Brown & Brown, Inc. — 2011 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011; unaudited interim financial statements. Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and services organization operating primarily in property and casualty insurance. Its reportable segments are Retail, National Programs, Wholesale Brokerage and Services.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total revenues | $246.8 million | $243.7 million | $509.0 million | $495.9 million |
| Income before taxes | $61.5 million | $68.0 million | $138.1 million | $141.1 million |
| Net income | $37.0 million | $41.2 million | $83.3 million | $85.3 million |
| Diluted EPS | $0.26 | $0.29 | $0.57 | $0.59 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $123.6 million | $166.7 million |
- Second-quarter revenue increased 1.3%; six-month revenue increased 2.6%. Revenue growth was driven primarily by acquisitions and was partly offset by lower profit-sharing contingent commissions.
- Net income declined 10.1% in the quarter and 2.3% year to date. Approximate net income margins were 15.0% versus 16.9% in the prior-year quarter and 16.4% versus 17.2% for the first six months.
- Core commissions and fees increased 3.9% in the quarter and 5.1% year to date, but internal growth remained negative at 4.8% and 3.6%, respectively, after excluding acquisitions, divestitures and contingent commissions.
- Profit-sharing contingent commissions fell 64.7% in the quarter to $2.3 million and 19.5% year to date to $31.2 million. Guaranteed supplemental commissions were $2.9 million in the quarter and $6.2 million year to date, compared with $3.7 million and $6.7 million, respectively, in 2010.
- Operating cash flow declined year to date, primarily reflecting increased receivables and other operating assets. Cash used for acquisitions was $85.6 million, compared with $34.0 million in the prior-year period.
- At June 30, 2011, cash and cash equivalents were $278.9 million, restricted cash and investments were $120.1 million, and total assets were $2.525 billion.
- Total debt was $251.7 million, consisting principally of unsecured senior notes. The company had no borrowings under its revolving credit facility at June 30, although maximum borrowings during the quarter reached $50.0 million. The current ratio was 1.39.
- Shareholders’ equity was $1.573 billion. Dividends declared increased to $0.0800 per share from $0.0775 in the comparable quarter.
Material changes versus the prior comparable period
- Expenses grew faster than revenue: total expenses increased 5.5% in the quarter and 4.5% year to date. Employee compensation and benefits ratios increased to 51.0% from 49.8% for the quarter and to 49.6% from 49.1% year to date.
- Non-cash stock-based compensation increased 52.2% in the quarter and 46.8% year to date following January 2011 grants under the 2010 Stock Incentive Plan. Management estimated incremental 2011 cost of approximately $5.1 million.
- The company recorded charges for changes in estimated acquisition earn-out payables of $1.6 million in the quarter and $1.5 million year to date, compared with credits of $0.5 million and $1.2 million, respectively, in 2010.
- Retail revenue increased 4.0% in the quarter and 4.9% year to date, but internal core growth was negative 5.3% and 4.2%. National Programs revenue declined 12.6% and 10.2%, while Wholesale Brokerage revenue declined 6.1% and 3.7%. Services revenue increased 68.1% and 71.8%, primarily from acquisitions.
- Brown & Brown completed 23 acquisitions in the first six months, compared with 10 in the prior-year period. Aggregate purchase price was $114.1 million, including $90.4 million of cash, $13.8 million of recorded earn-out payables and $0.6 million of notes payable.
- Goodwill increased to $1.262 billion from $1.195 billion at December 31, 2010, primarily from acquisitions. Management reported no goodwill impairment indicators during the period.
- Net cash provided by operating activities fell 25.9% year over year, while net cash used in investing activities increased to $91.3 million from $38.2 million.
Outlook, commentary, risks and unusual items
- Management reported 18 consecutive quarters of negative internal growth through the second quarter of 2011, reflecting a continuing soft insurance market, declining premium rates and reduced insurable exposure units.
- Management expected the decline in exposure units to improve gradually during the second half of 2011 and did not anticipate significant changes in insurance premium rates during 2011.
- Management expected Proctor Financial’s third-quarter 2011 commissions and fees revenue to be $1.0 million to $1.5 million below the third quarter of 2010.
- The company believed existing cash, investments, operating cash flow, debt facilities and refinancing arrangements would satisfy normal liquidity needs for at least the next twelve months. A $100.0 million Series E senior-note refinancing was scheduled to fund on September 15, 2011, coinciding with the maturity date of the Series A notes.
- Maximum future acquisition earn-out payments were $124.3 million at June 30, 2011, including $41.9 million recorded as current and non-current estimated earn-out payables.
- Contractual cash obligations totaled $550.6 million, including $251.7 million of debt, $99.5 million of operating leases, $63.7 million of interest obligations and the $124.3 million maximum acquisition earn-outs.
- Risks include adverse economic conditions, continued soft insurance pricing, exposure-unit declines, regulatory changes, competition, policy cancellations, concentration in several U.S. states, integration and performance of acquired businesses, earn-out estimates, litigation and governmental investigations.
- The company was in compliance with debt covenants. Management stated that pending legal matters were not expected to materially affect consolidated financial position, but unfavorable resolutions could materially affect results or cash flow in a particular period.
- No material changes were reported to previously disclosed risk factors, and no new material legal proceedings or developments requiring disclosure were identified.
Important facts for investors to verify
- Whether negative internal growth improves as premium rates and insurable exposure units stabilize, particularly in Retail and National Programs.
- The sustainability and timing of profit-sharing contingent commissions and guaranteed supplemental commissions.
- Proctor Financial’s revenue performance and the expected third-quarter decline disclosed by management.
- Completion and terms of the September 15, 2011 refinancing of the $100.0 million Series A notes.
- Cash conversion after acquisition spending, receivables growth and future earn-out payments.
- Performance, integration and impairment risk associated with the 23 acquisitions completed in the first half of 2011.
- Potential variability from acquisition earn-out revaluations, litigation outcomes, regulatory developments and insurance-market conditions.