Brown & Brown, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; filed August 6, 2012. Financial statements are unaudited. Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance-programs and insurance-services organization operating through Retail, National Programs, Wholesale Brokerage and Services divisions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Change | Six months 2012 | Six months 2011 | Change |
|---|---|---|---|---|---|---|
| Total revenues | $290.9 million | $246.8 million | 17.9% | $593.4 million | $509.0 million | 16.6% |
| Income before taxes | $71.1 million | $61.5 million | 15.7% | $153.9 million | $138.1 million | 11.4% |
| Net income | $42.5 million | $37.0 million | 14.7% | $91.9 million | $83.3 million | 10.3% |
| Diluted EPS | $0.29 | $0.26 | 11.5% | $0.63 | $0.57 | 10.5% |
| Operating cash flow | Not separately presented | Not separately presented | — | $112.7 million | $123.6 million | (8.8%) |
Approximate net margin was 14.6% in the second quarter versus 15.0% in the prior-year quarter, and 15.5% for the first six months versus 16.4% in the prior-year period. Income before taxes increased less rapidly than revenue, reflecting higher compensation, operating costs, amortization, depreciation and interest expense.
Revenue and operating drivers
- Core commissions and fees increased 19.0% in the quarter and 18.3% year to date, primarily from acquisitions.
- Core organic commissions and fees growth improved to 3.2% in the quarter and 2.1% year to date, compared with negative growth of 4.4% and 3.4%, respectively, in the comparable 2011 periods.
- Management cited stabilizing exposure units and modest increases in insurance premium rates, particularly in workers’ compensation and coastal property.
- Profit-sharing contingent commissions and guaranteed supplemental commissions declined. Combined amounts decreased to $3.3 million from $5.1 million in the quarter and to $30.1 million from $37.3 million year to date.
- Other income for the six months included approximately $2.2 million of gains on book-of-business sales and a $3.1 million legal settlement.
- Fee revenue represented 18.4% of commissions and fees for the first six months, up from 14.9% in the prior-year period.
Segment developments
| Segment | Q2 revenue change | Q2 pretax income change | Six-month revenue change | Six-month pretax income change |
|---|---|---|---|---|
| Retail | 5.8% | 4.0% | 5.9% | 6.3% |
| National Programs | 67.9% | 24.6% | 50.5% | (8.1%) |
| Wholesale Brokerage | 4.0% | 10.6% | 3.8% | 12.2% |
| Services | 68.2% | 1.2% | 65.7% | 29.8% |
National Programs and Services growth was principally acquisition-driven, especially following the Arrowhead acquisition. New acquisitions generated $30.6 million of revenue but a pretax loss of $0.8 million in the quarter, and $58.3 million of revenue but a pretax loss of $0.5 million for the six months.
Cash flow, liquidity and debt
- Cash and cash equivalents were $193.7 million at June 30, 2012, down from $286.3 million at December 31, 2011. Restricted cash and investments were $192.5 million.
- Six-month cash flow from operations was $112.7 million. Investing cash use was $378.0 million, including $369.7 million for acquisitions and $12.7 million for capital expenditures.
- Financing activities provided $172.6 million, including $200.0 million of new long-term debt. Dividends paid were $24.4 million.
- Total debt was $450.7 million, including $450.0 million of unsecured senior notes and $0.7 million of acquisition notes, compared with $251.3 million at December 31, 2011.
- The current ratio declined to 1.17 from 1.47 at year-end 2011. Management stated that existing cash, investments, operating cash flow and available debt facilities should meet normal liquidity needs through at least the end of 2012.
- All debt covenants were reported to be in compliance as of June 30, 2012. Contractual cash obligations totaled $837.8 million, including $147.1 million of maximum future acquisition contingency payments.
Material changes, outlook and unusual items
- Brown & Brown completed seven asset acquisitions and one stock acquisition during the first half of 2012 for an aggregate purchase price of $599.1 million, including the January acquisition of Arrowhead for approximately $423.9 million of net assets acquired.
- Acquisitions increased goodwill by approximately $352.5 million, contributing to total goodwill of $1.675 billion at June 30, 2012, compared with $1.323 billion at year-end 2011.
- Management expected positive core organic growth to continue for the remainder of 2012, based on stabilizing exposure units and modestly higher premium rates. No formal earnings or revenue guidance was provided.
- Employee compensation ratios increased to 51.8% of revenue in the quarter and 50.6% year to date, versus 51.0% and 49.6%, respectively. The company accrued for a special producer production bonus expected to cost approximately $6 million to $8 million in 2012, payable in the first quarter of 2013.
- Estimated acquisition earn-out payables were $58.0 million at June 30, 2012. Fair-value remeasurement produced income credits of $0.6 million in the quarter and $1.0 million year to date.
- Management identified insurance premium rates, exposure units, policy cancellations, contingent commissions, acquisition integration, earn-out estimates, regulatory conditions, competition, litigation and economic conditions in key states as significant risks.
- The company reported ordinary-course legal proceedings and stated that management does not currently expect a material adverse effect on consolidated financial position, while noting that unfavorable resolutions could materially affect future quarterly or annual results.
- No material changes to previously disclosed risk factors or material legal-proceeding developments were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether positive organic growth persists independently of acquisitions and whether exposure units and premium rates continue to improve.
- The integration, profitability and cash contribution of Arrowhead and other 2012 acquisitions, including their initial operating losses and substantial goodwill balances.
- The sustainability of contingent commissions, particularly after two insurers discontinued guaranteed supplemental commission contracts.
- The effect of higher leverage, variable-rate debt, scheduled maturities and $147.1 million of potential acquisition contingency payments on liquidity.
- The amount and timing of the estimated $6 million to $8 million producer bonus and other compensation-related cost increases.
- Potential volatility from earn-out fair-value adjustments, legal matters, regulatory changes and insurance-market conditions.