Crawford & Company — Q1 2023 Form 10-Q
Business context and period. Crawford provides claims management and outsourcing services to insurers and self-insured entities in more than 70 countries. This unaudited quarterly report covers the three months ended March 31, 2023, compared with Q1 2022. Results from most operations outside the U.S., Canada, the Caribbean, and certain Philippine subsidiaries are reported on a two-month delay.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue before reimbursements | $313.0 | $279.0 |
| Total revenue | $324.6 | $287.8 |
| Income before taxes | $16.0 | $7.6 |
| Net income | $10.7 | $5.2 |
| Net income attributable to Crawford shareholders | $10.7 | $5.1 |
| Basic and diluted EPS, each share class | $0.22 | $0.10 |
| Cash used in operating activities | $0.4 | $15.3 |
- Revenue before reimbursements grew 12.2% reported and 15.5% at constant exchange rates; foreign exchange reduced reported revenue by $9.4 million. Total revenue growth was 12.8%.
- Segment operating earnings rose to $29.0 million from $15.5 million. Segment operating margins were 10.5% for North America Loss Adjusting, 3.3% for International Operations, 9.8% for Broadspire, and 15.9% for Platform Solutions.
- Costs of services before reimbursements increased 10.5% to $227.1 million; selling, general and administrative expense fell 2.3% to $63.4 million. Corporate interest expense, net, increased to $4.4 million from $1.5 million.
- The effective tax rate was 32.9%, versus 32.0%. Management estimated a full-year 2023 effective rate of approximately 34%–36% as of March 31.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $43.3 million, down from $46.0 million at year-end; working capital was approximately $82.2 million, up $10.4 million.
- Long- and short-term borrowings, including current installments and finance leases, totaled $249.4 million, compared with $238.9 million at December 31, 2022. Short-term borrowings were $39.1 million and long-term debt and finance leases, less current installments, were $210.3 million.
- Management reported total liquidity of $235.2 million: $43.3 million cash plus $191.9 million additional borrowing capacity under its credit facility. The facility also supported $8.9 million of letters of credit.
- Investing cash outflow was $8.6 million, including $7.6 million of capitalized software costs. Financing cash inflow was $5.2 million, including net revolving-credit borrowing of approximately $9.1 million; dividends paid were $2.9 million. Cash, cash equivalents and restricted cash declined $2.7 million during the quarter.
- Operating cash use improved from $15.3 million to $0.4 million, principally reflecting higher net income, lower incentive-compensation payments, and increases in accrued income taxes and deferred revenues, partly offset by reductions in other accruals.
Material changes and segment trends
- Cases received declined 6.8% overall to 426,697. Management attributed much of the decrease to high-frequency, low-severity cases present in Q1 2022 that generated minimal revenue. Revenue growth therefore did not track case volumes directly.
- North America Loss Adjusting revenue increased 19.7% and segment operating earnings nearly doubled, primarily on higher U.S. weather-related activity and improved utilization. Cases fell 5.2% overall, but excluding certain low-revenue prior-year cases, management said cases increased 4.6%.
- International Operations revenue increased 2.9% reported, or 11.6% at constant exchange rates; the segment moved from a $3.1 million operating loss to $3.0 million of operating earnings. Foreign exchange reduced segment revenue by approximately $7.7 million.
- Broadspire revenue rose 6.2%, supported by 11.0% growth in Medical Management; operating earnings increased 23.2%. Overall cases declined 3.7%, largely due to fewer low-revenue Disability cases.
- Platform Solutions revenue grew 28.6% and operating earnings increased 24.0%, led by Networks and Contractor Connection. Operating margin decreased to 15.9% from 16.5%, reflecting expense growth and technology investment. Cases fell 10.5%; about $11.0 million of added revenue came from dedicated staff services not measured by cases.
Outlook, risks and unusual items
- The filing gives a tax-rate estimate but no company-wide revenue, earnings or cash-flow guidance. Management cautions that weather activity and macroeconomic uncertainties make Q1 results not necessarily indicative of the full year.
- Key stated risks include claim referral volumes and outsourcing levels, catastrophe frequency and severity, inflation and ability to recover costs, interest and foreign-exchange rates, customer retention and collections, staffing, acquisitions, pension funding, financing-covenant compliance, cybersecurity, and technology integration.
- Non-service pension costs were $2.2 million, compared with a $0.5 million credit in Q1 2022; management identified this as a non-operating item. The prior-year period also included a $1.8 million gain on sale of the Canadian head-office building. Contingent earnout expense declined to $0.2 million from $2.1 million.
- Management stated that disclosure controls and procedures were not effective as of March 31, 2023 because of a material weakness in U.K. IT general controls over change management and logical access, and related business-process controls. No financial-statement misstatement was identified. Remediation work was underway, and management expected remediation during fiscal 2023.
- The company disclosed ordinary-course litigation, indemnification, regulatory and employment matters. Management believes provisions are adequate for probable and estimable items, but an uninsured adverse outcome could materially affect results, financial position or cash flows.
- Ernst & Young performed an interim review, not an audit, and reported that it was not aware of material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether revenue and margin growth persist after considering foreign exchange, weather-related work, staff-augmentation revenue and lower case volumes.
- Whether the U.K. IT-control material weakness is remediated and controls operate effectively for a sufficient period.
- Debt, borrowing capacity, interest expense and compliance with credit-facility covenants as cash needs and rates change.
- Cash conversion and working-capital movements, particularly unbilled revenue, incentive-compensation payments and accrued liabilities.
- Developments in pension obligations, litigation and other contingencies, and the sensitivity of variable consideration and acquisition earnouts to revised estimates.