BRP Group, Inc. (BRP) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 9, 2023. The filing identifies the registrant as BRP Group, Inc. (not Baldwin Insurance Group, Inc.). BRP is a U.S.-focused insurance distribution and services company with three operating groups: Insurance Advisory Solutions, Underwriting, Capacity & Technology Solutions, and Mainstreet Insurance Solutions.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Commissions and fees | $330.4 million | $242.8 million |
| Operating income | $3.6 million | $39.7 million |
| Net income (loss) | $(25.9) million | $44.8 million |
| Net income (loss) attributable to BRP Group | $(14.1) million | $22.9 million |
| Diluted EPS | $(0.24) | $0.39 |
| Adjusted EBITDA and margin | $79.0 million; 24% | $72.9 million; 30% |
| Net cash used in operating activities | $(14.0) million | $(3.4) million |
Revenue grew 36% year over year. Management attributed $55.8 million of the increase to organic growth and $30.9 million to revenue from Partners acquired during 2022 that had not yet reached the 12-month ownership mark. Organic revenue growth was 23%, versus 16% in Q1 2022. GAAP operating margin was approximately 1.1%, down from 16.4%; adjusted EBITDA margin declined to 24% from 30%.
Profitability was pressured by a $24.8 million expense from an increase in the estimated fair value of contingent consideration, compared with a $5.6 million gain in Q1 2022. Interest expense rose to $27.9 million from $10.4 million. The prior-year period also included a $15.8 million gain on interest rate caps; Q1 2023 recorded a $1.4 million loss.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $81.3 million, restricted cash was $105.5 million, and total cash and restricted cash was $186.8 million.
- Outstanding debt included $836.0 million of Term Loan B and $485.0 million under the revolving facility. The respective stated interest rates were 8.21% and 7.90%. Revolver availability was $115.0 million; the company reported compliance with credit covenants.
- Total assets were $3.45 billion and total liabilities were $2.32 billion. Current assets were $780.5 million and current liabilities were $772.8 million.
- Contingent earnout liabilities totaled $286.2 million at fair value. Maximum estimated future contingent payments were $944.2 million; settlement terms permit some amounts to be paid in cash or stock at the company’s option.
Cash and restricted cash decreased $43.7 million during the quarter. Operating cash outflow was $14.0 million, investing cash outflow was $5.1 million, and financing cash outflow was $24.5 million. The operating cash outflow reflected, among other items, growth in receivables and timing of collections. Capital expenditures were $3.5 million.
Material changes and management outlook
- Commissions and fees increased across all three operating groups. UCTS growth included homeowners and renters products and activity under the QBE Program Administrator Agreement; Mainstreet’s increase was largely attributable to the Westwood acquisition contribution.
- Compensation and benefits expense rose $77.2 million, reflecting growth, acquired businesses, higher share-based compensation, and increased human-capital costs. Other operating expenses rose $10.2 million, including integration and technology costs.
- Management stated that it expects interest expense to continue increasing during 2023 because of higher rates on variable-rate debt. Interest-rate caps cover portions of the debt; management estimated that a 100-basis-point rate increase would raise annual interest expense by $10.2 million after considering the caps.
- Management believes cash, operating cash flows, and available borrowing capacity will be sufficient for working capital and commitments for the next 12 months and beyond. The filing provides no specific revenue or earnings guidance.
- Management noted that results are seasonal: revenue and adjusted EBITDA are typically highest in the first quarter and lowest in the fourth quarter. Acquisition contributions can affect period comparability and seasonality.
Risks, contingencies and unusual items
- Floating-rate borrowings expose the company to higher interest costs despite its interest-rate caps. Credit facilities are secured by substantially all BRP assets and include financial and other covenants.
- Contingent earnout fair values rely on management projections and other unobservable inputs; changes in partner performance expectations or discount rates can materially affect reported earnings and liabilities.
- The company disclosed a Delaware Chancery Court complaint challenging certain holder consent rights under its stockholders agreement. BRP and the holders dispute the allegations and entered into a consent and defense agreement, with an independent board committee empowered to make specified determinations.
- BRP reported ordinary-course legal claims, which management does not expect to have a material adverse effect. It also disclosed a $4.7 million commitment to the University of South Florida through October 2028; the board chair is expected to fund half.
- The company recorded a full valuation allowance against its deferred tax assets. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth and acquired revenue translate into sustained GAAP profitability and improved adjusted EBITDA margins.
- Cash conversion, receivable collections, and liquidity after earnout payments, debt service, and potential acquisitions.
- Floating-rate debt exposure, interest-rate cap coverage, and continued covenant compliance.
- Contingent earnout assumptions, potential settlement amounts, and the use of cash versus stock.
- Developments in the Delaware governance litigation and the effect of the consent agreement.