interest expense reflected increased interest rates. Other notable items included $0.7m of Q2 contingent earnout expense and $2.1m of Q2 non-service pension costs; the prior-year periods included non-service pension credits. The company recorded no goodwill impairment indicators in the first half.
- Management estimated a 2023 effective tax rate of approximately 36%–38% after known discrete items and did not expect further discretionary contributions to the U.S. defined-benefit pension plan during 2023. No revenue or earnings guidance was provided. Management cautioned that weather activity and macroeconomic uncertainty make interim results not necessarily indicative of full-year results.
- Risks include fluctuations in claims referrals and catastrophe activity, foreign exchange and interest rates, client retention and collections, inflation and labor costs, pension funding, acquisition integration, cybersecurity and technology execution, and compliance with financing covenants. Litigation or client indemnification claims could have a material effect if not covered by insurance, though management said provisions were adequate for known and foreseeable risks.
- Disclosure controls were reported ineffective as of June 30, 2023 because of a material weakness in U.K. IT general controls for change management and logical access, and related business-process controls. No financial-statement misstatement was identified. Remediation was ongoing, with completion expected during 2023.
Most important facts for investors to verify
- Whether revenue growth and segment earnings persist as claims volumes and catastrophe activity normalize, particularly given declining overall cases.
- Whether higher interest costs, borrowing levels and credit-facility capacity remain manageable.
- Progress and testing of the U.K. control remediation, including whether management declares the material weakness remediated.
- Actual tax rate, pension funding needs, and realization and collection of receivables and unbilled revenue.
- Potential outcomes and insurance coverage for litigation, indemnification claims and contingent acquisition earnouts.