Brown & Brown, Inc. — 2010 Q2 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a U.S.-focused insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services divisions. The filing covers the three and six months ended June 30, 2010, with unaudited financial statements prepared under U.S. GAAP.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $243.7 million | $246.4 million | $495.9 million | $509.9 million |
| Income before taxes | $68.0 million | $67.0 million | $141.1 million | $146.2 million |
| Net income | $41.2 million | $40.7 million | $85.3 million | $88.7 million |
| Diluted EPS | $0.29 | $0.29 | $0.59 | $0.63 |
| Net margin | 16.9% | 16.5% | 17.2% | 17.4% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $166.7 million | $185.0 million |
Commissions and fees were $241.1 million in the second quarter and $491.7 million for the first six months. Core commissions and fees, excluding profit-sharing contingent commissions and divested business, declined 4.0% internally in the quarter and 6.3% for the six-month period. The six-month employee compensation and benefits ratio was 49.1%, while the other operating expense ratio was 14.1%.
At June 30, 2010, cash and cash equivalents were $293.0 million, restricted cash and investments were $145.8 million, and total assets were $2.34 billion. Total debt was $255.8 million, including $250.0 million of long-term debt and $5.8 million of current debt. The company had no borrowings under its revolving credit facility and reported compliance with all debt covenants. The current ratio was 1.41.
Material changes versus the prior comparable period
- Second-quarter revenue decreased 1.1%, while six-month revenue decreased 2.7%.
- Second-quarter net income increased 1.3%, but six-month net income decreased 3.8%.
- Second-quarter income before taxes increased 1.5%; six-month income before taxes declined 3.5%.
- Profit-sharing contingent commissions declined 5.3% in the quarter but increased 5.3% for the six-month period to $38.7 million.
- Cost reductions, including lower salaries, bonuses, occupancy costs, supplies, insurance expense, and bad-debt write-offs, helped offset revenue pressure.
- Wholesale Brokerage income before taxes increased 35.5% for the six months, while National Programs income before taxes declined 11.6%. Retail income before taxes was essentially flat, and Services income before taxes declined 5.6%.
- The company acquired ten insurance intermediaries and several books of business during the first six months, for an aggregate purchase price of approximately $43.7 million. Acquisitions contributed $6.3 million of six-month revenue and $0.9 million of pretax income.
- Estimated acquisition earn-out liabilities were reduced by $1.6 million during the first six months, producing a pretax income benefit. The estimated earn-out payable was $15.1 million at June 30, 2010.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal earnings guidance. It stated that insurance pricing declines appeared to be slowing, but it did not see indications of improvement in insurance exposure units or pricing during 2010. Management expected no significant additional declines in these areas, while noting that the company had experienced fourteen consecutive quarters of negative internal growth in core commissions and fees.
Management expected 2010 non-cash stock-based compensation of approximately $7.8 million, compared with $7.4 million in 2009. It also expected existing cash, investments, operating cash flow, and available credit resources to satisfy normal liquidity needs through at least the end of 2010.
- Principal operating risks include weak economic conditions, declining insurance premium rates and exposure units, competition, regulatory actions, and concentration in states including California, Florida, Indiana, Michigan, New Jersey, New York, Pennsylvania, Texas, and Washington.
- Florida’s Citizens Property Insurance Corporation remained a competitive risk for certain National Programs and Wholesale Brokerage operations, although rate increases effective January 1, 2010 could improve the competitiveness of private-market insurers.
- Governmental investigations and litigation regarding insurance-industry compensation practices, including profit-sharing contingent commissions and override commissions, remained unresolved. The company could not estimate a loss range, and adverse outcomes could reduce or eliminate these commissions.
- The company was involved in ordinary-course litigation involving potentially substantial claims. Management did not expect a material adverse effect on consolidated financial position based on current information, insurance coverage, and legal advice, but unfavorable resolutions could materially affect a particular period’s results or cash flows.
- Unusual items included a $1.2 million legal judgment included in second-quarter other income and credits from reductions in estimated acquisition earn-out liabilities.
- Contractual cash obligations totaled $538.4 million, including $255.8 million of debt, $98.2 million of operating leases, $46.6 million of interest obligations, and maximum future acquisition earn-out payments of $126.4 million.
Important facts for investors to verify
- Whether negative internal growth in core commissions and fees improves after the second quarter and whether Proctor-related client losses continue.
- The sustainability and timing of profit-sharing contingent commissions, which are material to first-half revenue and vary with insurer profitability and other factors.
- The outcome of governmental investigations and litigation concerning contingent and override commissions.
- Actual future acquisition earn-out payments versus the $126.4 million maximum contingency and the $15.1 million estimated recorded liability.
- Refinancing and liquidity requirements associated with the $100.0 million senior-note maturity in 2011 and additional maturities thereafter.
- Whether acquisitions generate expected revenue and profitability and whether goodwill and amortizable intangible assets remain recoverable.
- Management’s statement that no material subsequent events occurred through issuance of the financial statements and that disclosure controls were effective.