Crawford & Co: Form 10-Q for the period ended Sep 30, 2023

Cautionary Statement Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Statements contained in this report that are not statements of historical fact are forward-looking statements made pursuant to the "safe harbor" provisions thereof. These statements may relate to, among other things, our expected future operating results and financial condition, our ability to grow our revenues and reduce our operating expenses, expectations regarding our anticipated contributions to our underfunded defined benefit pension plans, collectability of our billed and unbilled accounts receivable, financial results from our recently completed acquisitions, our continued compliance with the financial and other covenants contained in our financing agreements, and our other long-term capital resource and liquidity requirements. These statements may also relate to our business strategies, goals and expectations concerning our market position, future operations, margins, case and project volumes, profitability, contingencies, liquidity position, and capital resources. The words "anticipate", "believe", "could", "would", "should", "estimate", "expect", "intend", "may", "plan", "goal", "strategy", "predict", "project", "will" and similar terms and phrases, or the negatives thereof, identify forward-looking statements contained in this report.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations and the forward-looking statements related to our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially adversely affect our financial condition and results of operations, and whether the forward-looking statements ultimately prove to be correct. Included among the risks and uncertainties we face are risks related to the following:

• a decline in cases referred to us for any reason, including changes in the degree to which property and casualty insurance carriers outsource their claims handling functions,
• changes in global economic conditions,
• changes in interest rates,
• changes in foreign currency exchange rates,
• changes in regulations and practices of various governmental authorities,
• changes in our competitive environment,
• changes in the financial condition of our clients,
• changes in the rate of inflation and our ability to recover increased operating costs,
• the loss of any material customer,
• our ability to successfully integrate the operations of acquired businesses,
• our ability to timely identify and effectively remediate material weaknesses in internal control over financial reporting,
• regulatory changes related to funding of defined benefit pension plans,
• our U.S., U.K. and other international defined benefit pension plans and our future funding obligations thereunder,
• our ability to complete any transaction involving the acquisition or disposition of assets on terms and at times acceptable to us,
• our ability to identify new revenue sources not tied to the insurance underwriting cycle,
• our ability to develop or acquire information technology resources to support and grow our business,
• our ability to attract and retain qualified personnel,
• our ability to renew existing contracts with clients on satisfactory terms,
• our ability to collect amounts due from our clients and others,
• continued availability of funding under our financing agreements,
• general risks associated with doing business outside the U.S., including changes in tax rates,
• our ability to comply with the covenants in our financing or other agreements,
• changes in the frequency or severity of man-made or natural disasters,
• the ability of our third-party service providers, used for certain aspects of our internal business functions, to meet expected service levels,
• our ability to prevent or detect cybersecurity breaches and cyber incidents,
• our ability to achieve targeted integration goals with the consolidation and migration of multiple software platforms,
• risks associated with our having a controlling shareholder, and
• impairments of goodwill or our other indefinite-lived intangible assets.

As a result, undue reliance should not be placed on any forward-looking statements. Actual results and trends in the future may differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements speak only as of the date they are made and we undertake no obligation to publicly update any of these forward-looking statements in light of new information or future events.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with (i) our unaudited condensed consolidated financial statements and accompanying notes thereto for the three and nine months ended September 30, 2023 and 2022, and as of September 30, 2023, and December 31, 2022, contained in Item 1 of this Quarterly Report on Form 10-Q, and (ii) our Annual Report on Form 10-K for the year ended December 31, 2022. As described in Note 1, "Basis of Presentation," the financial results of our operations outside of the U.S., Canada, the Caribbean, and certain subsidiaries in the Philippines are included in our consolidated financial statements on a two-month delayed basis (fiscal year-end of October 31) as permitted by U.S. generally accepted accounting principles ("GAAP") in order to provide sufficient time for accumulation of their results.

Business Overview

Based in Atlanta, Georgia, Crawford & Company (www.crawco.com (http://www.crawco.com)) is a leading global provider of claims management and outsourcing solutions to insurance companies and self-insured entities with an expansive global network serving clients in more than 70 countries. The Company's two classes of stock are substantially identical, except with respect to voting rights for the Class B Common Stock (CRD-B), and protections for the non-voting Class A Common Stock (CRD-A). More information is available on the Company's website. The information contained on, or hyperlinked from, the Company's website is not a part of, and is not incorporated by reference into, this report.

We have a geographic reporting structure consisting of North America Loss Adjusting, International Operations, Broadspire, and Platform Solutions. Our four reportable segments are comprised of the following:

• North America Loss Adjusting, which services the North American property and casualty market. This is comprised of Loss Adjusting operations in the U.S. and Canada, including Global Technical Services and edjuster. The Canadian operations include all operations within that country.
• International Operations, which services the global property and casualty market outside North America. This is comprised of Loss Adjusting operations in the U.K., Europe, Australia, Asia and Latin America, including Crawford Legal Services. The International Operations include all operations, including Loss Adjusting, Global Technical Services, third party administration, and where applicable, Contractor Connection services, within the respective countries.
• Broadspire, which provides third party administration for workers' compensation, auto and liability, disability absence management, medical management, and accident and health to corporations, brokers and insurers in the U.S.
• Platform Solutions, which consists of the Contractor Connection, Networks, and Subrogation service lines in the U.S. The Networks service line includes Catastrophe operations and WeGoLook.

As discussed in more detail in subsequent sections of this MD&A, our four reportable segments represent components of our Company for which separate financial information is available, and which is evaluated regularly by our chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing operating performance.

Insurance companies rely on us for certain services such as field investigation and the evaluation of property and casualty insurance claims. Self-insured entities typically rely on us for a broader range of services. In addition to field investigation and claims evaluation, we may also provide initial loss reporting services for their claimants, loss mitigation services such as medical bill review, medical case management and vocational rehabilitation, risk management information services, and loss fund administration to pay their claims. Our Contractor Connection service line provides a managed contractor network to insurance carriers and consumer markets.

The global claims management services market is highly competitive and comprised of a large number of companies that vary in size and that offer a varied scope of services. The demand from insurance companies and self-insured entities for services provided by independent claims service firms like us is largely dependent on industry-wide claims volumes, which are affected by, among other things, the insurance underwriting cycle, weather-related events, general economic activity, overall employment levels and workplace injury rates. Demand is also impacted by decisions insurance companies and self-insured entities make with respect to the level of claims outsourced to independent claim service firms as opposed to those handled by their own in-house claims adjusters. In addition, our ability to retain clients and maintain or increase case referrals is also dependent in part on our ability to continue to provide high-quality, competitively priced services and effective sales efforts.

We typically earn our revenues on an individual fee-per-claim basis for claims management services that we provide to insurance companies and self-insured entities. Accordingly, the volume of claim referrals to us is a key driver of our revenues. We cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related cases and the occurrence of natural and man-made disasters, which are a significant source of cases for us and are not subject to accurate forecasting.

Results of Operations

Executive Summary

Consolidated revenues before reimbursements increased $30.7 million, or 10.4%, for the three months ended September 30, 2023 and $92.0 million, or 10.6% for the nine months ended September 30, 2023, compared with the same periods of 2022. The increase in the 2023 third quarter was due to increases in our North America Loss Adjusting, International, and Broadspire operating segments. The increase in the year-to-date period was due to increases in all of our operating segments. Changes in foreign exchange rates increased our consolidated revenues before reimbursements by $0.6 million, or 0.2%, for the three months ended September 30, 2023 while reducing our consolidated revenues before reimbursements by $16.3 million, or 1.9% for the nine months ended September 30, 2023 as compared with the prior year periods. To illustrate this impact, segment revenues are presented below, using a constant exchange rate, for the three and nine months ended September 30, 2023.

(in thousands, except percentages)

(in thousands, except percentages)

Excluding foreign currency impacts, consolidated revenues before reimbursements increased $30.1 million, or 10.2%, for the three months ended September 30, 2023, and increased $108.2 million, or 12.5% for the nine months ended September 30, 2023 compared with the same periods of 2022. Revenues from the North America Loss Adjusting segment increased in the 2023 third quarter and year-to-date periods due to an increase in new business in the U.S. Revenues from the International Operations segment increased in the 2023 third quarter and year-to-date periods primarily due to increases in the U.K., Europe, Asia, and Latin America. Revenues from the Broadspire segment increased for the quarter and year-to-date due to an increase in Claims and Medical Management revenues. Revenues from the Platform Solutions segment decreased in the third quarter due to a reduction in our Networks service line, although there is an increase in the current year-to-date period in all service lines. There was a $0.1 million increase in total company revenues in the 2023 third quarter and $1.4 million increase in the year-to-date period as a result of the 2022 Van Dijk acquisition. See Note 12, “Business Acquisitions” of our accompanying consolidated financial statements for more details of this activity.

Overall, there was a decrease in cases received of (1.6)% for the three months ended September 30, 2023 and a decrease of (5.1)% for the nine months ended September 30, 2023 due to a reduction of approximately 24,000 and 65,000 high-frequency, low-severity cases in our four operating segments that were present in the 2022 third quarter and year-to-date period, respectively, that generated minimal revenues in the comparable 2022 periods. This includes 5,000 and 17,000 cases received in our International Operations segment in the 2022 third quarter and year-to-date periods, respectively, as a result of a weather-related catastrophe in Australia for which revenues were recognized across several quarters as services were performed. In addition, our Platforms Solution segment generated a decrease in revenues of approximately $(4.9) million in the 2023 third quarter and an increase in revenues of $13.1 million in the 2023 year-to-date period not measured by cases where we provided dedicated employees to the clients. Accordingly, the overall increase in revenues in the 2023 periods does not necessarily correlate to the change in case volumes.

Cases received are presented below by segment for the three and nine months ended September 30, 2023 and 2022:

(whole numbers, except percentages)

To illustrate exposure to the impact of changes in foreign currencies, revenues before reimbursements are presented below by denominated currency for the three and nine months ended September 30, 2023:

(in thousands)

(in thousands)

Costs of services provided, before reimbursements, increased $8.7 million, or 3.9%, for the three months ended September 30, 2023, and increased $46.1 million, or 7.2% for the nine months ended September 30, 2023 as compared with the 2022 periods. These increases were primarily due to an increase in compensation expense and other costs in each of our operating segments resulting from the higher revenues, partially offset by the change in exchange rates.

Selling, general, and administrative ("SG&A") expenses increased $6.9 million, or 11.0%, in the three months ended September 30, 2023 due to an increase in compensation expense, including incentive compensation and an increase in unallocated payroll tax and benefits costs. SG&A expenses increased $6.6 million, or 3.4%, in the nine months ended September 30, 2023 as compared with the 2022 period, primarily due to an increase in incentive compensation expense, payroll tax and benefits, and the $1.8 million gain on the sale of our Canadian head office building which occurred in the 2022 first quarter described below.

We recognized a pretax non-cash goodwill impairment in the three months ended September 30, 2022 totaling $36.8 million related to the North America Loss Adjusting ($3.4 million), International Operations ($22.7 million), and Platform Solutions ($10.7 million) reportable segments.

We sold our Canadian head office building in Kitchener, Ontario Canada in the first quarter of 2022 for $3.1 million and recognized a pretax gain on disposal of $1.8 million. This gain is recorded as a credit within Unallocated Corporate and Shared Costs and is included in “Selling, general, and administrative expenses” on the Company's unaudited Condensed Consolidated Statements of Operations.

Operating Earnings of our Operating Segments

We believe that a discussion and analysis of the segment operating earnings of our operating segments is helpful in understanding the results of our operations. Operating earnings is our segment measure of profitability presented in conformity with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 280 "Segment Reporting." Operating earnings is the primary financial performance measure used by our senior management and CODM to evaluate the financial performance of our operating segments and make resource allocation and certain compensation decisions.

We believe operating earnings is a measure that is useful for others to evaluate segment operating performance using the same criteria used by our senior management and CODM. Segment operating earnings represents segment earnings, including the direct and indirect costs of certain administrative functions required to operate our business, but excludes unallocated corporate and shared costs and credits, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, contingent earnout adjustments, goodwill impairments, non-service pension costs and credits, income taxes, and net income or loss attributable to noncontrolling interests.

Administrative functions such as finance, human resources, information technology, quality and compliance, exist both in a centralized shared-service arrangement and within certain operations. Each of these functions is managed by centralized management and the costs of those services is allocated to the segments as indirect costs based on usage.

Gross profit is defined as segment revenues, less segment direct costs, which exclude centralized indirect administrative support costs allocated to the business.

Income taxes, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, contingent earnout adjustments, and non-service pension costs and credits are recurring components of our net income, but they are not considered part of our segment operating earnings because they are managed on a corporate-wide basis. Income taxes are calculated for the Company on a consolidated basis based on statutory rates in effect in the various jurisdictions in which we provide services, and vary significantly by jurisdiction. Net corporate interest expense results from capital structure decisions made by senior management and the Board of Directors, affecting the Company as a whole. Stock option expense represents the non-cash costs generally related to stock options and employee stock purchase plan expenses which are not allocated to our operating segments. Contingent earnout adjustments represent fair value adjustments of earnout liabilities arising from recent acquisitions. Amortization expense is a non-cash expense for finite-lived customer-relationship and trade name intangible assets acquired in business combinations. Non-service pension costs and credits represent the U.S. and U.K. non-service defined benefit pension costs and credits, which are non-operating in nature as the U.S. plan is frozen and the U.K. plans are closed to new participants. The service cost component of the U.K. plans remains in compensation expense. The exclusion of this measurement is intended to exclude market volatility related to an expense that is non-operating in nature and not related to business performance. None of these costs relate directly to the performance of our services or operating activities and, therefore, are excluded from segment operating earnings in order to better assess the results of each segment's operating activities on a consistent basis.

Goodwill impairments arise from time to time due to various factors, but are not allocated to our operating segments since they historically have not regularly impacted our performance and are not expected to impact our future performance on a regular basis.

Unallocated corporate and shared costs and credits include expenses and credits related to our chief executive officer and Board of Directors, certain provisions for bad debt allowances or subsequent recoveries such as those related to bankrupt clients, certain unallocated professional fees, and certain self-insurance costs and recoveries that are not allocated to our individual operating segments.

Additional discussion and analysis of our income taxes, net corporate interest expense, stock option expense, amortization of customer-relationship intangible assets, contingent earnout adjustments, goodwill impairments, non-service pension costs and credits, and unallocated corporate and shared costs and credits follows the discussion and analysis of the results of operations of our four operating segments.

Segment Revenues

In the normal course of business, our operating segments incur certain out-of-pocket expenses that are thereafter reimbursed by our clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are reported on a gross basis when reporting revenues and expenses, respectively, in our unaudited Condensed Consolidated Statements of Operations. In the discussion and analysis of results of operations which follows, we do not include a gross up of expenses and revenues for these pass-through reimbursed expenses. The amounts of reimbursed expenses and related revenues offset each other in our results of operations with no impact to our net income or operating earnings. A reconciliation of revenues before reimbursements to total revenues determined in accordance with GAAP is presented on the face of the accompanying unaudited Condensed Consolidated Statements of Operations.

Our segment results are impacted by changes in foreign exchange rates. We believe that a non-GAAP discussion and analysis of segment revenues before reimbursements by major region, based on actual exchange rates and using a constant exchange rate, is helpful in understanding the results of our segment operations.

Segment Expenses

Our discussion and analysis of segment operating expenses is comprised of two components: "Direct Compensation, Fringe Benefits & Non-Employee Labor" and "Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor."

"Direct Compensation, Fringe Benefits & Non-Employee Labor" includes direct compensation, payroll taxes, and benefits provided to the employees of each segment, as well as payments to outsourced service providers that augment our staff in each segment. As a service company, these costs represent our most significant and variable operating expenses.

Costs of administrative functions, including direct compensation, payroll taxes, and benefits, are managed centrally and considered indirect costs. The allocated indirect costs of our shared-services infrastructure are allocated to each segment based on usage and reflected within "Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor" of each segment.

In addition to allocated corporate and shared costs, "Expenses Other Than Direct Compensation, Fringe Benefits & Non-Employee Labor" includes travel and entertainment, office rent and occupancy costs, automobile expenses, office operating expenses, data processing costs, cost of risk, professional fees, and amortization and depreciation expense other than amortization of customer-relationship intangible assets.

In addition, we believe that a non-GAAP discussion and analysis of segment gross profit is helpful in understanding the results of our segment operations, excluding indirect centralized administrative support costs. Our discussion and analysis of segment gross profit includes the revenues and direct expenses of each segment.

Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses and expense amounts exclude reimbursed out-of-pocket expenses.

Segment Performance Indicators

We typically earn our revenues on an individual fee-per-claim basis for claims management services we provide to carriers, brokers and corporates. Accordingly, the volume of claim referrals to us is a key driver of our revenues. We believe that a discussion and analysis of the segment unit volumes, as measured by cases received, is helpful in understanding the results of our operations.

Operating results for our North America Loss Adjusting, International Operations, Broadspire, and Platform Solutions segments reconciled to net income (loss) before income taxes and net income (loss) attributable to shareholders of Crawford & Company were follows:

(in thousands, except percentages)

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NORTH AMERICA LOSS ADJUSTING SEGMENT

Operating earnings in our North America Loss Adjusting segment totaled $10.5 million, or 13.2% of revenues before reimbursements, for the three months ended September 30, 2023, compared with 2022 operating earnings of $3.8 million, or 5.6% of revenues before reimbursements. For the nine months ended September 30, 2023, our North American Loss Adjusting segment reported operating earnings of $22.4 million, or 9.7% of revenues before reimbursements, compared with 2022 operating earnings of $10.5 million, or 5.3% of revenues before reimbursements. The increase in operating earnings in the 2023 third quarter and year-to-date periods were primarily due to the increase in revenues in the U.S. and improved staff utilization.

Excluding centralized indirect support costs, gross profit increased from $12.4 million, or 18.5% of revenues before reimbursements in 2022, to $19.7 million, or 24.9% of revenues before reimbursements, in the three months ended September 30, 2023. For the nine months ended September 30, 2023, gross profit increased from $35.0 million, or 17.8% of revenues before reimbursements in 2022, to $50.4 million, or 21.7% of revenues before reimbursements, due primarily to the increase in revenues in the U.S. and improved staff utilization.

Operating results for our North America Loss Adjusting segment, including gross profit, for the three and nine months ended September 30, 2023 and 2022 were as follows:

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Revenues before Reimbursements

North America Loss Adjusting segment revenues are primarily derived from the property and casualty insurance company markets in the U.S. and Canada. Revenues before reimbursements by major region, based on actual exchange rates and using a constant exchange rate, for the three and nine months ended September 30, 2023 and 2022 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

Revenues before reimbursements from our North America Loss Adjusting segment totaled $79.4 million in the three months ended September 30, 2023, compared with $66.8 million in the 2022 period. This increase was due to increased business in the U.S. from both new and existing clients and increased utilization. The change in exchange rates decreased our North America Loss Adjusting segment revenues by approximately 1.0%, or $0.7 million, for the three months ended September 30, 2023 as compared with the 2022 period. Absent foreign exchange rate fluctuations, North America Loss Adjusting segment revenues would have been $80.1 million for the three months ended September 30, 2023. There was an increase in segment unit volume, measured principally by cases received, of 8.8% for the three months ended September 30, 2023, compared with the 2022 period, due to an increase in clients and associated staff in the U.S., partially offset by reduction in Canada. Changes in product mix and in the rates charged for those services accounted for an 11.0% revenue increase for the three months ended September 30, 2023 compared with the same period in 2022, due to increases in pricing and average fee per case.

Revenues before reimbursements from our North America Loss Adjusting segment totaled $232.3 million in the nine months ended September 30, 2023, compared with $197.0 million in the 2022 period. This increase was due to increased business in the U.S. from both new and existing clients, and an increase in weather-related cases. The change in exchange rates decreased our North America Loss Adjusting segment revenues by approximately 1.8%, or $3.6 million, for the nine months ended September 30, 2023 as compared with the 2022 period. Absent foreign exchange rate fluctuations, North America Loss Adjusting segment revenues would have been $235.9 million for the nine months ended September 30, 2023. There was a slight decrease in segment unit volume, measured principally by cases received, of (0.2)% for the nine months ended September 30, 2023, compared with the 2022 period, due to a change in the mix of services provided and reduction in high-frequency, low-severity cases that were present in the prior year. Excluding 17,400 high-frequency, low-severity cases received in the 2022 period for which minimal revenues were recognized, cases received would have increased by 8.2% in the 2023 year-to-date period compared with 2022. Revenues from these cases were recognized across several quarters as services were performed. Changes in product mix and in the rates charged for those services accounted for an 11.5% revenue increase for the nine months ended September 30, 2023 compared with the same period in 2022, due to increases in pricing and average fee per case.

The increase in revenues in the U.S. for the three and nine months ended September 30, 2023 was due to an increase in both Field Operations and Global Technical Services revenues in the current year, as a result of an increase in expert adjusting staff and increased business from new and existing clients. Based on constant foreign exchange rates, there was a slight decrease in revenues in Canada in the 2023 third quarter, although an increase in the 2023 year-to-date period, compared with 2022, partially offset by a reduction in high-frequency, low-severity cases in 2023.

Revenue variance components for our North America Loss Adjusting segment, for the three and nine months ended September 30, 2023 are summarized as follows:

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses incurred in our North America Loss Adjusting segment, which are included in total Company revenues, were $2.5 million and $2.2 million for the three months ended September 30, 2023 and 2022, respectively. Reimbursements were $7.8 million and $6.2 million for the nine months ended September 30, 2023 and 2022, respectively. These increases were due to the increase in revenues, partially offset by a change in the mix of claims handled in Canada.

Case Volume Analysis

North America Loss Adjusting segment unit volumes by geographic region, measured by cases received, for the three and nine months ended September 30, 2023 and 2022 were as follows:

(whole numbers, except percentages)

Overall, there was an increase in cases of 8.8% in the three months ended September 30, 2023, compared to the same period in 2022. The increase in U.S. case volumes in the 2023 third quarter was due to an increase in cases from both new and existing clients. There was a decrease in cases in Canada in the 2023 third quarter due to a change in the mix of services provided resulting from fewer high-frequency, low-severity cases, compared with the 2022 period.

There was a slight decrease in cases of (0.2)% in the nine months ended September 30, 2023, compared to the same period in 2022. There was an increase in U.S. case volumes in the year-to-date period due to an increase from both new and existing clients and an increase in weather-related activity. There was a decrease in cases in Canada in the nine-month period due to a change in the mix of services provided resulting from fewer high-frequency, low-severity cases in the 2023 year-to-date period. There were approximately 12,200 high-frequency, low-severity Contractor Connection and automobile cases received in Canada in the 2022 year-to-date period, and 5,200 high-frequency, low-severity cases received in the U.S. for which minimal revenues were recognized. Excluding these cases, North America Loss Adjusting cases would have increased by 17,000, or 8.2%, in the 2023 year-to-date period, compared to 2022.

Direct Compensation, Fringe Benefits & Non-Employee Labor

The most significant expense in our North America Loss Adjusting segment is the compensation of employees, including related payroll taxes and fringe benefits, and the payments to outsourced service providers that augment the functions performed by our employees. As a percentage of revenues before reimbursements, direct compensation, fringe benefits, and non-employee labor expenses were 67.6% for the three months ended September 30, 2023 compared with 72.3% for the 2022 period. For the nine months ended September 30, 2023, direct compensation, fringe benefits, and non-employee labor expenses were 69.9% compared with 72.5% for the 2022 period. The total dollar amount of these expenses increased to $53.6 million for the three months ended September 30, 2023 from $48.3 million for the comparable 2022 period, and were $162.4 million for the nine months ended September 30, 2023 compared to $142.9 million in 2022. The increase in amounts was due to an increase in employees required to handle the increased cases. The decrease in the percentage of revenues before reimbursements is due to the increased revenues and improved staff utilization, compared to the 2022 periods. There was an average of 2,058 full-time equivalent employees in this segment in the nine months ended September 30, 2023 compared with an average of 1,997 in the 2022 period.

Expenses Other than Reimbursements, Direct Compensation, Fringe Benefits & Non-Employee Labor

North America Loss Adjusting expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor were $15.3 million for the three months ended September 30, 2023 compared with $14.7 million for the 2022 period. As a percentage of revenues before reimbursements, expenses other than direct compensation, fringe benefits, and non-employee labor expenses were 19.3% for the three months ended September 30, 2023 compared with 22.1% for the 2022 period. For the nine months ended September 30, 2023, expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor were $47.5 million, compared with $43.6 million for the 2022 period. As a percentage of revenues before reimbursements, expenses other than direct compensation, fringe benefits, and non-employee labor expenses were 20.4% for the nine months ended September 30, 2023, compared with 22.1% for the 2022 period. The increase in the current year amounts was due to the higher revenues and technology investments, and an increase in the allowance for estimated credit losses. The decrease in the expense as a percentage of revenues before reimbursements is due to operating leverage from the increased revenues.

INTERNATIONAL OPERATIONS SEGMENT

Operating earnings in our International Operations segment were $2.2 million, or 2.2% of revenues before reimbursements, for the three months ended September 30, 2023, compared with an operating loss of $(3.9) million, or (4.6)% of revenues before reimbursements, in the 2022 period. For the nine months ended September 30, 2023, our International Operations segment reported operating earnings of $9.0 million, or 3.1% of revenues before reimbursements, compared with an operating loss in 2022 of $(7.6) million, or (2.8)% of revenues before reimbursements. The increase in operating earnings in the 2023 periods was primarily due to increased revenues in the U.K., Europe, Asia, and Latin America, and cost reductions in various international operations.

Excluding centralized indirect support costs, gross profit increased from $9.4 million, or 10.9% of revenues before reimbursements in 2022, to $14.5 million, or 14.8% of revenues before reimbursements, in the three months ended September 30, 2023. For the nine months ended September 30, 2023, gross profit increased from $32.4 million, or 12.1% of revenues before reimbursements in 2022, to $47.2 million, or 16.6% of revenues before reimbursements. These increases were primarily due to increased revenues and cost reductions in various operations.

Operating results for our International Operations segment, including gross profit, for the three and nine months ended September 30, 2023 and 2022 were as follows:

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Revenues before Reimbursements

International Operations segment revenues are primarily derived from the global property and casualty insurance company markets in the U.K, Europe, Australia, Asia and Latin America. Revenues before reimbursements by major region, based on actual exchange rates and using a constant exchange rate, for the three and nine months ended September 30, 2023 and 2022 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

Revenues before reimbursements from our International Operations segment totaled $98.1 million in the three months ended September 30, 2023, compared with $86.1 million in the 2022 period. This increase was primarily due to an increase in the U.K., Europe and Latin America. The change in exchange rates increased our International Operations segment revenues by approximately 1.4%, or $1.3 million, for the three months ended September 30, 2023 as compared with the 2022 period. Absent foreign exchange rate fluctuations, International Operations segment revenues would have been $96.8 million for the three months ended September 30, 2023. There was a $0.1 million increase, or 0.1% increase in International Operations revenues in the quarter as a result of the 2022 Van Dijk acquisition in Europe. There was a decrease in segment unit volume, measured principally by cases received, of (1.8)% for the three months ended September 30, 2023, compared with the 2022 period, due to a change in the mix of services provided between quarters. There were 5,000 cases received in Australia in the 2022 third quarter as a result of a weather-related catastrophe for which revenues were recognized across several quarters as services were performed. In addition, cases declined 5.2% due to a decrease of 6,500 high-frequency, low-severity cases received in Europe in the 2022 third quarter for which only minimal revenues were recognized. Changes in product mix and in the rates charged for those services accounted for a 4.9% revenue increase for the three months ended September 30, 2023 compared with the same period in 2022.

Revenues before reimbursements from our International Operations segment totaled $285.2 million in the nine months ended September 30, 2023, compared with $269.0 million in the 2022 period. This increase was primarily due to increases in the U.K. and Latin America. The change in exchange rates decreased our International Operations segment revenues by approximately 4.7%, or $12.7 million, for the nine months ended September 30, 2023 as compared with 2022. Absent foreign exchange rate fluctuations, International Operations segment revenues would have been $297.9 million for the nine months ended September 30, 2023. There was a $1.4 million increase, or 0.5% increase in International Operations revenues in the year-to-date period as a result of the Van Dijk acquisition in Europe. There was a decrease in segment unit volume, measured principally by cases received, of (11.3)% for the nine months ended September 30, 2023, compared with the 2022 period, due to a change in the mix of services provided between periods. There were 17,000 cases received in Australia in the 2022 period as a result of a weather-related catastrophe for which revenues were recognized across several quarters as services were performed. In addition, cases declined 5.2% due to a decrease of 21,100 high-frequency, low-severity cases received in Europe in the 2022 year-to-date period for which only minimal revenues were recognized. Changes in product mix and in the rates charged for those services accounted for a 12.1% revenue increase for the nine months ended September 30, 2023 compared with the same period in 2022.

Based on constant foreign exchange rates, the increase in revenues in the U.K. for the 2023 third quarter and year-to-date periods was due to an increase in case volumes from both new and existing clients. There was an increase in revenues in Europe in the 2023 periods, compared with 2022, due to increases in the Netherlands, including the benefit of the Van Dijk acquisition, partially offset by a decrease in high-frequency, low-severity case volume increases in Scandinavia. There was a decrease in revenues in Australia in the quarter, although an increase in the year-to-date period due to the continued handling of weather-related case activity from the 2022 flooding catastrophe. There was an increase in revenues in Asia in the 2023 third quarter, compared with 2022, due to an increase in high-frequency, low-severity activity in Singapore, and an increase in weather-related claim activity in the year-to-date period. The increase in revenues in Latin America in 2023 was due to an increase in cases with higher average fees in Chile, partially offset by a decrease in high-frequency, low-severity cases in Brazil and Colombia in the third quarter.

Revenue variance components for our International Operations segment, for the three and nine months ended September 30, 2023 are summarized as follows:

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses incurred in our International Operations segment, which are included in total Company revenues, were $7.7 million and $8.1 million for the three months ended September 30, 2023 and 2022, respectively. Reimbursements were $24.4 million and $21.2 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in reimbursed expenses in the year-to-date period was due to the increase in revenues, although there was a decreased use of third parties in the current year third quarter.

Case Volume Analysis

International Operations segment unit volumes by geographic region, measured by cases received, for the three and nine months ended September 30, 2023 and 2022 were as follows:

(whole numbers, except percentages)

Overall, there was a decrease in cases received of (1.8)% for the three months ended September 30, 2023, compared with the 2022 period. There was an increase in the U.K. in the third quarter due to increases from both new and existing clients. Cases declined in Europe due to a change in the mix of services provided between periods, including a reduction of 6,500 high-frequency, low-severity cases in Scandinavia. There was a decrease of 5,000 weather-related cases in Australia in the 2022 third quarter related to flooding catastrophe, although revenues are recognized across multiple quarters as services are performed. The increase in cases received in Asia was due to an increase in high-frequency, low-severity activity in Singapore. Latin America also experienced an increase in cases received in Chile, partially offset by a decrease in high-frequency, low-severity cases in Brazil and Colombia.

Overall, there was a decrease in cases received of (11.3)% for the nine months ended September 30, 2023, compared with the 2022 period. There was an increase in cases in the U.K., due to new business from both new and existing clients. Cases declined in Europe due to a change in the mix of services provided between periods, including a reduction of 21,100 high-frequency, low-severity cases in Scandinavia. There was a decrease in 17,000 weather-related cases in Australia related to flooding catastrophe in 2022 referenced above. There was an increase in cases received in Asia due to an increase in high-frequency, low-severity weather-related activity. Latin America experienced an increase in high-frequency, low-severity cases in Chile and Brazil, partially offset by a reduction in Colombia.

Direct Compensation, Fringe Benefits & Non-Employee Labor

The most significant expense in our International Operations segment is the compensation of employees, including related payroll taxes and fringe benefits, and the payments to outsourced service providers that augment the functions performed by our employees. As a percentage of revenues before reimbursements, direct compensation, fringe benefits, and non-employee labor expenses was 67.7% for the three months ended September 30, 2023 compared with 71.6% for the 2022 period. The total dollar amount of these expenses were $66.4 million for the three months ended September 30, 2023, compared to $61.7 million for the 2022 period. For the nine months ended September 30, 2023, direct compensation, fringe benefits, and non-employee labor expenses were 66.7%, compared with 70.7% in 2022, and were $190.2 million for the nine months ended September 30, 2023 compared to $190.3 million in 2022. The increase in the amounts was due to the higher revenues and an increase in incentive compensation, partially offset by cost reductions undertaken in 2022. The decrease in the percentage of revenues before reimbursements is due to improved staff utilization. There was an average of 3,660 full-time equivalent employees in this segment in the nine months ended September 30, 2023, including 15 from the Van Dijk acquisition, compared with an average of 3,650 in the comparable 2022 period.

Expenses Other than Reimbursements, Direct Compensation, Fringe Benefits & Non-Employee Labor

International Operations expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor were $29.4 million for the three months ended September 30, 2023 compared with $28.3 million for the 2022 period. As a percentage of revenues before reimbursements, expenses other than direct compensation, fringe benefits, and non-employee labor expenses were 30.0% for the three months ended September 30, 2023 compared with 32.9% for the 2022 period. For the nine months ended September 30, 2023, expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor were $86.1 million, compared with $86.4 million for the 2022 period. As a percentage of revenues before reimbursements, expenses other than direct compensation, fringe benefits, and non-employee labor expenses were 30.2% for the nine months ended September 30, 2023, compared with 32.1% for the 2022 period. The increase in the third quarter expense was due to the increased business activities, although there was a slight decrease in administrative costs in the year-to-date period. There was a decrease in the expense as a percent of revenues before reimbursements due to improved operating leverage.

BROADSPIRE SEGMENT

Our Broadspire segment reported operating earnings of $13.5 million, or 15.3% of revenues before reimbursements, for the three months ended September 30, 2023 as compared with $6.2 million, or 7.9% of revenues before reimbursements, for the third quarter of 2022. For the nine months ended September 30, 2023, our Broadspire segment reported operating earnings of $29.6 million, or 11.7% of revenues before reimbursements, compared with 2022 operating earnings of $20.3 million, or 8.6% of revenues before reimbursements. The increase in the 2023 third quarter and year-to-date period was due to an increase in revenues resulting from new client programs, increased medical management usage, and pricing improvements.

Excluding centralized indirect support costs, third quarter gross profit increased from $17.9 million, or 22.8% of revenues before reimbursements, in 2022 to $25.5 million, or 28.9% of revenues before reimbursements in 2023. For the nine months ended September 30, 2023, gross profit increased from $52.0 million, or 22.1% of revenues before reimbursements in 2022, to $64.5 million, or 25.5% of revenues before reimbursements. These increases were due to the increased revenues and improved staff utilization.

Operating results for our Broadspire segment, including gross profit, for the three and nine months ended September 30, 2023 and 2022 were as follows:

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Revenues before Reimbursements

Broadspire revenues are derived from the casualty and disability insurance and self-insured markets in the U.S. Revenues before reimbursements by service line for the three and nine months ended September 30, 2023 and 2022 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

Revenues before reimbursements from our Broadspire segment totaled $88.3 million in the three months ended September 30, 2023 compared with $78.4 million in the 2022 period. This increase was primarily due to an increase in new client growth and an increase in average fees across both service lines. Revenues were positively impacted by an increase in unit volumes, measured principally by cases received, of 1.1% for the three months ended September 30, 2023 compared with the same period of 2022. This is partly due to a $3.2 million increase in revenues within our Medical Management service line for which no cases are received, or 3.6% of the increase in revenues. Changes in product mix and in the rates charged for those services accounted for a 8.0% revenue increase for the 2023 third quarter compared with the 2022 period, primarily due to an increase in workers compensation cases and an increase in the average fee per case.

For the nine months ended September 30, 2023, revenues before reimbursements from our Broadspire segment totaled $253.4 million compared with $234.9 million in the 2022 period. This increase was primarily due to an increase in new client growth and an increase in average fees across both service lines. Revenues were positively impacted by a slight increase in unit volumes, measured principally by cases received, of 0.2% for the nine months ended September 30, 2023 compared with the same period of 2022. This is partly due to a $5.3 million increase in revenues within our Medical Management service line for which no cases are received, or 2.2% of the increase in revenues. Changes in product mix and in the rates charged for those services accounted for a 5.4% revenue increase for the 2023 nine-month period compared with 2022, primarily due to an increase in workers compensation cases and an increase in the average fee per case.

Revenue variance components for our Broadspire segment, for the three and nine months ended September 30, 2023 are summarized as follows:

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Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses incurred in our Broadspire segment were $0.7 million and $0.9 million for the three months ended September 30, 2023 and 2022, respectively. Reimbursements were $2.4 million for both the nine months ended September 30, 2023 and 2022, respectively. Although revenues increased in the 2023 periods, there was not an associated increase in reimbursed expenses.

Case Volume Analysis

Broadspire unit volumes by service line, as measured by cases received, for the three and nine months ended September 30, 2023 and 2022 were as follows:

(whole numbers, except percentages)

Overall case volumes were 1.1% higher for the three months ended September 30, 2023 and 0.2% higher for the nine months ended September 30, 2023 due primarily to an increase in Medical Management referrals. There was a decrease in Claims Management cases due to a reduction in casualty cases, although there was a change in the mix of cases received which resulted in an increase in revenues and an increase in the average fee per case.

Direct Compensation, Fringe Benefits & Non-Employee Labor

The most significant expense in our Broadspire segment is the compensation of employees, including related payroll taxes and fringe benefits, and the payments to outsourced service providers that augment the functions performed by our employees. Direct compensation, fringe benefits, and non-employee labor totaled $54.3 million for the three months ended September 30, 2023, compared to $49.9 million for the comparable 2022 period. Direct compensation, fringe benefits, and non-employee labor, as a percent of the related revenues before reimbursements, decreased from 63.6% in the 2022 third quarter to 61.5% in 2023 third quarter, primarily due to the increased revenues. For the nine months ended September 30, 2023, direct compensation, fringe benefits, and non-employee labor totaled $161.5 million, compared to $147.6 million in 2022. For the nine months ended September 30, 2023, direct compensation, fringe benefits, and non-employee labor, as a percent of the related revenues before reimbursements, increased from 62.8% in 2022 to 63.7% in 2023. The increase in the amounts was due to the increased revenues and an increase in average full-time equivalent employees in support of client requirements. The decrease in expense as a percent of revenues before reimbursements was due to the increased revenues and operating leverage in 2023. Average full-time equivalent employees in this segment totaled 2,601 in the first nine months ended September 30, 2023, compared with 2,473 in the comparable 2022 period.

Expenses Other than Reimbursements, Direct Compensation, Fringe Benefits & Non-Employee Labor

Broadspire segment expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor as a percent of revenues before reimbursements were 23.2% for the three months ended September 30, 2023, compared with 28.5% in the 2022 period. The amount of these expenses decreased from $22.3 million for the three months ended September 30, 2022 to $20.5 million in 2023. For the nine months ended September 30, 2023, expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor were $62.3 million, compared with $67.0 million for the 2022 period. As a percentage of revenues before reimbursements, expenses other than, direct compensation, fringe benefits, and non-employee labor expenses were 24.6% for the nine months ended September 30, 2023, compared with 28.5% for the 2022 period. The decrease in the overall expense and in expense as a percent of revenues before reimbursements was due to the increased revenues and lower non-compensation related costs.

PLATFORM SOLUTIONS SEGMENT

Our Platform Solutions segment reported operating earnings of $8.5 million for the three months ended September 30, 2023, compared with operating earnings of $10.1 million in the 2022 period. The segment operating margin decreased from 15.8% for the three months ended September 30, 2022, to 14.2% in the comparable 2023 period. This decrease was due to a reduction in revenues in our Networks service line. For the nine months ended September 30, 2023, our Platform Solutions segment reported operating earnings of $26.6 million, or 14.1% of revenues before reimbursements, compared with 2022 operating earnings of $22.7 million, or 13.7% of revenues before reimbursements. The increase in operating earnings was due to the increased revenues in each of our Networks, Contractor Connection and Subrogation service lines.

Excluding indirect support costs, gross profit in the third quarter decreased from $15.6 million, or 24.5% of revenues before reimbursements in 2022, to $14.1 million, or 23.5% of revenues before reimbursements, in 2023. This decrease was due to a reduction in revenues in our Networks service line. For the nine months ended September 30, 2023, gross profit increased from $38.0 million, or 22.8% of revenues before reimbursements in 2022, to $43.5 million, or 23.1% of revenues before reimbursements in 2023. The increase in gross profit in the 2023 year-to-date period is due to the increase in revenues in each of our service lines.

Operating results for our Platform Solutions segment, including gross profit, for the three and nine months ended September 30, 2023 and 2022 were as follows:

Revenues before Reimbursements

Platform Solutions segment revenues are primarily derived from the property and casualty insurance company markets in the U.S. Revenues before reimbursements by service line for the three and nine months ended September 30, 2023 and 2022 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

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Revenues before reimbursements from our Platform Solutions segment totaled $59.8 million in the three months ended September 30, 2023, compared with $63.7 million in the 2022 period. This decrease was primarily due to a reduction in our Networks service line where we provide staff augmentation for our clients, partially offset by increases in our Contractor Connection and Subrogation service lines. There was a decrease in segment unit volume, measured principally by cases received, of (9.0)%, for the three months ended September 30, 2023, compared with the 2022 period. There was a decrease in high-frequency, low-severity cases in our Networks service line of 7,600 cases, or a 5.1% decrease in Platform Solutions cases received, in the 2023 third quarter. Revenues in our Platform Solutions segment include revenues from existing clients where we provide staff augmentation for our clients, which resulted in $(4.9) million of decreased revenues in the 2023 third quarter, or a (7.7)% decrease in Platform Solutions revenue. The revenues generated from these clients consist of providing dedicated employees to the clients which is not measured by cases, and accordingly there is no change in cases received to match the change in revenues. Changes in product mix and in the rates charged for those services accounted for a 5.6% revenue increase for the 2023 three-month period compared with 2022, due to increases in pricing and average case values.

For the nine months ended September 30, 2023, revenues before reimbursements from our Platform Solutions segment totaled $188.3 million, compared with $166.3 million in the 2022 period. This increase was primarily due to an increase in our Networks service line due to new client growth and increased utilization with existing clients, as well as increases in our Contractor Connection and Subrogation service lines. There was a decrease in segment unit volume, measured principally by cases received, of (7.1)%, compared with the 2022 period. There was a decrease in high-frequency, low-severity cases in our Networks service line of 16,000 cases, or a 4.2% decrease in Platform Solutions cases received, in the 2023 year-to-date period. Revenues in our Platform Solutions segment include revenues from existing clients where we provide staff augmentation for our clients, which resulted in $13.1 million of increased revenues in the 2023 nine-month period, or a 7.0% increase in Platform Solutions revenue. Changes in product mix and in the rates charged for those services accounted for a 9.2% revenue increase for the 2023 nine-month period compared with 2022, due to increases in pricing and average case values.

The decrease in revenues for the three months ended September 30, 2023 in our Networks service line was primarily due to a reduction where we provide staff augmentation for our clients. The increase in revenues in our Networks service line for the nine months ended September 30, 2023 was due to increased utilization with existing clients in our Catastrophe service line, partially offset by a reduction in WeGoLook. The increase in Contractor Connection was due to increases in pricing and the average case values. There was an increase in revenues in our Subrogation service line, in spite of a reduction in cases received, due to a special project in the 2022 year-to-date period that had a lower average fee per case.

Revenue variance components for our Platform Solutions segment, for the three and nine months ended September 30, 2023 are summarized as follows:

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses incurred in our Platform Solutions segment were $1.1 million for the three months ended September 30, 2023 compared with $0.4 million in the 2022 period. Reimbursements were $2.2 million and $0.7 million for the nine months ended September 30, 2023 and 2022, respectively. These increases were due to the increased revenues and an increased use of third parties in the 2023 periods.

Case Volume Analysis

Platform Solutions unit volumes by service line, as measured by cases received, for the three and nine months ended September 30, 2023 and 2022 were as follows:

(whole numbers, except percentages)

Overall case volumes were (9.0)% lower in the three months ended September 30, 2023, compared with the 2022 period, due to decreases in Contractor Connection and Networks. For the nine months ended September 30, 2023, overall case volumes were (7.1)% lower compared with 2022 due to decreases in each of our service lines. There was a decrease in high-frequency, low-severity cases in our Networks service line of 7,600 cases and 16,000 cases in the three months and nine months ended September 30, 2023, respectively, compared to 2022. This was due to a decrease in high-frequency, low-severity cases received in WeGoLook resulting from a special project in 2022, partially offset by an increase in Catastrophe. A portion of the increase in revenues in our Networks service line is the result of revenues generated which consists of us providing dedicated employees to clients. This revenue is not based on fees per case, and accordingly there is no increase in cases received to match the increase in revenues. There was a decrease in cases received in our Contractor Connection service line in the 2023 periods due to carrier clients experiencing decreased program utilization. The decrease in cases in our Subrogation service line in the year-to-date period was due to a special project in the 2022 period that had a lower average fee per case.

Direct Compensation, Fringe Benefits & Non-Employee Labor

Platform Solutions direct compensation, fringe benefits, and non-employee labor expenses as a percent of revenues before reimbursements were 66.2% in the 2023 third quarter compared with 66.1% in the 2022 quarter. For the nine months ended September 30, 2023, direct compensation, fringe benefits, and non-employee labor expenses were 66.0% compared with 66.4% in 2022. The dollar amount of these expenses was $39.6 million for the 2023 third quarter and $42.1 million in the 2022 quarter, and were $124.2 million for the nine months ended September 30, 2023 compared to $110.4 million in 2022. The decrease in costs in the third quarter was due to the reduction in revenues. The increase in costs in the year-to-date period was due to higher revenues in the current year and increased employees to support client growth. The decrease in the expense as a percentage of revenues before reimbursements in the current year was due to the increased revenues and improved staff utilization. There was an average of 1,417 full-time equivalent employees in the Platform Solutions segment in the 2023 nine-month period, compared with an average of 1,259 for the comparable 2022 period.

Expenses Other than Reimbursements, Direct Compensation, Fringe Benefits & Non-Employee Labor

Expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor were 19.5% of Platform Solutions revenues before reimbursements for the three months ended September 30, 2023 compared with 18.0% for the comparable period in 2022. The dollar amount of these expenses increased to $11.7 million in the 2023 third quarter as compared with $11.5 million in the 2022 period. For the nine months ended September 30, 2023, expenses other than reimbursements, direct compensation, fringe benefits, and non-employee labor were $37.5 million, compared with $33.1 million for the 2022 period. As a percentage of revenues before reimbursements, expenses other than direct compensation, fringe benefits, and non-employee labor expenses were 19.9% for the nine months ended September 30, 2023, compared with 19.9% for the 2022 period. The increase in the operating expenses in the 2023 periods is due to additional expense needed to support the increased revenues, including the cost of technology investments. The increase as a percent of revenues before reimbursements for the third quarter is due to the lower revenues in the 2023 period, although the percent of revenues before reimbursements remained consistent in the year-to-date periods.

EXPENSES AND CREDITS EXCLUDED FROM SEGMENT OPERATING EARNINGS

Income Taxes

Our consolidated effective income tax rate may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our various domestic and international operations which are subject to income taxes at different rates, our ability to utilize net operating loss and tax credit carryforwards, amounts related to uncertain income tax positions, and goodwill impairments. We estimate that our effective income tax rate for 2023 will be approximately 36% to 38% after considering known discrete items as of September 30, 2023.

The provision for income taxes on consolidated income before income tax totaled $6.8 million and a benefit of $(13.3) million for the three months ended September 30, 2023 and 2022, respectively. The overall effective tax rate decreased to 35.8% for the three months ended September 30, 2023 compared with 46.6% for the 2022 period primarily due to the impact of a partially non-deductible goodwill impairment in 2022.

The provision for income taxes on consolidated income before income tax totaled $17.3 million and a benefit of $(8.1) million for the nine months ended September 30, 2023 and 2022, respectively. The overall effective tax rate decreased to 35.6% for the nine months ended September 30, 2023 compared with 65.5% for the 2022 period primarily due to the impact of a partially non-deductible goodwill impairment in 2022.

Net Corporate Interest Expense

Net corporate interest expense consists of interest expense that we incur on our short- and long-term borrowings, partially offset by any interest income we earn on available cash balances and short-term investments. These amounts vary based on interest rates, borrowings outstanding and the amounts of invested cash. Corporate interest expense totaled $5.3 million and $3.1 million for the three months ended September 30, 2023 and 2022, respectively. Interest income was $0.7 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively. Corporate interest expense totaled $14.9 million and $6.8 million for the nine months ended September 30, 2023 and 2022, respectively. Interest income was $1.7 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in the 2023 periods is primarily due to higher interest cost in 2023 compared to 2022 as a result of increases in interest rates.

Stock Option Expense

Stock option expense, a component of stock-based compensation, is comprised of non-cash expenses related to stock options granted under our various stock option and employee stock purchase plans. Stock option expense is not allocated to our operating segments. Stock option expense totaled $0.1 million for each of the three months ended September 30, 2023 and 2022. Stock option expense totaled $0.4 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively.

Amortization of Customer-Relationship Intangible Assets

Amortization of customer-relationship intangible assets represents the non-cash amortization expense for finite-lived customer-relationship and trade name intangible assets. Amortization expense associated with these intangible assets totaled $2.0 million for each of the three months ended September 30, 2023 and 2022. Amortization expense associated with these intangible assets totaled $5.9 million for the nine months ended September 30, 2023 and $5.8 million for the 2022 period. This amortization expense is included in "Selling, general, and administrative expenses" in our unaudited Condensed Consolidated Statements of Operations.

Unallocated Corporate and Shared Costs, Net

Certain unallocated corporate and shared costs are excluded from the determination of segment operating earnings. For the three and nine months ended September 30, 2023 and 2022, unallocated corporate and shared costs and credits represented expenses for our chief executive officer and our Board of Directors, certain adjustments to our self-insured liabilities, certain unallocated legal costs and professional fees, and certain adjustments and recoveries to our allowances for estimated credit losses.

Unallocated corporate and shared costs were $4.8 million and $2.4 million for the three months ended September 30, 2023 and 2022, respectively. The increase in the 2023 third quarter was primarily due to an increase in incentive compensation and an increase in unallocated payroll tax and benefits costs. For the nine months ended September 30, 2023 and 2022, unallocated corporate and shared costs were $10.0 million and $7.4 million, respectively. The increase in the the year-to-date period was primarily due to a $1.8 million gain on sale of our Canadian head office building in the 2022 first quarter and a $1.2 million increase in self-insured costs, partially offset by other cost reductions.

Contingent Earnout Adjustments

Contingent earnout expense represents the fair value adjustment of earnout liabilities arising from recent acquisitions. This expense totaled $2.1 million and $3.1 million for the three and nine months ended September 30, 2023, respectively, compared to $0.9 million and $3.2 million for the three and nine months ended September 30, 2022, respectively. The fair value adjustment is based on changes to projections of acquired entities over the respective earnout periods, which span multiple years.

Non-Service Pension Cost and Credits

Non-service pension cost totaled $2.2 million and $6.4 million for the three and nine months ended September 30, 2023, respectively, compared to credits of ($0.5) million and ($1.6) million for the three and nine months ended September 30, 2022, respectively, primarily due to higher interest cost in 2023 compared to 2022 given changes in market rates. Non-service pension costs represents the U.S. and U.K. non-service defined benefit pension costs, which are non-operating in nature as the U.S. plan is frozen and the U.K. plans are closed to new participants. The service cost component of the U.K. plans remains in compensation expense.

Goodwill Impairment

The Company recognized a pretax non-cash goodwill impairment in the 2022 third quarter totaling $36.8 million. This impairment consisted of $3.4 million related to its North America Loss Adjusting reportable segment, $22.7 million related to its International Operations reportable segment, and $10.7 million related to its Platform Solutions reportable segment. There was no similar goodwill impairment in 2023.

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

At September 30, 2023, our working capital balance (current assets less current liabilities) was approximately $89.3 million, an increase of $17.5 million from the working capital balance at December 31, 2022. Our cash and cash equivalents were $49.2 million at September 30, 2023, compared with $46.0 million at December 31, 2022.

Cash and cash equivalents as of September 30, 2023 consisted of $20.2 million held in the U.S. and $29.0 million held in our foreign subsidiaries. The Company generally does not provide for additional U.S. and foreign income taxes on undistributed earnings of foreign subsidiaries because they are considered to be indefinitely reinvested. The Company maintained its permanent reinvestment assertion on a portion of prior year undistributed earnings for certain foreign operations and accrued deferred taxes attributable to these earnings. The majority of the remaining historical earnings and future foreign earnings are expected to remain permanently reinvested and will be used to provide working capital for these operations, fund defined benefit pension plan obligations, repay non-U.S. debt, fund capital improvements, and fund future acquisitions.

However, if at a future date or time funds that remain permanently reinvested are necessary for our operations in the U.S. or we otherwise believe it is in our best interests to repatriate all or a portion of such funds, we may be required to accrue and pay taxes to repatriate these funds. No assurances can be provided as to the amount or timing thereof, the tax consequences related thereto, or the ultimate impact any such action may have on our results of operations or financial condition.

Cash Provided by (Used in) Operating Activities

Cash provided by operating activities was $68.1 million for the nine months ended September 30, 2023, compared with $16.2 million used in operating activities in the 2022 period. The increase in cash was primarily driven by higher earnings, an improvement in working capital, including a reduction in work in process, increases in accrued incentive compensation accruals as compared to payouts for prior year performance, and an increase in income tax refunds received.

Cash Used in Investing Activities

Cash used in investing activities was $27.7 million for the nine months ended September 30, 2023, compared with $48.2 million used in the first nine months of 2022. The decrease in use for 2023 was primarily due to $20.9 million in payments related to the Praxis acquisition in 2022. Capital expenditures were $27.7 million in 2023 compared to $24.9 million in 2022.

Cash (Used in) Provided by Financing Activities

Cash used in financing activities was $38.1 million for the nine months ended September 30, 2023, compared with $46.9 million provided in the 2022 period. During the first nine months of 2023, there was a decrease of $22.8 million of net borrowing from our revolving credit facility, compared with a net increase during the comparable 2022 period of $84.8 million. The decrease in borrowing in the 2023 period was primarily related to more positive cash flows from operations as well as 2023 requiring fewer funds for investing activities and share repurchases. Share repurchases totaled $0.6 million in the 2023 period, compared with $26.7 million for the first nine months of 2022. We paid $9.3 million in dividends in the nine months ended September 30, 2023 compared with $8.9 million in the 2022 period.

Other Matters Concerning Liquidity and Capital Resources

As a component of our Credit Facility with Bank of America (the "Credit Facility"), we maintain a letter of credit facility to satisfy certain contractual obligations. Including $8.9 million of undrawn letters of credit issued under the letter of credit facility, the available balance under our credit facility totaled $232.0 million at September 30, 2023. Our short-term debt obligations typically peak during the first half of each year due to the annual payment of incentive compensation, contributions to retirement plans, working capital fluctuations, and certain other recurring payments, and generally decline during the balance of the year. The balance of short-term borrowings represents amounts under our credit facility that we expect, but are not required, to repay in the next twelve months. Long- and short-term borrowings outstanding, including current installments and finance leases, totaled $218.4 million as of September 30, 2023 compared with $238.9 million at December 31, 2022.

Our liquidity is defined as cash on hand and borrowing capacity under our Credit Facility based on our trailing twelve month EBITDA, as defined in our Credit Facility. At September 30, 2023, we had $49.2 million of cash on hand and, based on trailing twelve month EBITDA and the Credit Facility limit, additional borrowing capacity of $232.0 million, resulting in total liquidity of $281.2 million at September 30, 2023.

On May 19, 2023, we amended the Credit Agreement. Pursuant to the amendment, London Interbank Offered Rate ("LIBOR") has been replaced with Term Secured Overnight Financing Rate ("Term SOFR") as the U.S. dollar reference rate.

Defined Benefit Pension Funding and Cost

We sponsor a qualified defined benefit pension plan in the U.S. (the "U.S. Qualified Plan"), three defined benefit pension plans in the U.K., and defined benefit pension plans in the Netherlands, Norway, Germany, and the Philippines. Effective December 31, 2002, we froze our U.S. Qualified Plan. Our frozen U.S. Qualified Plan and U.K. plans were underfunded by $24.3 million and overfunded by $20.4 million, respectively, at December 31, 2022, based on accumulated benefit obligations of $304.1 million and $154.5 million for the U.S. Qualified Plan and the U.K. plans, respectively.

For the nine months ended September 30, 2023 we made no contributions to our U.S. defined benefit pension plan and $1.8 million to our U.K defined benefit pension plans, compared with no contributions to the U.S. plan and $0.5 million to the U.K. plans for the nine months ended September 30, 2022. We do not expect to make any additional discretionary contributions to our U.S. defined benefit pension plan during the remainder of 2023. Anticipated funding for the other international plans is not significant.

Dividend Payments

Our Board of Directors makes dividend decisions from time to time based in part on an assessment of current and projected earnings and cash flows. During the nine months ended September 30, 2023, we paid $9.3 million in dividends. Our ability to pay future dividends could be impacted by many factors including the funding requirements of our defined benefit pension plans, repayments of outstanding borrowings, levels of cash expected to be generated by our operating activities, and covenants and other restrictions contained in any credit facilities or other financing agreements.

Financial Condition

Other significant changes on our unaudited Condensed Consolidated Balance Sheet as of September 30, 2023, compared with our unaudited Condensed Consolidated Balance Sheet as of December 31, 2022 were as follows:

• Accounts receivable increased $6.3 million excluding foreign currency exchange impacts. This increase was primarily due to an increase our North America Loss Adjustment segment.
• Prepaid income taxes, net of accrued taxes, decreased $5.3 million excluding foreign exchange impacts. The decrease is primarily due to refunds received related to Australian, Canadian, and U.S. operations.
• Prepaid expenses and other operating activities increased $5.6 million excluding foreign currency exchange impacts. The increase was primarily due to timing of annual payments made for prepaid software services and prepaid insurance.

At September 30, 2023, we were not a party to any off-balance sheet arrangements which we believe could materially impact our operations, financial condition, or cash flows.

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, we have certain material obligations under operating lease agreements to which we are a party. The Company records operating lease-related assets and liabilities on our unaudited Condensed Consolidated Balance Sheets.

We also maintain funds in various trust accounts to administer claims for certain clients. These funds are not available for our general operating activities and, as such, have not been recorded in the accompanying unaudited Condensed Consolidated Balance Sheets. We have concluded that we do not have a material off-balance sheet risk related to these funds.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Except as set forth below, there have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

New Accounting Standards Adopted

Additional information related to adoption of accounting standards is provided in Note 2 to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Pending Adoption of New Accounting Standards

No pending adoptions of issued accounting standards as of September 30, 2023 that are expected to be material to the consolidated financial statements.

For a discussion of quantitative and qualitative disclosures about the Company's market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2022. Our exposures to market risk have not changed materially since December 31, 2022.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. The Company's management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and not be detected.

As of the end of the period covered by this report, we performed an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective as of September 30, 2023 because of the material weakness in internal control over financial reporting described below.

As discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, the Company’s operations in the U.K. did not have effective information technology general controls (ITGCs) in the areas of change management and logical access over certain information technology systems that supported its financial reporting processes. The Company's U.K. business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. The material weakness did not result in any identified misstatements in the Company’s financial statements.

Notwithstanding the identified material weaknesses, management has concluded that the condensed consolidated financial statements included in this quarterly report on Form 10-Q fairly present, in all material respects, the Company's financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. generally accepted accounting principles.

During the quarter ended September 30, 2023, the Company continued to improve the user access review procedures and change management protocols in Crawford U.K., implemented improved documentation and monitoring procedures, and improved training procedures that are being issued globally in 2023.

Management’s Remediation Plan

As discussed in the Company's Annual Report on form 10-K for the year ended December 31, 2022, to remediate the material weakness described above, the Company is implementing revised controls and processes in Crawford U.K. that include the following, among others: (1) improve the documentation of the user access review control activities and control activities over program change management to more clearly communicate management’s expectation of the required responsibilities for the control activities; (2) develop personnel by enhancing training for ITGC owners regarding their roles and responsibilities within the control objectives and activities; and (3) implement automated user access review and program change management tools to ensure compliance. The Audit Committee of the Board of Directors has reviewed and discussed these matters with management.

The material weakness will be considered remediated when management concludes that, through testing, the applicable remediated controls are designed, implemented and operating effectively for a sufficient period of time for our management to conclude that the material weakness has been remediated. The Company will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting. The Company expects remediation of this material weakness will be completed during fiscal year 2023.

Changes in Internal Control over Financial Reporting

Other than the ongoing remediation efforts described above, there were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

In addition to the other information set forth in this report, the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022 could materially affect our business, financial condition, or results of operations. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or results of operations.