Crawford & Company (CRD-A, CRD-B) — Q3 2022 Form 10-Q
Business context and reporting period. Crawford provides claims management and outsourcing services in more than 70 countries. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the same periods in 2021. The company reorganized its segments in January 2022 into North America Loss Adjusting, International Operations, Broadspire and Platform Solutions; prior segment results were reclassified for comparison.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue before reimbursements | $294.9m | $288.5m | $867.3m | $809.1m |
| Total revenue | $306.4m | $297.6m | $897.9m | $836.3m |
| Net income (loss) attributable to Crawford shareholders | ($15.1m) | $11.2m | ($4.2m) | $29.0m |
| Basic EPS, Class A / Class B | ($0.31) / ($0.31) | $0.21 / $0.21 | ($0.08) / ($0.09) | $0.55 / $0.55 |
| Operating cash flow | Not provided separately for quarter | Not provided separately for quarter | ($16.2m) | $20.0m |
- Q3 revenue before reimbursements grew 2.2% year over year; nine-month revenue grew 7.2%. Foreign exchange reduced revenue before reimbursements by $11.0m in Q3 and $20.1m year to date. At constant exchange rates, growth was 6.1% and 9.7%, respectively.
- Q3 segment operating earnings were North America Loss Adjusting $3.7m (5.5% margin), International Operations loss of $3.8m (negative 4.5%), Broadspire $6.2m (7.9%) and Platform Solutions $10.1m (15.8%). Nine-month results were $10.5m (5.3%), loss of $7.6m (negative 2.8%), $20.3m (8.6%) and $22.7m (13.7%), respectively. Segment operating earnings are a company-defined measure and exclude corporate items and impairment.
- At September 30, cash and cash equivalents were $33.1m, down from $53.2m at year-end 2021. Working capital was $83.0m, up $40.9m. Short- and long-term borrowings plus finance leases totaled $257.4m, versus $175.0m at December 31, 2021. The company reported $142.4m of total liquidity, including $109.3m of additional borrowing capacity; $8.8m of letters of credit were outstanding.
- Nine-month investing cash outflow was $48.2m, including $26.3m for acquisitions and $19.9m of capitalized software. Financing provided $46.9m, including a net $84.8m increase in revolving-facility borrowing; dividends were $8.9m and share repurchases were $26.7m.
Material changes and drivers
- The company recorded a $36.8m noncash goodwill impairment in Q3: $22.7m in International Operations, $10.7m in Platform Solutions and $3.4m in North America Loss Adjusting. International Operations and Crawford Legal Services goodwill were fully impaired. Management cited weaker forecasts, higher interest rates and a lower share price; impairment testing used discount rates of 15.5%–18.0% and a 2.0% terminal growth rate.
- Revenue growth reflected higher case activity, new clients and acquisitions, including edjuster and Praxis. Total cases received increased 13.1% in Q3 and 15.3% year to date. International Operations revenue was pressured by currency translation and weaker UK/Legal Services performance; segment operating results moved to losses.
- Costs rose: nine-month costs of services before reimbursements increased 9.4%, faster than revenue growth, and SG&A increased 8.5%. Management cited compensation, acquisition costs and technology investment. The 2021 comparison also included Canadian wage subsidies ($5.9m for the first nine months) that did not recur in 2022.
- Currency translation losses contributed to a $19.4m nine-month foreign currency translation loss in other comprehensive income. Shareholders’ investment declined to $161.3m from $211.4m at year-end 2021.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management estimated a 2022 effective tax rate of approximately 250%–260% after known discrete items. It said the Q3 impairment tax benefit would normalize in Q4, with a lower anticipated full-year impairment-related tax benefit of $3.4m.
- Management cautioned that weather events, pandemics and macroeconomic conditions make interim results non-indicative of full-year or future performance. Key stated risks include claim volumes and outsourcing trends, inflation and wage costs, interest and foreign-exchange rates, client retention and collections, acquisition integration, pension funding, financing covenants, cybersecurity and potential further goodwill impairment.
- Operating cash flow was negative year to date, driven in part by higher receivables, payroll and tax accrual timing, incentive payments and absence of prior-year wage-subsidy receipts. Unbilled revenues rose $23.5m excluding FX, primarily due to weather activity and North American growth.
- The company disclosed ordinary-course litigation and disputes, generally insured but subject to deductibles and self-insured retentions; management considers provisions adequate, while noting an uncovered adverse outcome could materially affect results. The filing reports no material off-balance-sheet arrangements. The independent accountant performed an interim review, not a full audit, and reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether International Operations can restore profitability and whether lower margins in North America and Platform Solutions persist.
- Goodwill valuation assumptions and the potential for further impairment as forecasts, rates and market values change.
- Cash conversion, receivables and unbilled-revenue collection, borrowing levels, available facility capacity and covenant compliance.
- The sustainability of case-volume growth, its revenue contribution by case mix, and the impact of foreign exchange and compensation inflation.
- Acquisition performance and contingent earnout exposure, including the revised Praxis earnout valuation.
- The full-year tax-rate estimate and Q4 treatment of the impairment-related tax benefit.