Business Context and Reporting Period
Brown & Brown, Inc. is a diversified insurance agency, wholesale broker, insurance programs, and insurance-related services company operating through Retail, National Programs, Wholesale Brokerage, and Services segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenues | $598.8 million | $575.2 million | 4.1% |
| Income before taxes | $129.4 million | $123.5 million | 4.8% |
| Net income | $96.8 million | $92.6 million | 4.5% |
| Income before-tax margin | 21.6% | 21.5% | Up 0.1 point |
| EBITDAC | $176.8 million | $168.6 million | 4.9% |
| EBITDAC margin | 29.5% | 29.3% | Up 0.2 points |
| Diluted earnings per share | $0.34 | $0.33 | Up $0.01 |
- For the six months ended June 30, 2020, revenue was $1.297 billion, up 8.6%; income before taxes was $334.7 million, up 23.0%; net income was $249.2 million, up 20.7%; and diluted EPS was $0.88 versus $0.73.
- Six-month income-before-tax margin was 25.8% versus 22.8%, while EBITDAC was $418.8 million versus $365.7 million and EBITDAC margin was 32.3% versus 30.6%. EBITDAC is a non-GAAP measure.
- Q2 core commissions and fees increased 4.9%, but consolidated Organic Revenue growth was only 0.5%. Six-month Organic Revenue growth was 3.1%.
- Q2 segment Organic Revenue growth was 15.5% for National Programs, 0.1% for Wholesale Brokerage, negative 2.6% for Retail, and negative 15.4% for Services.
- Operating cash flow for the six months was $416.7 million versus $305.7 million. Cash and cash equivalents were $623.2 million at June 30, 2020, and cash plus restricted cash was $1.062 billion.
- Capital expenditures were $35.9 million, and cash paid for acquisitions was $291.4 million. The company completed ten acquisitions during the first half of 2020.
- Total debt was $1.629 billion at June 30, 2020, up $73.6 million from December 31, 2019. Long-term debt, net of discount and issuance costs, was $1.566 billion, with $62.5 million classified as current.
- The company had $200.0 million outstanding on its revolving facility and reported $600.0 million of additional availability. Including expansion options subject to lender approval, incremental borrowing capacity was up to $1.3 billion.
- The company declared dividends of $0.085 per share in each quarter, compared with $0.080 per share in 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth was supported by acquisitions, net new business, renewal activity, and higher profit-sharing contingent commissions. Q2 growth was partially offset by lower guaranteed supplemental commissions, primarily because of a one-time National Programs commission in Q2 2019.
- Management recorded an approximately $8.0 million Q2 revenue adjustment and a $7.1 million first-half adjustment to reflect expected COVID-19 effects on customer activity, exposure units, and variable policy revenues.
- Employee compensation and benefits rose 11.9% in Q2 and represented 57.9% of revenue versus 53.8% in 2019. Other operating expenses declined 22.9%, primarily because of lower travel, meetings, professional fees, and other variable costs.
- Services revenue declined 15.5% in Q2 and 12.9% for the first half, reflecting lower claims activity, shelter-in-place measures, lower Social Security advocacy claims, a terminated customer contract, and lower weather-related claims.
- National Programs was the strongest segment, with Q2 revenue up 17.3%, income before taxes up 20.1%, and EBITDAC margin increasing to 40.6% from 38.9%.
- Q2 interest expense declined 15.2% because of lower floating-rate interest costs and scheduled debt amortization, partly offset by additional revolving borrowings.
- Goodwill increased to $4.023 billion from $3.746 billion at year-end, primarily from acquisitions. No goodwill impairment charge was recorded.
- The company deferred approximately $60.0 million of federal and state income taxes and employer payroll taxes in Q2. Approximately $50.0 million of income tax payments were expected in Q3 2020, while $10.0 million of deferred employer payroll taxes is expected to be paid in 2021 and 2022.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that it does not expect to achieve the level of Organic Revenue growth attained in 2019 through the remainder of 2020 because of COVID-19, the recession, lower customer activity, and reduced insurable exposure units. No specific full-year earnings guidance was provided.
- The company used remote-work arrangements with virtually no reported disruption to client service, but identified continuing risks from the pandemic, delayed customer or carrier payments, reduced insurance purchases, premium refunds or grace periods, possible retroactive coverage requirements, and third-party disruptions.
- Estimated acquisition earn-out payables were $218.5 million at June 30, 2020, with maximum future acquisition contingency payments of $446.5 million. A July 27, 2020 amendment made a $25.0 million Hays-related earn-out payable in 2022 and removed further contingency for that amount.
- Contractual cash obligations totaled $2.690 billion, including $1.638 billion of debt, $446.5 million of maximum acquisition contingencies, $264.3 million of operating lease obligations, and $253.4 million of interest obligations.
- The company remained in compliance with debt covenants. Floating-rate debt and the anticipated discontinuation of LIBOR after 2021 create interest-rate and benchmark-transition risks.
- Legal proceedings arise in the ordinary course of business. Management reported no proceedings expected currently to have a material adverse effect, but unfavorable resolutions could affect results, cash flow, and liquidity.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether COVID-19-related reductions in exposure units, customer activity, and variable commission estimates persist or result in additional revenue adjustments.
- The sustainability of National Programs growth and the recovery prospects for Retail and Services, particularly Services claims volumes.
- Acquisition integration, goodwill valuation, amortization, and the future cash requirements associated with $218.5 million of recorded earn-outs and $446.5 million of maximum contingencies.
- Liquidity after acquisition spending, scheduled debt amortization, deferred tax payments, and any additional COVID-19-related delays in customer or carrier collections.
- The effect of higher compensation costs, non-cash stock compensation, technology investments, and cost reductions on future margins.
- Future changes in interest rates, LIBOR replacement terms, debt covenant compliance, and access to revolving-credit expansion options.