Brown & Brown, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Brown & Brown, Inc. is a diversified insurance agency, wholesale brokerage, insurance programs and services organization focused primarily on property and casualty products. Its four reportable segments are Retail, National Programs, Wholesale Brokerage and Services. This unaudited filing covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenues | $247.6 million | $243.8 million | $743.6 million | $753.7 million |
| Income before taxes | $73.0 million | $67.5 million | $214.1 million | $213.7 million |
| Net income | $44.3 million | $41.0 million | $129.6 million | $129.6 million |
| Diluted EPS | $0.31 | $0.29 | $0.90 | $0.91 |
| Operating cash flow | Not separately provided | Not separately provided | $226.2 million | $189.3 million |
Q3 pretax margin was approximately 29.5% versus 27.7% in the prior-year quarter; net margin was approximately 17.9% versus 16.8%. For the nine-month period, pretax margin was approximately 28.8% versus 28.4%, while net margin was approximately 17.4% in both periods.
- Commissions and fees increased 1.3% in Q3, including profit-sharing commissions, but declined 1.8% for the first nine months.
- Core commissions and fees internal growth was negative 2.6% in Q3 and negative 5.1% for nine months, excluding acquisition and divestiture effects.
- Employee compensation and benefits were $122.0 million in Q3 and $365.6 million for nine months; other operating expenses were $31.3 million and $101.3 million, respectively.
- Cash and cash equivalents were $257.2 million at September 30, 2010, up from $197.1 million at December 31, 2009.
- Current assets were $669.7 million versus current liabilities of $594.3 million, producing a current ratio of 1.13 versus 1.28 at year-end 2009.
- Total debt was $251.8 million, including $101.7 million classified as current; no borrowings were outstanding under the revolving credit facility. The company was in compliance with its debt covenants.
- Dividends declared were $0.0775 per share in Q3 and $0.2325 per share for nine months.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 1.6% and net income increased 8.1%, principally because expense reductions exceeded modest revenue growth.
- Nine-month revenue declined 1.3%, while net income was essentially unchanged. Lower core commissions and fees were substantially offset by expense controls and higher profit-sharing commissions.
- Other operating expenses declined 11.9% in Q3 and 5.4% for nine months. The decreases included a $3.6 million reimbursement of legal fees from an insurance carrier.
- Other income increased to $4.7 million for nine months from $1.2 million, including a $1.7 million legal judgment received from former employees who violated non-solicitation agreements.
- The company acquired 18 insurance intermediaries and books of business during the first nine months for an aggregate purchase price of $142.3 million, compared with $47.0 million for eight acquisitions in the prior-year period. These acquisitions contributed $14.4 million of revenue and $1.7 million of pretax income through September 30, 2010.
- Goodwill increased to $1.167 billion from $1.074 billion at December 31, 2009, primarily from acquisitions. Management reported no impairment from its most recent annual assessment.
- The Services Division delivered 40.5% Q3 revenue growth and 23.5% nine-month growth, largely from acquisitions. Retail revenue declined 0.5% in Q3 and 2.5% for nine months; National Programs revenue declined 3.7% for nine months; Wholesale Brokerage revenue declined 0.7% for nine months.
Guidance, Outlook, Risks and Unusual Items
- Management continued to describe the insurance market as soft, with declining premium rates and reduced insurable exposure units. It did not anticipate significant additional declines in 2010 but reported no clear indications of improvement.
- Management expected Proctor Financial’s Q4 2010 commissions and fees revenue to be flat with Q4 2009.
- The company estimated 2010 non-cash stock-based compensation of approximately $6.7 million, compared with $7.4 million in 2009.
- Management stated that existing cash, investments, operating cash flow and available credit were expected to satisfy normal liquidity needs through at least the end of 2011.
- The company was considering issuing $100 million of notes due in 2021 to refinance $100 million of Series A notes maturing September 15, 2011. The expected all-in coupon was 4.4% to 5.0%; no completed refinancing was reported in this filing.
- Maximum future acquisition earn-out payments totaled $144.8 million; the recorded estimated earn-out liability was $26.7 million at September 30, 2010. Revaluations generated a $1.0 million credit to pretax income for the nine-month period.
- Governmental inquiries and litigation concerning insurance-industry compensation practices, including profit-sharing contingent commissions and override commissions, remained unresolved. The company could not estimate a loss range or predict whether these matters could reduce or eliminate such commissions.
- Ordinary-course litigation could materially affect results or cash flows in a particular period despite management’s view that it was unlikely to materially affect consolidated financial position.
- Key operating risks include economic weakness, regulatory changes, competition, concentration in several states, adverse events in California, Florida, Indiana, Michigan, New Jersey, New York, Pennsylvania, Texas or Washington, and failure to integrate acquisitions.
- No material changes to previously disclosed risk factors or internal control effectiveness were reported.
Important Facts for Investors to Verify
- Reconcile the reported $226.2 million of operating cash flow in the cash-flow statement with the approximately $226.5 million amount cited in MD&A.
- Assess the sustainability of earnings improvements after excluding the $3.6 million legal-fee reimbursement, $1.7 million legal judgment and acquisition-related contributions.
- Monitor negative internal revenue growth, particularly in Retail and National Programs, and the effect of continued soft insurance pricing and weak exposure units.
- Review acquisition integration, goodwill of $1.167 billion, amortization expense and the $144.8 million maximum earn-out exposure.
- Evaluate liquidity and refinancing requirements related to the $100 million Series A notes due in September 2011 and the $101.7 million current portion of debt.
- Follow governmental investigations and litigation regarding contingent and override commissions, including potential effects on future revenue and regulatory costs.