Brown & Brown, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services divisions. The filing covers the three and nine months ended September 30, 2013. Financial statements are unaudited and prepared under U.S. GAAP; amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $359.3 million | $303.8 million | $1,020.1 million | $897.2 million |
| Income before taxes | $95.5 million | $81.6 million | $281.2 million | $235.6 million |
| Net income | $57.7 million | $49.5 million | $169.9 million | $141.4 million |
| Diluted EPS | $0.39 | $0.34 | $1.16 | $0.97 |
| Operating cash flow | Not separately provided | Not separately provided | $309.9 million | $189.0 million |
- Revenue increased 18.3% in the quarter and 13.7% year to date; net income increased 16.7% and 20.1%, respectively.
- Approximate pretax margins were 26.6% in Q3 and 27.6% year to date, compared with 26.9% and 26.3% in the comparable 2012 periods. Approximate net margins were 16.1% and 16.7%, compared with 16.3% and 15.8%.
- Core organic commissions and fees internal growth was 7.3% in Q3 and 8.2% year to date, versus 1.0% and 1.7% in the prior-year periods.
- Cash and cash equivalents were $171.0 million at September 30, 2013, down from $219.8 million at December 31, 2012. Restricted cash and investments were $247.3 million.
- Total debt was $480.0 million, including $100.0 million current debt and $380.0 million long-term debt. The Company reported compliance with all debt covenants.
- The current ratio declined to 0.98 from 1.34 at December 31, 2012, partly reflecting increased premiums payable and other current liabilities.
- Dividends declared increased to $0.0900 per share in Q3 from $0.0850 in Q3 2012; dividends paid during the first nine months were $39.0 million.
Material Changes Versus the Prior Comparable Period
- Growth was supported by acquisitions, net new business, higher profit-sharing contingent commissions, and improving insurance premium rates and exposure units.
- Q3 core commissions and fees increased 18.7%, including approximately $34.8 million from acquired agencies and $20.8 million from internal growth after divestitures.
- Year-to-date core commissions and fees increased 14.1%, including approximately $54.8 million from acquired agencies and $69.1 million from internal growth after divestitures.
- Brown & Brown acquired Beecher Carlson Holdings, Inc. on July 1, 2013. Aggregate 2013 acquisition purchase prices were approximately $484.3 million, including approximately $379.7 million of cash payments. The acquisitions added $278.6 million of goodwill and $106.4 million of purchased customer accounts.
- Acquired businesses contributed $29.1 million of Q3 revenue and generated a $3.5 million pretax loss; year-to-date contributions were $29.7 million of revenue and a $3.3 million pretax loss.
- National Programs pretax income declined 3.0% in Q3 and 1.1% year to date despite revenue growth, primarily due to higher compensation, operating expenses, interest allocations, and earn-out effects.
- Wholesale Brokerage pretax income increased 28.5% in Q3 and 29.4% year to date. Services pretax income increased 97.2% in Q3 and 161.6% year to date, partly due to Colonial Claims activity associated with Superstorm Sandy.
- Employee compensation increased 20.6% in Q3 and 11.9% year to date. Non-cash stock compensation increased 90.1% in Q3 and 30.8% year to date, primarily due to new July 2013 awards.
- Other income declined year to date by $4.4 million, primarily because the prior-year period included gains on customer-account sales and a $3.1 million legal settlement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected continued positive quarterly internal revenue growth for the remainder of 2013, assuming insurance premium rates and exposure units continued to increase. This outlook excluded the effect of lower expected Colonial Claims revenue.
- Colonial Claims revenue for Q4 2013 was estimated at $1.5 million to $2.0 million, compared with $7.4 million in Q4 2012 following Superstorm Sandy.
- Management believed existing cash, investments, operating cash flow, and available credit facilities would satisfy normal liquidity needs through at least the end of 2014.
- Maximum future acquisition contingency payments were $135.1 million at September 30, 2013, including $46.7 million of recorded estimated earn-out payables.
- Total contractual cash obligations were $852.5 million, including $480.0 million of debt, $140.5 million of operating leases, $42.4 million of interest obligations, and $135.1 million of maximum acquisition contingencies.
- Management identified risks from insurance premium rates and exposure units, economic and regulatory conditions, competition, geographic concentration, acquisition integration, earn-out estimates, litigation, policy cancellations, tax changes, and the ability to forecast liquidity needs.
- Brown & Brown was involved in ordinary-course legal proceedings. Management did not expect a material adverse effect on consolidated financial position, but unfavorable developments could materially affect results or cash flows in a particular period.
- On November 1, 2013, CFO Cory T. Walker announced his retirement, expected no later than the later of March 4, 2014 or the filing date of the 2013 Form 10-K. A transition agreement provided up to $1.25 million in staged payments, subject to conditions.
Important Facts for Investors to Verify
- Assess whether the strong organic growth rate of 7.3% in Q3 and 8.2% year to date is sustainable after separating acquisition effects, contingent commissions, and unusual claims activity.
- Review Beecher Carlson’s integration progress, profitability, goodwill allocation, and the potential for acquisition-related impairment or additional earn-out payments.
- Monitor liquidity given the $100.0 million current debt balance, a current ratio below 1.0, and substantial fiduciary and restricted cash balances.
- Reconcile reported operating cash flow with acquisition spending of $339.4 million, dividends of $39.0 million, and the $48.9 million decline in unrestricted cash.
- Evaluate the effect of lower Colonial Claims revenue after the Superstorm Sandy comparison period.
- Review contingent commissions, guaranteed supplemental commissions, estimated earn-outs, legal matters, debt covenants, and the CFO transition for potential volatility or unusual items.