Brown & Brown, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Brown & Brown is a diversified insurance intermediary providing retail brokerage, national programs, wholesale brokerage, and insurance-related services. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $618.7 million | $530.9 million | $1,813.2 million | $1,505.5 million |
| Income before taxes | $151.8 million | $142.5 million | $423.9 million | $361.9 million |
| Net income | $115.5 million | $106.1 million | $322.0 million | $270.8 million |
| Diluted EPS | $0.41 | $0.38 | $1.14 | $0.96 |
| Income before-tax margin | 24.5% | 26.8% | 23.4% | 24.0% |
| EBITDAC | $195.0 million | $178.0 million | $560.7 million | $472.4 million |
| EBITDAC margin | 31.5% | 33.5% | 30.9% | 31.4% |
| Organic revenue growth | 3.4% | 1.4% | 3.1% | 4.0% |
Revenue increased 16.5% in the third quarter and 20.4% for the first nine months. Net income increased 8.9% and 18.9%, respectively. Growth was led by acquisitions and net new and renewal business, while margins declined because of higher compensation, amortization, and interest expense.
Operating cash flow was $447.1 million for the first nine months of 2019, compared with $355.5 million in 2018. Investing cash flow was negative $339.6 million, including $288.4 million for acquired businesses and $47.4 million of capital expenditures. Financing cash flow was negative $10.5 million after debt activity, share repurchases, and $67.4 million of dividends.
Cash and cash equivalents were $497.5 million at September 30, 2019, and restricted cash and investments were $377.1 million. Total cash inclusive of restricted cash was $874.6 million, compared with $777.6 million at December 31, 2018.
Total debt was $1.569 billion, net of discounts and issuance costs, compared with $1.507 billion at December 31, 2018. The company had $100.0 million outstanding on its revolving facility and reported compliance with all debt covenants. Management stated that cash, investments, operating cash flow, and available revolver capacity should cover normal liquidity needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Core commissions and fees increased 16.8% in Q3 and 20.1% year to date. Acquisitions contributed approximately $71.0 million of Q3 core commissions and fees and $251.9 million for the first nine months.
- The company completed 18 acquisitions during the first nine months, with cash paid of $291.6 million. Acquisitions added $275.3 million of goodwill and $104.9 million of purchased customer accounts.
- Interest expense increased 82.0% in Q3 and 66.6% year to date, primarily because of acquisition-related debt, including financing for the Hays Companies acquisition, and higher costs on floating-rate debt.
- Amortization increased 21.4% in Q3 and 24.6% year to date as a result of acquired intangible assets.
- Employee compensation and benefits increased 23.5% in Q3 and 23.1% year to date. Compensation as a percentage of revenue rose to 53.5% from 50.5% in Q3 and to 53.7% from 52.5% year to date.
- Retail remained the largest segment. Q3 Retail revenue increased 29.3%, but pre-tax income declined 16.5% and EBITDAC margin fell to 27.3% from 30.5%, principally because of Hays-related margin dilution, higher compensation, amortization, and interest costs.
- Wholesale Brokerage delivered the strongest Q3 organic growth at 11.0%, with pre-tax income up 22.4%. Services revenue increased 4.2%, while organic revenue declined 0.7%.
- National Programs Q3 revenue declined 0.5%, and profit-sharing contingent commissions declined because of loss development on several programs. A one-time guaranteed supplemental commission benefited the nine-month results.
- The company adopted the lease accounting standard effective January 1, 2019, recognizing operating lease assets of $193.4 million and operating lease liabilities of $218.9 million at September 30, 2019. The adoption materially increased reported assets and liabilities but did not significantly affect reported operating results.
- During the third quarter, the company repurchased 274,981 shares in open-market transactions for approximately $9.7 million. Approximately $490.2 million remained available under the repurchase authorization.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal quantitative earnings guidance. It stated that, if recent increases in customer exposure units continued and premium-rate changes remained similar to 2018, it expected positive organic revenue growth for full-year 2019.
Management identified the following principal risks: integrating Hays and other acquisitions; acquisition execution and goodwill or intangible-asset impairment; insurance-market and premium volatility; catastrophic events; competition and industry disintermediation; client, carrier, or financial-institution insolvencies; leverage and refinancing risk; regulatory and legal exposure; errors and omissions claims; cybersecurity or information-system interruptions; tax and accounting changes; and interest-rate and foreign-exchange fluctuations.
Unusual or potentially nonrecurring items included a one-time guaranteed supplemental commission in National Programs, a prior-year one-time revenue-recognition adjustment affecting comparisons, gains on business disposals, and a $6.9 million year-to-date credit from changes in estimated acquisition earn-out liabilities. The company reported $146.6 million of estimated earn-out payables and maximum future acquisition contingency payments of $310.6 million.
Brown & Brown is involved in ordinary-course litigation and claims. Management stated that no current proceeding is expected to have a material adverse effect on financial condition, operations, or cash flows, although unfavorable developments could affect future results and liquidity.
Important Facts for Investors to Verify
- Whether acquisition-driven revenue growth converts into sustainable organic growth and whether Hays integration improves Retail margins.
- The effect of higher debt balances, floating-rate borrowings, and scheduled principal payments on future interest expense and cash flow.
- The quality and timing of contingent commissions and guaranteed supplemental commissions, including the nonrecurring National Programs item.
- Potential changes in the $146.6 million of estimated earn-out liabilities and the $310.6 million maximum contingent acquisition obligations.
- Goodwill and intangible-asset exposure, including $3.702 billion of goodwill and $923.4 million of amortizable intangible assets at September 30, 2019.
- Liquidity availability after acquisitions, share repurchases, dividends, debt service, and restricted cash requirements.
- Reinsurance counterparty exposure related to Wright Flood, including $309.8 million of reinsurance recoverables and $383.6 million of prepaid reinsurance premiums.