Business Context and Reporting Period
Company: Brown & Brown, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: The Company operates as an insurance agency and brokerage firm with four primary segments: Retail, National Programs, Services, and Brokerage. Operations are conducted entirely within the United States.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2002 | 9 Months Ended Sep 30, 2001 |
|---|---|---|---|
| Total Revenues | $110,657 | $336,595 | $269,152 |
| Net Income | $20,178 | $61,741 | $38,698 |
| Diluted EPS | $0.29 | $0.91 | $0.61 |
| Operating Cash Flow (9mo) | N/A | $68,142 | $60,352 |
| Cash & Equivalents (Sep 30, 2002) | $144,982 | ||
| Long-Term Debt (Sep 30, 2002) | $62,237 (net of current portion) | ||
| Current Ratio (Sep 30, 2002) | 1.35 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues for the nine months ended September 30, 2002, increased 25.1% to $336.6 million compared to $269.2 million in the prior year. Commissions and fees rose 26.6%, driven by $39.3 million in revenue from acquired agencies and organic growth.
- Profitability: Net income for the nine-month period increased 59.5% to $61.7 million. Diluted earnings per share rose 49.2% to $0.91.
- Expense Management: Employee compensation as a percentage of total revenue improved to 48.9% (9 months 2002) from 52.2% (9 months 2001). Amortization expense decreased 11.9% due to the adoption of SFAS No. 142, which eliminated goodwill amortization.
- Liquidity: Cash and cash equivalents surged from $16.0 million at year-end 2001 to $145.0 million at September 30, 2002. This increase was primarily fueled by a $149.4 million follow-on stock offering in March 2002.
Guidance, Outlook, and Risks
- Acquisitions: The Company continues an active acquisition strategy. In the first nine months of 2002, it acquired 17 agencies. A significant subsequent event occurred on November 1, 2002, with the acquisition of Cal-Surance Associates for approximately $64 million.
- Capital Structure: The Company holds a $90 million term loan (outstanding balance $67.5 million) and a $50 million revolving credit facility (unused as of Sept 30, 2002). An interest rate swap effectively fixed the rate on the term loan at 4.53%.
- Risks: Management cites risks including material adverse changes in economic conditions, regulatory actions, competition, and integration challenges of acquired businesses. The Company notes that results for the nine-month period are not necessarily indicative of full-year results.
- Legal Proceedings: The Company is involved in routine litigation. A specific case, Gresham & Associates, Inc. v. Anthony T. Strianese et al., resulted in summary judgment in favor of the Company in June 2002, though the plaintiff intends to appeal.
Investor Verification Checklist
- Stock Offering Impact: Verify the dilution effects and capital deployment strategy following the $149.4 million follow-on offering in March 2002.
- Acquisition Integration: Assess the assimilation of 17 agencies acquired in 2002 and the subsequent Cal-Surance acquisition to ensure projected synergies are realized.
- Goodwill Accounting: Confirm the impact of SFAS No. 142 on future earnings, specifically the elimination of goodwill amortization and the requirements for annual impairment testing.
- Debt Covenants: Review the funded debt to EBITDA ratio requirements for the $90 million term loan and the $50 million revolving facility.
- Core Growth: Distinguish between organic "core" commission growth (reported as 11.9% for the nine months) and growth driven by acquisitions to evaluate underlying business health.