Brown & Brown, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance-programs and related-services organization operating primarily in the United States. Its four reportable segments are Retail, National Programs, Wholesale Brokerage and Services.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Total revenues | $466.3 million | $446.5 million | 4.4% |
| Commissions and fees | $464.7 million | $445.7 million | 4.3% |
| Organic revenue growth | 1.6% | 2.6% | Down 1.0 percentage point |
| Income before income taxes | $108.0 million | $109.1 million | Down 1.0% |
| Net income | $66.1 million | $66.3 million | Down 0.2% |
| Diluted EPS | $0.46 | $0.47 | Down $0.01 |
| Dividends declared per share | $0.14 | $0.12 | 16.7% |
| Metric | Six months 2017 | Six months 2016 | Change |
|---|---|---|---|
| Total revenues | $931.4 million | $870.7 million | 7.0% |
| Commissions and fees | $909.3 million | $868.0 million | 4.8% |
| Organic revenue growth | 2.5% | 2.0% | Up 0.5 percentage point |
| Income before income taxes | $219.0 million | $211.6 million | 3.5% |
| Net income | $136.2 million | $128.3 million | 6.2% |
| Diluted EPS | $0.96 | $0.91 | 5.5% |
Margins: Net margin was approximately 14.2% in Q2 and 14.6% for the first six months, compared with approximately 14.8% and 14.7%, respectively, in the prior-year periods. Pretax margin was approximately 23.2% in Q2 and 23.5% for the first six months. Employee compensation and benefits increased to 52.4% of revenue in Q2 and 52.7% for the first half, versus 51.8% and 52.3% in the prior-year periods.
Cash flow and liquidity: Net cash provided by operating activities was $270.1 million for the first six months, compared with $238.7 million in 2016 under the retrospectively adopted restricted-cash presentation. Capital expenditures were $8.8 million. Cash and cash equivalents were $600.3 million at June 30, 2017, and restricted cash was $276.6 million. Cash and cash equivalents inclusive of restricted cash totaled $876.9 million, up from $781.3 million at December 31, 2016.
Debt: Total debt was $985.4 million net of discount and debt issuance costs, down from $1.0739 billion at year-end 2016. The company had $395.0 million outstanding under its amended term loan and no revolving-loan borrowings. The amended credit agreement extended the $800.0 million revolving facility and term-loan maturity to June 28, 2022. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Wholesale Brokerage was the strongest growth segment, with Q2 revenue up 17.5%, six-month revenue up 19.6%, and organic growth of 6.2% and 6.7%, respectively.
- National Programs revenue increased 4.5% in Q2 and 2.4% for the first half, aided by higher profit-sharing contingent commissions; organic growth remained modest at 0.8% and 0.4%.
- Retail revenue increased 1.9% in Q2 and 2.5% for the first half, but pretax income declined 2.4% and 2.8%, respectively, primarily because of higher compensation, earn-out charges and lower disposal gains.
- Services revenue declined 0.4% in Q2 but increased 3.3% for the first half. Pretax income rose 22.3% in Q2 and 21.8% for the first half due to expense management and higher-margin business.
- Profit-sharing contingent commissions increased $4.5 million in Q2 and $2.5 million for the first half, principally in National Programs.
- The change in estimated acquisition earn-out payables increased to $5.6 million in Q2 and $9.6 million for the first half, compared with $4.1 million and $3.2 million, respectively, in 2016.
- The company acquired three insurance intermediaries during the first six months for $11.5 million in cash, compared with five acquisitions and $109.4 million of cash consideration in the prior-year period.
- The company repurchased 261,615 shares under its authorization during the quarter for approximately $11.2 million. Remaining authorization was approximately $356.2 million at June 30, 2017.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical earnings guidance. It stated that, if gradual increases in insurable exposure units continued through 2017 and premium-rate changes were similar to 2016, positive quarterly organic revenue growth was expected to continue.
The first six months included a $20.0 million legal settlement received from AssuredPartners and recorded in other income. This increased other income to $21.5 million from $1.8 million in the prior-year period and materially benefited reported pretax income and net income.
Management highlighted pressure from declining property-insurance rates, particularly in catastrophe-prone and coastal markets, changing carrier risk appetite, carrier loss experience, weather-related claims, competition, acquisition valuations and integration, personnel retention, regulatory changes, legal proceedings, policy cancellations and renewals, economic conditions and technology execution.
Estimated acquisition earn-out payables were $57.9 million at June 30, 2017, while maximum future acquisition contingency payments were $100.2 million. Contractual cash obligations totaled $1.552 billion, including $995.0 million of long-term debt, $204.2 million of operating leases and $200.6 million of interest obligations.
The company early adopted restricted-cash cash-flow guidance and adopted new stock-compensation guidance in 2017. It was evaluating the future revenue-recognition standard and expected the full-year effect to be immaterial, although timing between quarters could change. Lease accounting adoption could recognize significant right-of-use assets and liabilities; undiscounted remaining lease payments were $204.2 million.
Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Determine how much future earnings growth depends on acquisitions versus organic revenue growth, particularly given Q2 organic growth of 1.6%.
- Assess the sustainability and volatility of contingent commissions and the effect of carrier loss ratios on future revenue.
- Adjust period comparisons for the $20.0 million legal settlement and other unusual income items.
- Monitor compensation inflation, producer incentive costs and recurring earn-out remeasurement charges for margin pressure.
- Review the amended credit agreement, floating-rate exposure, scheduled principal payments and remaining borrowing capacity.
- Evaluate exposure to catastrophe-prone property markets, premium-rate declines, carrier appetite changes and weather-related claims.
- Review the $100.2 million maximum acquisition contingency exposure and the company’s ability to fund acquisitions, repurchases and dividends while reducing debt.
- Follow the implementation effects of the revenue-recognition and lease-accounting standards, including possible changes in revenue timing and reported liabilities.