Business Context and Reporting Period
Brown & Brown, Inc. is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenues | $530.9 million | $475.6 million | $1.505 billion | $1.407 billion |
| Income before taxes | $142.5 million | $124.4 million | $361.9 million | $343.4 million |
| Net income | $106.1 million | $75.9 million | $270.8 million | $212.1 million |
| Diluted EPS | $0.38 | $0.27 | $0.96 | $0.74 |
| Income before-tax margin | 26.8% | 26.2% | 24.0% | 24.4% |
| EBITDAC | $178.0 million | $159.4 million | $472.4 million | $462.3 million |
| EBITDAC margin | 33.5% | 33.5% | 31.4% | 32.9% |
| Organic revenue growth | 1.4% | 3.4% | 4.0% | 2.8% |
- Q3 revenue increased 11.6% and net income increased 39.7%. For the first nine months, revenue increased 7.0% and net income increased 27.7%.
- Commissions and fees were $529.8 million in Q3 and $1.502 billion for the first nine months. Q3 core commissions and fees grew 9.4%; nine-month core commissions and fees grew 9.3%.
- Operating cash flow was $355.5 million for the first nine months, compared with $313.6 million in 2017.
- Investing cash outflow was $271.7 million, including $254.8 million for acquisitions. Financing cash outflow was $183.2 million, including $115.0 million of debt repayments and $62.4 million of dividends.
- Cash and cash equivalents were $423.0 million at September 30, 2018. Cash including restricted cash was $724.7 million, down from $824.1 million at December 31, 2017.
- Total debt was $862.4 million net of discounts and issuance costs, down $113.8 million from December 31, 2017. The Company had $370.0 million outstanding under its term loan and no revolving-loan borrowings; the revolving facility provides up to $800.0 million of availability.
- Shareholders’ equity was $2.939 billion at September 30, 2018, compared with $2.583 billion at year-end 2017. The quarterly dividend was $0.075 per share.
Material Changes Versus the Prior Comparable Period
- The Company adopted ASC Topic 606 and related ASC 340 guidance on January 1, 2018 using the modified retrospective method. Opening retained earnings increased by $117.5 million.
- For the first nine months, the new revenue standard increased reported commissions and fees by $24.7 million and net income by $15.8 million versus the amounts that would have been reported under the prior policies. The standard primarily changed the timing of commission, fee, contingent-commission, and contract-cost recognition.
- Q3 organic revenue growth slowed to 1.4% from 3.4% in the prior-year quarter, although nine-month organic growth improved to 4.0% from 2.8%.
- Other income declined to $1.2 million for the first nine months from $22.0 million in 2017, primarily because the prior-year period included a $20.0 million AssuredPartners legal settlement.
- Employee compensation and benefits increased 7.4% for the first nine months, while other operating expenses increased 15.9%. Nine-month EBITDAC margin declined to 31.4% from 32.9%.
- The Company completed eighteen acquisitions during the first nine months, paying $265.9 million in cash. Acquisitions contributed $29.2 million of revenue and $1.8 million of pretax income during the period.
- Goodwill increased to $2.930 billion from $2.716 billion at year-end 2017, primarily from acquisitions.
- The Company repaid the $100.0 million Series E Senior Notes in May 2018 and made scheduled term-loan payments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected positive full-year 2018 organic revenue growth if exposure-unit growth continued and premium-rate changes remained similar to 2017.
- Management stated that cash, investments, operating cash flow, and available credit were expected to satisfy normal liquidity needs for at least the next twelve months.
- On October 22, 2018, the Company agreed to acquire The Hays Group and related businesses for $705.0 million: $605.0 million in cash and $100.0 million in Brown & Brown shares, plus potential earn-outs of up to $25.0 million. The cash portion was expected to be funded initially with the revolving credit facility, and closing was expected in November 2018 subject to conditions.
- Contractual cash obligations totaled $1.456 billion, including $870.0 million of long-term debt, $209.8 million of operating leases, $166.3 million of interest obligations, and maximum acquisition contingency payments of $151.6 million.
- Estimated acquisition earn-out payables were $65.3 million at September 30, 2018; maximum future acquisition contingency payments were $151.6 million.
- Key risks include economic conditions, premium rates and exposure units, regulatory changes, catastrophe events, competition and disintermediation, acquisition integration, acquisition valuations, personnel retention, litigation, policy cancellations, technology execution, and interest-rate and foreign-exchange exposure.
- Management reported no material adverse legal proceeding, no material change in previously disclosed risk factors, compliance with debt covenants, and effective disclosure controls as of September 30, 2018.
- Wright Flood remains primarily liable to policyholders for ceded policies if reinsurers fail to perform. At September 30, 2018, the Company reported $98.5 million of reinsurance recoverable and $345.0 million of prepaid reinsurance premiums.
Important Facts for Investors to Verify
- Assess the sustainability of earnings growth excluding the timing effects and one-time adjustments from ASC 606 adoption.
- Monitor organic revenue growth, particularly the Q3 decline in National Programs organic revenue and the slower consolidated Q3 growth rate.
- Evaluate the funding, leverage, integration execution, and expected contribution of the $705.0 million Hays Group acquisition.
- Reconcile operating cash flow with acquisition spending, debt repayments, dividends, and the reduction in unrestricted cash.
- Track margin pressure from compensation, technology investment, consulting, and other operating expenses.
- Review acquisition earn-out obligations, goodwill and intangible-asset balances, and future amortization expense.
- Consider litigation, regulatory, reinsurance, catastrophe, premium-rate, and policy-renewal exposures when evaluating future results.