Crawford & Co: Form 10-Q for the period ended Mar 31, 2024

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,
• proliferation and escalation of international hostilities and geopolitical events, such as the ongoing conflicts in Russia/Ukraine and Israel,
• 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 months ended March 31, 2024 and 2023, and as of March 31, 2024, and December 31, 2023, 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, 2023. 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.

Results of Operations

Consolidated revenues before reimbursements decreased $14.7 million, or (4.6)%, for the three months ended March 31, 2024, compared with the same period of 2023. The decrease in the 2024 first quarter was primarily due to decreases in our Platform Solutions operating segment. Changes in foreign exchange rates increased our consolidated revenues before reimbursements by $0.9 million, or 0.3%, for the three months ended March 31, 2024 as compared with the prior year period. To illustrate this impact, segment revenues are presented below, using a constant exchange rate, for the three months ended March 31, 2024.

(in thousands, except percentages)

Excluding foreign currency impacts, consolidated revenues before reimbursements decreased $15.6 million, or (4.9)%, for the three months ended March 31, 2024 compared to the prior year first quarter. Revenues from the North America Loss Adjusting segment decreased slightly in the 2024 first quarter due to a decrease in weather-related activity. Revenues from the International Operations segment increased in the 2024 first quarter primarily due to increases in the U.K., Europe, and Latin America, partially offset by a reduction in Australia. Revenues from the Broadspire segment increased for the quarter due to an increase in Claims and Medical Management revenues. Revenues from the Platform Solutions segment decreased in the first quarter primarily due to a reduction in our Networks service line as we were completing claims related to Hurricane Ian in the 2023 period.

Overall, there was a decrease in cases received of (4.0)% for the three months ended March 31, 2024 due to a reduction of approximately 22,100 high-frequency, low-severity cases in our North America Loss Adjusting and Platform Solutions operating segments that were present in the 2023 first quarter that generated minimal revenues in the 2023 period. This includes 10,300 cases received in our North America Loss Adjusting segment in the 2023 first quarter related to Contractor Connection in Canada, as well as 11,800 cases received in our Platform Solutions segment in the 2023 first quarter related to the Networks service line.

Cases received are presented below by segment for the three months ended March 31, 2024 and 2023:

(whole numbers, except percentages)

23

To illustrate exposure to the impact of changes in foreign currencies, revenues before reimbursements are presented below by denominated currency for the three months ended March 31, 2024:

(in thousands)

Costs of services provided, before reimbursements, decreased $12.7 million, or 5.6%, for the three months ended March 31, 2024 as compared with the 2023 period. This decrease was primarily due to a decrease in compensation expense and other costs in the Platform Solutions segment resulting from the lower revenues, partially offset by increases in compensation expense and other costs in our three other operating segments.

Selling, general, and administrative expenses increased $10.6 million, or 15.9%, in the three months ended March 31, 2024 as compared with the 2023 period. The increase was primarily due to professional fees, IT costs, bad debt expense, and compensation expense, including taxes and benefits.

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 acquisition-related intangible assets, contingent earnout adjustments, non-service pension costs, 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 acquisition-related intangible assets, contingent earnout adjustments, and non-service pension costs 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 acquisition-related and trade name intangible assets acquired in business combinations. Non-service pension costs represent 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. 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.

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 acquisition-related intangible assets, contingent earnout adjustments, non-service pension costs, and unallocated corporate and shared costs, net 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 acquisition-related 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 before income taxes and net income 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 $4.5 million, or 5.8% of revenues before reimbursements, for the three months ended March 31, 2024, compared with 2023 operating earnings of $8.1 million, or 10.4% of revenues before reimbursements. The decrease in operating earnings in the 2024 first quarter was primarily due to the decrease in revenues in Canada and U.S. Field Operations and reduced staff utilization related to the decrease in weather-related activity.

Excluding centralized indirect support costs, gross profit decreased from $17.3 million, or 22.4% of revenues before reimbursements in 2023, to $14.5 million, or 18.8% of revenues before reimbursements, in the three months ended March 31, 2024 due primarily to the decrease in revenues due to mild weather events.

Operating results for our North America Loss Adjusting segment, including gross profit, for the three months ended March 31, 2024 and 2023 were as follows:

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 months ended March 31, 2024 and 2023 were as follows:

(in thousands, except percentages)

Revenues before reimbursements from our North America Loss Adjusting segment totaled $77.4 million in the three months ended March 31, 2024, compared with $77.6 million in the 2023 period. This slight decrease was due to a decrease in Canada and U.S. Field Operations, partially offset by an increase in U.S. Global Technical Services revenues. There was a decrease in segment unit volume, measured principally by cases received, of (15.2)% for the three months ended March 31, 2024, compared with the 2023 period. This was partially offset by a decrease in high-frequency, low-severity cases received in Contractor Connection in Canada of 10,300 or 14.2%. Changes in product mix and in the rates charged for those services accounted for a 0.7% revenue increase for the three months ended March 31, 2024 compared with the same period in 2023, due to increases in pricing and average fee per case.

The increase in revenues in the U.S. for the three months ended March 31, 2024 was due to an increase in in Global Technical Services revenues from an increase in expert adjusting staff and increased business from new and existing clients offset by a decrease in U.S. Field Operations as a result of a decrease in weather-related activity.

Revenue variance components for our North America Loss Adjusting segment, for the three months ended March 31, 2024 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 $1.9 million and $2.9 million for the three months ended March 31, 2024 and 2023, respectively.

Case Volume Analysis

North America Loss Adjusting segment unit volumes by geographic region, measured by cases received, for the three months ended March 31, 2024 and 2023 were as follows:

(whole numbers, except percentages)

Overall, there was a decrease in cases of (15.2)% in the three months ended March 31, 2024, compared to the same period in 2023. The decrease in U.S. case volumes in the 2024 first quarter was due to less weather-related activity partially offset by an increase in Global Technical Services. There was a decrease in cases in Canada in the 2024 first quarter due to 10,300 less high-frequency, low-severity Contractor Connection cases related to the loss of a customer, as compared with the 2023 period.

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 71.7% for the three months ended March 31, 2024 compared with 69.8% for the 2023 period. The total dollar amount of these expenses increased to $55.5 million for the three months ended March 31, 2024 from $54.2 million for the comparable 2023 period. The increase was due to an increase in employees in Global Technical Services. The increase in the percentage of revenues before reimbursements is due to the reduced revenues and lower staff utilization in U.S. Field Operations and Canada, compared to the 2023 period. There was an average of 2,046 full-time equivalent employees in this segment in the three months ended March 31, 2024 compared with an average of 2,091 in the 2023 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 $17.4 million for the three months ended March 31, 2024 compared with $15.4 million for the 2023 period. As a percentage of revenues before reimbursements, expenses other than direct compensation, fringe benefits, and non-employee labor expenses were 22.5% for the three months ended March 31, 2024 compared with 19.8% for the 2023 period. The increase in the current year amounts was due to higher technology investments, auto expenses, and self-insurance costs. The increase in the expense as a percentage of revenues before reimbursements is due to decreased revenues.

INTERNATIONAL OPERATIONS SEGMENT

Operating earnings in our International Operations segment were $1.7 million, or 1.7% of revenues before reimbursements, for the three months ended March 31, 2024, compared with $3.0 million, or 3.3% of revenues before reimbursements, in the 2023 period. The decrease in operating earnings in the 2024 period was primarily due to Australia flood activity in the prior year first quarter and reductions in Legal Services productivity levels, partially offset by increases in Latin America and the U.K.

Excluding centralized indirect support costs, gross profit slightly increased from $15.7 million, or 17.1% of revenues before reimbursements in 2023, to $16.0 million, or 16.3% of revenues before reimbursements, in the three months ended March 31, 2024. The increase in gross profit was driven by the $6.2 million increase in revenues, and the decrease in gross profit percentage was primarily due to the growth in direct expenses exceeding the increase in revenues.

Operating results for our International Operations segment, including gross profit, for the three months ended March 31, 2024 and 2023 were as follows:

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 months ended March 31, 2024 and 2023 were as follows:

(in thousands, except percentages)

Revenues before reimbursements from our International Operations segment totaled $98.1 million in the three months ended March 31, 2024, compared with $91.9 million in the 2023 period. This increase was 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 1.0%, or $0.9 million, for the three months ended March 31, 2024 as compared with the 2023 period. Absent foreign exchange rate fluctuations, International Operations segment revenues would have been $97.2 million for the three months ended March 31, 2024. There was an increase in segment unit volume, measured principally by cases received, of 7.2% for the three months ended March 31, 2024, compared with the 2023 period. Cases received increased by 9,000 or 7.1% in the three months ended March 31, 2024, driven by severe storms in Australia, for which revenues are expected to be recognized primarily in future quarters. This was partially offset by a decrease in high-frequency, low-severity cases received in the U.K. of 3,500 or (2.8%). Changes in product mix and in the rates charged for those services accounted for a 2.9% revenue increase for the three months ended March 31, 2024 compared with the same period in 2023.

Based on constant foreign exchange rates, the increase in revenues in the U.K. for the 2024 first quarter period was due to an increase in property and third party administration revenues driven by higher value claims. There was an increase in revenues in Europe in the 2024 period, compared with 2023, due to increases in Spain and Norway. There was a decrease in revenues in Australia in the quarter due to the continued handling of weather-related case activity during the first quarter of 2023 from the 2022 flooding catastrophe. There was a decrease in revenues in Asia in the 2024 first quarter, compared with 2023, due to decreased large loss claims in Thailand and reduced weather-related activity in the Philippines. The increase in revenues in Latin America in the 2024 first quarter was primarily driven by increased volumes across third-party administration and loss adjusting.

Revenue variance components for our International Operations segment, for the three months ended March 31, 2024 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 $8.5 million and $7.5 million for the three months ended March 31, 2024 and 2023, respectively. The increase in the quarter was due to increased use of third parties in the current year first quarter.

Case Volume Analysis

International Operations segment unit volumes by geographic region, measured by cases received, for the three months ended March 31, 2024 and 2023 were as follows:

(whole numbers, except percentages)

Overall, there was an increase in cases received of 7.2% for the three months ended March 31, 2024, compared with the 2023 period. There was a decrease in the U.K. in the first quarter due to decreases in high-frequency, low-severity cases in third party administration. Cases declined slightly in Europe due to a decrease in claims in Sweden. There was an increase of 9,000 high-frequency, low-severity weather-related cases in Australia, although revenues are expected to be 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 experienced an increase in cases received in Chile.

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 66.2% for the three months ended March 31, 2024 compared with 66.9% for the 2023 period. The total dollar amount of these expenses was $65.0 million for the three months ended March 31, 2024, compared to $61.4 million for the 2023 period. The increase was due to increases in compensation expense, including incentive compensation. The decrease in the percentage of revenues before reimbursements is due to higher revenues in the 2024 first quarter and improved staff utilization. There was an average of 3,611 full-time equivalent employees in this segment in the three months ended March 31, 2024, compared with an average of 3,693 in the comparable 2023 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 $31.4 million for the three months ended March 31, 2024 compared with $27.4 million for the 2023 period. As a percentage of revenues before reimbursements, expenses other than direct compensation, fringe benefits, and non-employee labor expenses were 32.0% for the three months ended March 31, 2024 compared with 29.8% for the 2023 period. The increase in the first quarter expense and percent of revenues before reimbursements was due to increased IT application costs.

BROADSPIRE SEGMENT

Our Broadspire segment reported operating earnings of $12.8 million, or 13.6% of revenues before reimbursements, for the three months ended March 31, 2024 as compared with $7.9 million, or 9.4% of revenues before reimbursements, for the first quarter of 2023. The increase in the 2024 first quarter was due to an increase in revenues resulting from new client programs, increased medical management usage, and pricing improvements.

Excluding centralized indirect support costs, first quarter gross profit increased from $19.2 million, or 22.9% of revenues before reimbursements, in 2023 to $24.3 million, or 25.8% of revenues before reimbursements in 2024. This increase was due to the increased revenues and improved staff utilization.

Operating results for our Broadspire segment, including gross profit, for the three months ended March 31, 2024 and 2023 were as follows:

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 months ended March 31, 2024 and 2023 were as follows:

(in thousands, except percentages)

Revenues before reimbursements from our Broadspire segment totaled $94.3 million in the three months ended March 31, 2024 compared with $84.1 million in the 2023 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 5.4% for the three months ended March 31, 2024 compared with the same period of 2023. This is partly due to a $2.8 million increase in revenues within our Medical Management service line for which no cases are received, or 3.3% of the increase in revenues. There was also a $1.2 million increase in revenues within our Claims Management service line related to income earned which offsets the costs of managing the funds maintained to administer claims for our customers, for which no cases are received, or 1.4% of the increase in revenues. Changes in product mix and in the rates charged for those services accounted for a 2.1% revenue increase for the 2024 first quarter compared with the 2023 period, 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 months ended March 31, 2024 are summarized as follows:

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses incurred in our Broadspire segment were $0.9 million and $0.7 million for the three months ended March 31, 2024 and 2023, respectively. The increase in the 2024 period was primarily due to the increased revenues in the current period.

Case Volume Analysis

Broadspire unit volumes by service line, as measured by cases received, for the three months ended March 31, 2024 and 2023 were as follows:

(whole numbers, except percentages)

Overall case volumes were 5.4% higher for the three months ended March 31, 2024 due primarily to an increase in Medical Management referrals. There was a decrease in Claims Management cases due to a reduction in accident and health cases that impacted the mix of cases received resulting in 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 $57.3 million for the three months ended March 31, 2024, compared to $52.6 million for the comparable 2023 period. Direct compensation, fringe benefits, and non-employee labor, as a percent of the related revenues before reimbursements, decreased from 62.6% in the 2023 first quarter to 60.7% in 2024 first quarter, primarily due to the increased revenues. Average full-time equivalent employees in this segment totaled 2,669 in the three months ended March 31, 2024, compared with 2,591 in the 2023 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 25.7% for the three months ended March 31, 2024, compared with 27.9% in the 2023 period. The amount of these expenses increased from $23.5 million for the three months ended March 31, 2023 to $24.2 million in 2024 related to the increased business activity. The decrease in the expense as a percent of revenues before reimbursements was due to the increased revenues.

PLATFORM SOLUTIONS SEGMENT

Our Platform Solutions segment reported operating earnings of $1.1 million for the three months ended March 31, 2024, compared with operating earnings of $10.0 million in the 2023 period. The segment operating margin decreased from 15.9% for the three months ended March 31, 2023, to 3.5% in the comparable 2024 period. This decrease was primarily due to a reduction in revenues in our Networks service line as we were completing claims related to Hurricane Ian in the 2023 period.

Excluding indirect support costs, gross profit in the first quarter decreased from $15.5 million, or 24.7% of revenues before reimbursements in 2023, to $7.2 million, or 22.7% of revenues before reimbursements, in 2024. This decrease was primarily due to a reduction in revenues in our Networks service line.

Operating results for our Platform Solutions segment, including gross profit, for the three months ended March 31, 2024 and 2023 were as follows:

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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 months ended March 31, 2024 and 2023 were as follows:

(in thousands, except percentages)

Revenues before reimbursements from our Platform Solutions segment totaled $31.9 million in the three months ended March 31, 2024, compared with $62.8 million in the 2023 period. This decrease was primarily due to a reduction in our Networks service line where we provide staff augmentation for our clients, along with a decrease in our Contractor Connection service line related to less weather-related activity in the first quarter of 2024, offset partially by an increase in our Subrogation service line. During the 2023 first quarter our Networks service line was completing claims related to Hurricane Ian. There was a decrease in segment unit volume, measured principally by cases received, of (22.6)%, for the three months ended March 31, 2024, compared with the 2023 period. There was a decrease in high-frequency, low-severity cases in our Networks service line of 11,800 cases, or 12.0% in the three months ended March 31, 2024, compared to 2023. Revenues in our Networks service line include revenues from existing clients where we provide staff augmentation for our clients, which resulted in $(29.1) million or (46.3)% of decreased revenues in the 2024 first quarter as we were completing Hurricane Ian related claims in the 2023 period. Changes in product mix and in the rates charged for those services accounted for a 7.7% revenue increase for the 2024 three-month period compared with 2023, due to increases in average case values.

Revenue variance components for our Platform Solutions segment, for the three months ended March 31, 2024 are summarized as follows:

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses incurred in our Platform Solutions segment were $0.1 million for the three months ended March 31, 2024 compared with $0.4 million in the 2023 period. The decrease was due the reduced Networks revenues in the 2024 period.

Case Volume Analysis

Platform Solutions unit volumes by service line, as measured by cases received, for the three months ended March 31, 2024 and 2023 were as follows:

(whole numbers, except percentages)

33

Overall case volumes were (22.6)% lower in the three months ended March 31, 2024, compared with the 2023 period, due to decreases in Contractor Connection and Networks from less weather-related activity. There was a decrease in high-frequency, low-severity cases in our Networks service line of 11,800 cases in the three months ended March 31, 2024, compared to 2023. A portion of the decrease 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 change in cases received to match the change in revenues. There was a decrease in cases received in our Contractor Connection service line in the 2024 period due to less weather-related activity. The increase in cases in our Subrogation service line in the year-to-date period was due to a favorable change in product mix.

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 59.3% in the 2024 first quarter compared with 65.1% in the 2023 quarter. The dollar amount of these expenses was $18.9 million for the 2024 first quarter and $40.9 million in the 2023 quarter. The decrease in costs in the first quarter was due to the reduction in revenues. There was an average of 842 full-time equivalent employees in the Platform Solutions segment in the 2024 three-month period, compared with an average of 1,445 for the comparable 2023 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 37.2% of Platform Solutions revenues before reimbursements for the three months ended March 31, 2024 compared with 19.0% for the comparable period in 2023. The dollar amount of these expenses remained consistent in the 2024 first quarter as compared the 2023 period at $11.9 million. The increase as a percent of revenues before reimbursements for the first quarter is due to the lower revenues in the 2024 period.

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 2024 will be approximately 30% to 32% after considering known discrete items as of March 31, 2024.

The provision for income taxes on consolidated income before income tax totaled $1.0 million and $5.3 million for the three months ended March 31, 2024 and 2023, respectively. The overall effective tax rate decreased to 27.4% for the three months ended March 31, 2024 compared with 32.9% for the 2023 period primarily due to a larger impact of discrete tax items resulting from lower year-over-year earnings.

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 $4.5 million and $4.7 million for the three months ended March 31, 2024 and 2023, respectively. Interest income was $0.9 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.

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 $0.2 million for each of the three months ended March 31, 2024 and 2023.

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related 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 $1.9 million for each of the three months ended March 31, 2024 and 2023. 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 months ended March 31, 2024 and 2023, 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 $8.0 million and $4.1 million for the three months ended March 31, 2024 and 2023, respectively. The increase in the 2024 first quarter was primarily due to an increase in professional fees, compensation-related costs, and other reserves.

Contingent Earnout Adjustments

Contingent earnout expense represents the fair value adjustment of earnout liabilities arising from recent acquisitions. This expense totaled $0.2 million for each of the three months ended March 31, 2024 and 2023. 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 Costs

Non-service pension costs totaled $2.5 million for the three months ended March 31, 2024, compared to $2.2 million for the three months ended March 31, 2023. 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.

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

At March 31, 2024, our working capital balance (current assets less current liabilities) was approximately $81.7 million, an increase of $11.6 million from the working capital balance at December 31, 2023. Our cash and cash equivalents were $45.2 million at March 31, 2024, compared with $58.4 million at December 31, 2023.

Cash and cash equivalents as of March 31, 2024 consisted of $16.3 million held in the U.S. and $28.9 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 Used in Operating Activities

Cash used in operating activities was $19.8 million for the three months ended March 31, 2024, compared with $0.4 million used in operating activities in the 2023 period. The increase in cash used was primarily driven by lower earnings and increases in incentive compensation payments as compared to prior year payments.

Cash Used in Investing Activities

Cash used in investing activities was $9.6 million for the three months ended March 31, 2024, compared with $8.6 million used in the first three months of 2023. The increase in cash used in 2024 was due to increases in capital expenditures in 2024 compared to 2023.

Cash Provided by Financing Activities

Cash provided by financing activities was $16.1 million for the three months ended March 31, 2024, compared with $5.2 million provided in the 2023 period. During the first three months of 2024, there was an increase of $21.0 million in net borrowing from our revolving credit facility, compared with a net increase during the 2023 period of $9.1 million. The increase in borrowing in the 2024 period was primarily related to lower cash flows from operations. Share repurchases totaled $0.7 million in the 2024 period, while there were no share repurchases in the 2023 period. We paid $3.4 million in dividends in the three months ended March 31, 2024 compared with $2.9 million in the 2023 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 $208.7 million at March 31, 2024. 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 $230.2 million as of March 31, 2024 compared with $209.1 million at December 31, 2023.

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 March 31, 2024, we had $45.2 million of cash on hand and, based on trailing twelve month EBITDA and the Credit Facility limit, additional borrowing capacity of $208.7 million, resulting in total liquidity of $253.9 million at March 31, 2024.

Additionally, the Company expects to make payments totaling $8.5 million in the next twelve months for contingent earnouts related to previous business acquisitions.

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 $22.3 million and overfunded by $10.9 million, respectively, at December 31, 2023, based on accumulated benefit obligations of $285.3 million and $145.3 million for the U.S. Qualified Plan and the U.K. plans, respectively.

For the three months ended March 31, 2024 we made no contributions to our U.S. defined benefit pension plan and $0.6 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 three months ended March 31, 2023. We do not expect to make any additional discretionary contributions to our U.S. defined benefit pension plan during the remainder of 2024. 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 three months ended March 31, 2024, we paid $3.4 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 Sheets as of March 31, 2024, compared with our unaudited Condensed Consolidated Balance Sheets as of December 31, 2023 were as follows:

• Accounts receivable decreased $6.3 million excluding foreign currency exchange impacts. This decrease was primarily due to U.S. Field Operations and Canada in the North America Loss Adjusting segment.
• Unbilled revenues increased $9.5 million excluding foreign exchange impacts. The increase is primarily attributable to the U.K. and Australia in the International Operations segment and Global Technical Services in the North America Loss Adjusting Segment.
• Accounts payable and accrued liabilities decreased $25.8 million excluding foreign currency exchange impacts. The decrease is primarily due to payments for employee incentive compensation, 401(k) contributions, and timing of accrued payroll.

At March 31, 2024, 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, 2023, 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

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, 2023.

New Accounting Standards Adopted

No new accounting standard were adopted during the three months ended March 31, 2024.

Pending Adoption of New Accounting Standards

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

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, 2023. Our exposures to market risk have not changed materially since December 31, 2023.

Evaluation of Disclosure Controls and Procedures

The Registrant maintains a set of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), designed to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Exchange Act is recorded, processed, summarized or reported within the time periods specified in SEC rules and regulations.

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 its 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. Judgments in decision-making can be faulty and 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 the Company's 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.

The Registrant's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Registrant's disclosure controls and procedures as of March 31, 2024. Based on that evaluation, the Registrant's Chief Executive Officer and Chief Financial Officer concluded that the Registrant's disclosure controls and procedures were effective as of March 31, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our 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, 2023 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.