Brown & Brown, Inc. — Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services divisions. The filing covers the unaudited three and six months ended June 30, 2013, compared with the same periods in 2012.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenues | $325.8 million | $290.9 million | $660.8 million | $593.4 million |
| Income before taxes | $86.2 million | $71.1 million | $185.7 million | $153.9 million |
| Net income | $52.0 million | $42.5 million | $112.1 million | $91.9 million |
| Diluted EPS | $0.36 | $0.29 | $0.77 | $0.63 |
| Net margin | 16.0% | 14.6% | 17.0% | 15.5% |
| Operating cash flow | Not separately provided | Not separately provided | $221.9 million | $112.7 million |
- Core organic commissions and fees internal growth was 7.4% in the second quarter and 8.8% for the first six months, compared with 3.2% and 2.1%, respectively, in 2012.
- Commissions and fees increased 11.8% in the second quarter and 12.2% for the first six months. Profit-sharing contingent commissions rose materially, while guaranteed supplemental commissions declined.
- Cash and cash equivalents were $385.5 million at June 30, 2013, up from $219.8 million at December 31, 2012. Restricted cash and investments were $210.5 million.
- The current ratio improved to 1.47 from 1.34 at year-end 2012.
- Total debt was $450.0 million of long-term debt plus $33,000 of current acquisition notes. No borrowings were outstanding under the SunTrust Revolver at June 30, 2013.
- Shareholders’ equity was $1.90 billion, compared with $1.81 billion at December 31, 2012. Dividends declared were $0.09 per share in the quarter and $0.18 per share year to date.
Material changes versus the prior comparable period
- Second-quarter revenue increased 12.0%, pretax income increased 21.2%, and net income increased 22.5%. For the first six months, revenue increased 11.4%, pretax income 20.6%, and net income 22.0%.
- Employee compensation ratios improved to 50.2% from 51.8% in the quarter and to 48.9% from 50.6% year to date. Other operating expense ratios were broadly stable.
- National Programs and Wholesale Brokerage delivered particularly strong second-quarter internal growth of 18.3% and 10.8%, respectively. Services revenue grew 36.6% year to date, largely reflecting Colonial Claims activity associated with Superstorm Sandy.
- 2013 acquisition activity was substantially lower than in 2012: aggregate purchase price was approximately $16.8 million for 2013 acquisitions versus $599.1 million in the first six months of 2012.
- Other income declined year to date to $2.4 million from $6.6 million, primarily because 2012 included a $3.1 million legal settlement and higher gains on sold customer accounts.
- The estimated acquisition earn-out payable balance was $48.9 million at June 30, 2013, compared with $53.0 million at December 31, 2012. Fair-value remeasurement produced a $2.2 million expense in the first six months of 2013 versus a $1.0 million credit in 2012.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected continued positive quarterly internal revenue growth for the remainder of 2013 if premium rates and insurable exposure units continued to rise, excluding the Colonial Claims comparison effect.
- Colonial Claims benefited from Superstorm Sandy-related activity. Management estimated third- and fourth-quarter 2013 Colonial Claims revenue of $1.5 million to $2.0 million per quarter absent another major flooding event.
- Management believed existing cash, investments, operating cash flow, and available credit facilities would satisfy normal liquidity needs through at least the end of 2013.
- On July 1, 2013, after the reporting date, the company acquired Beecher Carlson Holdings for an aggregate purchase price of $454.5 million, including $364.6 million of cash and $89.8 million of assumed liabilities. The acquisition was financed partly with a $30.0 million Wells Fargo revolver draw and a $30.0 million Bank of America term loan.
- The Beecher acquisition is expected to add significant goodwill and amortizable intangible assets; the filing presented preliminary allocation amounts, including $265.0 million of goodwill and $99.0 million of purchased customer accounts.
- On July 1, 2013, the company issued additional nonvested stock awards expected to add approximately $14.3 million of annualized compensation expense.
- Maximum future acquisition contingency payments were $135.2 million at June 30, 2013, including $48.9 million of recorded earn-out payables.
- The company was involved in ordinary-course litigation and regulatory matters. Management did not expect a material adverse effect on consolidated financial position, but unfavorable outcomes could materially affect a particular period’s results or cash flows.
- Key operating risks include insurance premium rates, exposure units, policy cancellations, competition, regulatory changes, geographic concentration, acquisition integration, earn-out estimates, litigation, tax assumptions, and interest-rate exposure.
- No material changes were reported to previously disclosed risk factors, and management concluded that disclosure controls were effective as of June 30, 2013.
Important facts for investors to verify
- Assess whether the strong organic growth trend continued after the second quarter and separate sustainable growth from acquisition and catastrophe-claims effects.
- Verify the post-quarter Beecher acquisition’s final purchase-price allocation, financing, debt levels, integration costs, and contribution to earnings and cash flow.
- Monitor the decline in guaranteed supplemental commissions and the volatility of profit-sharing contingent commissions.
- Review future earn-out payments, the $135.2 million maximum contingent acquisition obligations, and related fair-value assumptions.
- Reconcile reported cash with restricted cash and fiduciary obligations, and evaluate liquidity after the Beecher financing and any subsequent acquisitions.
- Evaluate exposure to Superstorm Sandy comparison effects, future catastrophe activity, insurance pricing, exposure-unit trends, and Florida Citizens market developments.
- Confirm the impact of the July 2013 stock awards, amortization, and additional borrowing on future margins, diluted EPS, and leverage.