Brown & Brown, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance agency, wholesale broker, insurance programs and services organization operating through Retail, National Programs, Wholesale Brokerage and Services segments. The filing covers the three months ended March 31, 2020; financial statements are unaudited and presented under U.S. GAAP.
The quarter included the initial effects of the COVID-19 pandemic. Management characterized the first-quarter impact on results as net immaterial but expects the pandemic and resulting recession to reduce customer activity, insurable exposure units and revenue growth during the remainder of 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $698.5 million | $619.3 million | 12.8% |
| Commissions and fees | $696.5 million | $617.5 million | 12.8% |
| Core commissions and fees | $668.7 million | $598.5 million | 11.7% |
| Income before income taxes | $205.3 million | $148.5 million | 38.2% |
| Income before tax margin | 29.4% | 24.0% | Up 5.4 points |
| Net income | $152.4 million | $113.9 million | 33.8% |
| Diluted earnings per share | $0.54 | $0.40 | Increase |
| EBITDAC | $242.0 million | $197.2 million | 22.7% |
| EBITDAC margin | 34.6% | 31.8% | Up 2.8 points |
| Organic Revenue growth | 5.6% | 2.0% | Up 3.6 points |
| Net cash provided by operating activities | $33.8 million | $5.4 million | Increase |
| Capital expenditures | $16.5 million | $23.2 million | Down 29.0% |
Employee compensation and benefits were $349.6 million, or 50.1% of revenue, compared with 53.7% in the prior-year quarter. Other operating expenses increased 20.7% to $107.1 million, representing 15.3% of revenue.
Profit-sharing contingent commissions increased 56.3% to $23.9 million, while guaranteed supplemental commissions increased 6.1% to $3.9 million. The increase in contingent commissions was primarily attributable to cash received in the quarter exceeding the amount accrued at December 31, 2019 for 2019 earnings, as well as acquisition growth.
Liquidity, cash flow and debt
- Cash and cash equivalents were $385.8 million at March 31, 2020, compared with $542.2 million at December 31, 2019.
- Cash and cash equivalents plus restricted cash totaled $775.2 million at March 31, 2020, down from $963.0 million at year-end 2019.
- Operating cash flow was $33.8 million. Investing cash flow was negative $169.2 million, including $153.3 million paid for acquisitions. Financing cash flow was negative $52.4 million.
- Total debt was $1.542 billion, net of unamortized discounts and issuance costs, down $13.2 million from December 31, 2019. The company remained in compliance with all debt covenants.
- At March 31, 2020, the revolving credit facility provided up to $700.0 million of available cash capacity. Management expected to borrow $250.0 million before May 1, 2020, leaving $450.0 million of additional capacity after that borrowing.
- Including expansion options subject to lender approval, management stated that incremental borrowing capacity could reach up to $1.1 billion.
- Scheduled debt principal payments were expected to total $55.0 million in 2020 and $70.0 million in 2021.
- The company declared a quarterly dividend of $0.085 per share, compared with $0.080 per share in Q1 2019.
Material changes versus the prior comparable period
- Revenue growth reflected $41.3 million of core revenue from acquisitions, approximately $33.0 million from net new and renewal business, and a $4.1 million reduction from divested businesses.
- Five insurance intermediaries were acquired for cash consideration of $153.3 million. The acquisitions contributed $5.6 million of revenue and a $0.5 million pretax loss from their acquisition dates through March 31, 2020.
- Goodwill increased to $3.882 billion from $3.746 billion, primarily from acquisitions. No goodwill impairment was recorded.
- The change in estimated acquisition earn-out payables shifted from a $1.2 million expense in Q1 2019 to a $11.0 million pretax benefit in Q1 2020. This included a $12.6 million decrease in fair value, with $6.0 million attributed to lower expected performance related to COVID-19.
- Services was the only segment with lower revenue: revenue declined 10.2% to $44.5 million and Organic Revenue declined 13.1%. Retail revenue increased 15.0%, National Programs increased 17.2% and Wholesale Brokerage increased 10.2%.
- Retail, National Programs and Wholesale Brokerage pretax margins were 28.8%, 23.1% and 22.8%, respectively, compared with 24.1%, 17.6% and 22.1% in Q1 2019. Services pretax margin increased to 22.7% from 18.5%, primarily because of the earn-out benefit, despite weaker operating performance.
- The company reduced projected remaining policy-year revenue for employee benefits and workers’ compensation by $10.5 million because of expected COVID-19 effects on employment and the economy. Management stated that this adjustment reduced reported Organic Revenue growth.
Outlook, risks, contingencies and unusual items
Management did not provide formal full-year financial guidance. It stated that Q1 Organic Revenue growth of 5.6% is not expected to be sustained through the remainder of 2020 because COVID-19 may reduce customer demand, employment, insurable exposure units and new business.
- COVID-19 could delay customer or carrier payments, reduce insurance purchases, disrupt operations and remote-work processes, impair goodwill or other assets, and restrict access to capital or increase financing costs.
- Acquisition-related earn-outs totaled $157.7 million at March 31, 2020; maximum future acquisition contingency payments were $366.5 million. These obligations depend on acquired businesses’ future performance and may create earnings volatility.
- Goodwill and amortizable intangible assets were substantial, totaling $3.882 billion and $932.9 million, respectively, creating impairment and future amortization risk.
- Approximately $701.3 million of borrowings carried floating interest rates tied to LIBOR. The company is evaluating the transition from LIBOR to alternative reference rates after 2021.
- The company is subject to ordinary-course litigation and regulatory proceedings. Management did not identify any matter expected to have a material adverse effect, but unfavorable developments could affect results, cash flow or liquidity.
- Wright National Flood Insurance Company remains primarily liable to policyholders even when risks are reinsured. Its March 31, 2020 statutory capital and surplus was $30.2 million, and substantially all National Flood Insurance Program premiums were ceded to FEMA.
- The company adopted new credit-loss, goodwill impairment and cloud-computing implementation-cost guidance effective January 1, 2020; management reported no material adoption impact.
Most important facts for investors to verify
- Whether COVID-19 caused a sustained reduction in Organic Revenue, customer payments, employment-related insurance exposure and contingent commissions after March 31, 2020.
- Whether the planned $250.0 million revolving-credit borrowing occurred and how subsequent borrowing affected leverage and liquidity.
- The performance of the five Q1 acquisitions, including earn-out revisions, integration results and the risk of further reductions in expected acquired-business performance.
- Whether the Services segment recovered from its 13.1% Organic Revenue decline and whether the other segments maintained their reported growth rates.
- The sustainability of reported margin expansion after excluding the unusual $11.0 million earn-out benefit and considering COVID-19-related revenue adjustments.
- Compliance with debt covenants, scheduled principal payments and the company’s exposure to floating rates and the LIBOR transition.
- Potential goodwill or intangible-asset impairment if economic conditions deteriorate.
- Future litigation, regulatory, reinsurance and carrier-counterparty developments that could affect cash flow or liquidity.