BRO

Business Context and Reporting Period

Company: BROWN & BROWN, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: The Company operates as an insurance agency with four divisions: Retail, National Programs, Service, and Brokerage. Operations are conducted entirely within the United States. The financial statements for the period have been restated to include results from multiple acquisitions accounted for under the pooling-of-interests method.

Key Financial Metrics

Note: Total Debt includes $17,815 current portion and $79,362 long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Commissions and fees increased 43% ($25.3M) for the quarter and 39% ($70.9M) for the nine months compared to 2000. Approximately $18.8M (quarter) and $53.3M (nine months) of this increase is attributed to the acquisition of Riedman Corporation and other purchase-method acquisitions.
• Profitability: Net income increased 48% for the quarter and 45% for the nine months. Diluted EPS rose 40% and 41% respectively.
• Expense Increases: Employee compensation rose 35% (quarter) and 33% (nine months), primarily due to new employees from acquisitions. Interest expense surged 784% for the quarter and 616% for the nine months due to debt incurred for the Riedman acquisition.
• Balance Sheet: Total assets grew from $305.5M (Dec 31, 2000) to $453.9M (Sep 30, 2001), driven by a significant increase in intangible assets (from $104.2M to $231.5M) and long-term debt.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management attributes growth to organic production and strategic acquisitions. Core commissions (excluding acquisitions) increased 12.1% (quarter) and 11.6% (nine months). The Company believes existing cash, operating funds, and a $50M revolving credit facility are sufficient for normal needs.

Acquisitions and Accounting Changes

• Acquisitions: Significant activity includes the purchase of Riedman Corporation ($92M purchase price) and numerous pooling-of-interests transactions (e.g., Huval, The Young Agency, Layne & Associates).
• Stock Split: A 2-for-1 stock split was authorized effective November 21, 2001. All share data in the filing is restated to reflect this.
• New Accounting Standards: SFAS 141 and SFAS 142 were issued in June 2001. Future acquisitions will use the purchase method, and goodwill will no longer be amortized but tested annually for impairment, potentially increasing earnings volatility.

Risks and Contingencies

• Market Risks: Exposure to interest rate changes on $82.4M of variable-rate debt. A 1% rate change could impact net income by approximately $824,000.
• Operational Risks: Risks include economic downturns, premium pressure, regulatory changes, competition, and natural disasters in concentrated markets (Arizona, Florida, New York).
• Legal: No material legal proceedings beyond routine litigation. A specific case (Gresham & Associates v. Strianese) remains pending with no material developments.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of expected benefits from the Riedman acquisition and other recent purchases, given the significant increase in amortization and interest expenses.
• Debt Covenants: Monitor the Funded Debt to EBITDA ratio, as the $90M term loan interest rate is tied to this metric.
• Goodwill Impairment: Assess the impact of SFAS 142 on future earnings, as the cessation of goodwill amortization will be offset by potential impairment charges.
• Core Growth: Distinguish between organic growth (12% core commission increase) and acquisition-driven growth to evaluate underlying business health.
• Liquidity: Review the current ratio of 0.84 and the reliance on the $50M revolving credit facility to manage working capital needs.