Kingsway(KFS) - 2023 Q4 - Annual Results

Company Announcement & Overview Press Release & Key Dates Kingsway Financial Services Inc. released its FY2023 full-year operating results on March 5, 2024, and announced an Investor Day on May 20, 2024, at the NYSE - Release Date: March 5, 2024[1] - Announcement Content: FY2023 full-year operating results[1] - Investor Day: May 20, 2024, at the New York Stock Exchange[1] About the Company & Business Segments Kingsway is a holding company operating in extended warranty and commercial services through subsidiaries, with common stock listed on the NYSE - Company Description: Holding company, primarily operating in extended warranty and commercial services[12] - Stock Listing: New York Stock Exchange, ticker symbol “KFS”[12] - Extended Warranty Subsidiaries: IWS, Penn Warranty, Preferred Warranties, Trinity Warranty Solutions[13] - Commercial Services Subsidiaries (KSX): CSuite, Ravix, Secure Nursing Service, Digital Diagnostics, Inc.[13] Full Year 2023 Financial Performance Consolidated Financial Highlights Kingsway achieved 11% consolidated revenue growth to $103.2 million in FY2023, driven by KSX, with net income rising to $24 million but adjusted EBITDA decreasing to $9.1 million FY2023 Consolidated Financial Data | Metric | FY2023 (Millions) | FY2022 (Millions) | Change (%) | | :----------------------- | :---------------- | :---------------- | :--------- | | Consolidated Revenue | $103.2 | $93.3 | +11% | | Consolidated Net Income | $24.0 | $15.1 | +58.9% | | Adjusted Consolidated EBITDA | $9.1 | $11.1 | -18.1% | - Operating companies' 12-month run-rate adjusted EBITDA is $17 million to $18 million, reflecting profitability of current or recently acquired businesses[4] Segment Performance The KSX segment showed strong revenue and adjusted EBITDA growth due to recent acquisitions, while the Extended Warranty segment declined due to the PWSC sale and increased claims, though severity eased by year-end Extended Warranty Segment Extended Warranty revenue decreased to $68.2 million in 2023, with $4.9 million of the $5.8 million decline attributed to the PWSC sale, and adjusted EBITDA fell to $8.4 million due to lower revenue and higher claims, despite year-end stabilization Extended Warranty Segment Key Financial Data | Metric | FY2023 (Millions) | FY2022 (Millions) | Change (YoY) | | :-------------------------------- | :---------------- | :---------------- | :----------- | | Extended Warranty Revenue | $68.2 | $74.0 | -$5.8M (-7.8%) | | Extended Warranty Adjusted EBITDA | $8.4 | $10.7 (pro forma) | -$2.3M (-21.5%) | - Revenue decline of $4.9 million attributed to the sale of PWSC in July 2022[4] - Average claims costs significantly increased in Q2 and Q3 2023, but began to stabilize by year-end[4] Kingsway Search Xcelerator (KSX) Segment KSX revenue surged 82% to $35 million in 2023, and adjusted EBITDA grew 50% to $5.7 million, primarily driven by strategic acquisitions in late 2022 and 2023 KSX Segment Key Financial Data | Metric | FY2023 (Millions) | FY2022 (Millions) | Change (YoY) | | :---------------------- | :---------------- | :---------------- | :----------- | | KSX Revenue | $35.0 | $19.2 | +$15.8M (+82%) | | KSX Adjusted EBITDA | $5.7 | $3.8 | +$1.9M (+50%) | - Revenue and EBITDA growth primarily driven by acquisitions of CSuite and SNS (Nov 2022), SPI (Sep 2023), and DDI (Oct 2023)[4][7] Business Developments & Strategy Recent Business Highlights Kingsway appointed Paul Vidal as OIR for KSX, bringing AI robotics expertise, and Tyler Gordy joined the Strategic Advisory Board, while acquisitions of SPI and DDI in 2023 further expanded the KSX portfolio - New Appointment (OIR): Paul Vidal joined the KSX segment, previously Head of Operations at GrayMatter Robotics (AI industrial robotics company)[4] - New Appointment (Strategic Advisory Board): Tyler Gordy, former CEO of PWSC[4] - Acquisitions: SPI in September 2023 and DDI in October 2023, both integrated into the KSX platform[4][7] Management's Strategic Commentary CEO John T. Fitzgerald noted FY2023 results met expectations, driven by KSX acquisitions, while the Extended Warranty segment faced macroeconomic and claims challenges, with KSX remaining central to growth and shareholder returns, targeting 2-3 acquisitions annually - FY2023 Performance: Generally met expectations, with 11% revenue growth driven by KSX acquisitions[5] - Extended Warranty Challenges: Affected by macroeconomic conditions and increased claims severity, but claims severity eased by late 2023[6] - Strategic Focus: KSX platform is central to growing cash flow and enhancing shareholder returns[7] - Acquisition Strategy: Target two to three acquisitions annually, with four OIRs actively seeking investment targets[7] - Integration Success: SPI and DDI transitions were smooth and performed well[7] Financing & Investor Relations Recent Financing Highlights As of February 29, 2024, Kingsway repurchased warrants and common shares for $7.2 million, generated $16.7 million from warrant exercises in 2023, reduced net debt to $35.3 million, and repurchased trust preferred debt at a discount, achieving over 20% IRR Recent Financing Activities | Metric | Value | Period | | :-------------------------------- | :---------------- | :---------------- | | Warrants Repurchased | 1,093,861 | Through Feb 29, 2024 | | Common Shares Repurchased | 430,727 | Through Feb 29, 2024 | | Combined Repurchase Cost | $7.2 million | Through Feb 29, 2024 | | Cash from Warrant Exercises | $16.7 million | FY2023 | | Warrants Outstanding | None | After Sep 15, 2023 | | Principal Debt Payments | $9.1 million | FY2023 | | Total Net Debt (Dec 31, 2023) | $35.3 million | End of FY2023 | | Total Net Debt (Dec 31, 2022) | $37.9 million | End of FY2022 | - Repurchased trust preferred debt in March 2023, repaying $96.7 million principal and deferred interest at 60.8 cents on the dollar, achieving over 20% IRR[12] Investor Conference & Events Management held a conference call on March 5, 2024, to discuss results, and Kingsway will host an Investor Day on May 20, 2024, at the NYSE following its annual meeting - Conference Call Date: March 5, 2024, 5:00 PM ET[9][10] - Investor Day Date: May 20, 2024, 9:30 AM ET, at the New York Stock Exchange[10] - Investor Day Contact: James Carbonara[12] Non-GAAP Measures & Disclosures Non-GAAP Financial Measure Explanation Management believes non-GAAP adjusted EBITDA provides useful operational insights and enhances financial performance evaluation by enabling more meaningful comparisons across periods, serving as a supplement to GAAP results - Non-GAAP Adjusted EBITDA Purpose: Provides operational performance insights, enhances financial assessment, and enables more meaningful cross-period comparisons[14] - Management Use: Utilized for planning, budgeting, and reviewing business performance[14] - Investor Guidance: Should be considered a supplement to GAAP measures, not a substitute or superior metric[14] Forward-Looking Statements & Additional Information This press release contains forward-looking statements subject to risks and uncertainties, with investors advised to consult SEC filings for risk factors, and the company disclaims any obligation to update these statements - Statement Nature: Contains “forward-looking statements” subject to risks and uncertainties[15] - Risk Disclosure: Refer to the “Risk Factors” section in the company’s 2023 10-K annual report and subsequent 10-Q and 8-K filings[15] - Disclaimer: The company assumes no obligation to update or revise any forward-looking statements[15] - Information Access: Available via SEC (www.sec.gov), CSA (www.sedar.com) websites, or the company’s website **(www.kingsway-financial.com)**[16](index=16&type=chunk) Detailed Financial Reconciliations Consolidated GAAP Net Income (Loss) to Non-GAAP Adjusted EBITDA Reconciliation This section provides a detailed reconciliation of GAAP net income (loss) to non-GAAP adjusted EBITDA for 2023 and 2022, including adjustments for discontinued operations, debt extinguishment, and other non-recurring items Consolidated GAAP Net Income (Loss) to Non-GAAP Adjusted EBITDA Reconciliation | Metric | 12 Months Ended 12/31/23 (Thousands) | 12 Months Ended 12/31/22 (Thousands) | | :------------------------------------------ | :----------------------- | :----------------------- | | GAAP Net Income (Loss) | $24,012 | $15,065 | | Non-GAAP Adjustments (Total) | $(14,914) | $(3,936) | | Non-GAAP Adjusted EBITDA | $9,098 | $11,129 | - Key 2023 adjustments include $31.6 million gain on debt extinguishment and $1.5 million from discontinued operations[18] - Key 2022 adjustments include $26.4 million gain on PWSC sale and $15.1 million from discontinued operations[18] Extended Warranty Segment GAAP Operating Income to Non-GAAP Adjusted EBITDA Reconciliation This reconciliation details adjustments from GAAP operating income to non-GAAP adjusted EBITDA for the Extended Warranty segment in 2023 and 2022, including investment income, gains/losses on sales, depreciation, and pro forma EBITDA excluding PWSC Extended Warranty Segment GAAP Operating Income to Non-GAAP Adjusted EBITDA Reconciliation | Metric | 12 Months Ended 12/31/23 (Thousands) | 12 Months Ended 12/31/22 (Thousands) | | :------------------------------------------ | :----------------------- | :----------------------- | | GAAP Operating Income for Extended Warranty segment | $6,983 | $9,879 | | Non-GAAP Adjustments (Total) | $1,443 | $1,720 | | Non-GAAP Adjusted EBITDA for Extended Warranty segment | $8,426 | $11,599 | | Pro forma Non-GAAP adjusted EBITDA for Extended Warranty segment (excluding PWSC) | N/A | $10,667 | - 2022 pro forma adjusted EBITDA excludes PWSC performance to provide a comparable view after its July 2022 sale[21][22] KSX Segment GAAP Operating Income to Non-GAAP Adjusted EBITDA Reconciliation This section provides a reconciliation of KSX segment GAAP operating income to non-GAAP adjusted EBITDA for 2023 and 2022, with key adjustments for transition-related employee costs and depreciation KSX Segment GAAP Operating Income to Non-GAAP Adjusted EBITDA Reconciliation | Metric | 12 Months Ended 12/31/23 (Thousands) | 12 Months Ended 12/31/22 (Thousands) | | :------------------------------------------ | :----------------------- | :----------------------- | | GAAP Operating Income for KSX segment | $5,252 | $3,548 | | Non-GAAP Adjustments (Total) | $404 | $235 | | Non-GAAP Adjusted EBITDA for KSX segment | $5,656 | $3,783 | - Employee cost adjustments relate to staff providing assistance during the post-acquisition transition period[23]