Business context and reporting period
This is BRP Group, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2020. The filing names BRP Group, Inc. as the registrant; it does not identify the registrant as Baldwin Insurance Group, Inc. BRP is a U.S.-focused insurance distribution and services firm operating through Middle Market, Specialty, MainStreet and Medicare segments. The quarter included four acquisitions completed for total consideration of $59.7 million.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Commissions and fees | $54.2 million | $29.8 million | Up $24.3 million, or about 81%; acquisitions contributed $22.9 million |
| Operating income | $5.3 million | $11.3 million | Down $6.0 million; operating margin fell to 9.8% from 38.0% |
| Net income | $4.7 million | $9.7 million | Down $5.0 million |
| Net income attributable to BRP Group, Inc. | $1.5 million | $0 | 2019 income was attributable to noncontrolling interests |
| Basic / diluted EPS | $0.08 / $0.07 | Not presented | Adjusted diluted EPS was $0.19; it assumes exchange of Class B shares |
| Adjusted EBITDA / margin | $14.0 million / 26% | $10.1 million / 34% | EBITDA increased, but margin declined |
| Operating cash flow | $5.0 million | $4.9 million | Nearly unchanged |
| Cash and cash equivalents | $52.1 million | $67.7 million at Dec. 31, 2019 | Restricted cash was an additional $3.8 million |
| Revolving credit borrowings | $60.4 million | $40.4 million at Dec. 31, 2019 | Facility capacity increased to $300 million |
Material changes and operating performance
- Organic revenue growth was 5%, versus 12% in the comparable period. Acquisitions accounted for most reported revenue growth.
- Revenue grew in every operating group. Q1 2020 commissions and fees were $22.0 million in Middle Market, $17.4 million in Specialty, $8.3 million in MainStreet and $6.4 million in Medicare.
- Operating expenses rose to $48.9 million from $18.5 million. The increase included higher compensation and operating costs from acquired businesses, greater amortization, and a $4.4 million year-over-year swing in contingent-consideration fair-value expense.
- Investing cash outflow was $39.9 million, primarily reflecting acquisitions; financing provided $19.8 million. Cash and restricted cash together fell $15.1 million to $56.0 million.
- Total assets were $450.3 million at March 31, including $197.5 million of goodwill and $111.3 million of net intangible assets. Total liabilities were $195.4 million.
Outlook, risks and unusual items
- Management said cash, operating cash flow and available credit were expected to fund working capital and commitments for the foreseeable future, but further funding may be needed to continue acquisitions. No quantitative earnings or revenue guidance was provided.
- COVID-19 created substantial uncertainty. Management cited potential reduced client activity and insurable exposures, premium-payment delays, weaker new business, and lower contingent commissions. Incremental cancellation reserves reduced organic direct-bill and agency-bill revenue by $0.2 million and $0.1 million, respectively.
- Management expected higher loss ratios to weigh on MainStreet contingent revenue through June 2020, with base commissions and fees potentially increasing later in 2020 and into 2021. These are management expectations, not formal guidance.
- The company drew $20.0 million on its revolver in March in anticipation of pandemic effects. Subsequent to quarter-end, it borrowed another $24.5 million for the IRP acquisition and converted $10.0 million of working-capital borrowings to acquisition funding. The quarter-end credit agreement balance was $60.4 million; the company reported covenant compliance.
- Acquisition-related contingent earnout liabilities had a fair value of $53.9 million; maximum estimated exposure was $119.3 million. Fair values depend on Level 3 projections and assumptions.
- After quarter-end, BRP acquired IRP effective April 1 for $26.6 million cash plus 814,640 LLC units, with potential additional earnout consideration. Pendulum and Southern Protective Group acquisitions also became effective May 1; their accounting and consideration were still under evaluation.
- Disclosure controls were deemed ineffective at March 31, 2020 because four previously identified material weaknesses in financial reporting controls remained unresolved. Management reported remediation work was underway.
- The company reported ordinary-course legal claims and said their disposition was not expected to materially affect its financial position, results or liquidity. It identified no material changes to previously disclosed risks other than the COVID-19 risk update.
Important facts for investors to verify
- Confirm the registrant and security: this filing is for BRP Group, Inc. (Nasdaq: BRP), despite the request metadata naming Baldwin Insurance Group, Inc.
- Assess how much growth is organic versus acquisition-driven, and whether the 5% organic growth rate and 26% Adjusted EBITDA margin persist.
- Monitor pandemic-related client exposure, cancellations, premium collection, loss trends and contingent commission income.
- Review revolver availability and restrictions, covenant headroom, post-quarter borrowing, acquisition funding needs and the potential $119.3 million maximum earnout exposure.
- Track remediation of the four material weaknesses and effectiveness of internal controls in subsequent filings.