Brown & Brown, Inc. — 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Brown & Brown is a diversified insurance intermediary offering retail insurance, national programs, wholesale brokerage, and insurance-related services. The unaudited filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $424.2 million | $404.3 million | +4.9% |
| Commissions and fees | $422.3 million | $403.8 million | +4.6% |
| Income before taxes | $102.5 million | $93.8 million | +9.4% |
| Net income | $62.1 million | $57.0 million | +9.0% |
| Diluted EPS | $0.44 | $0.39 | +$0.05 |
| Dividends declared per share | $0.12 | $0.11 | +9.1% |
| Operating cash flow | $31.9 million | $50.7 million | -37.1% |
| Capital expenditures | $4.3 million | $3.7 million | +$0.5 million |
- Net margin was approximately 14.6%, compared with 14.1% in the prior-year quarter. Pretax margin was approximately 24.2%, compared with 23.2%.
- Core commissions and fees increased 4.8% to $388.2 million. Core organic commissions and fees grew 1.3%, versus 3.8% in Q1 2015.
- Employee compensation and benefits increased 5.9% to $224.1 million, and represented 52.8% of revenue versus 52.4%. Other operating expenses increased 4.1% to $63.6 million and represented 15.0% of revenue versus 15.1%.
- Cash and cash equivalents were $401.8 million at March 31, 2016, compared with $443.4 million at December 31, 2015. Including restricted cash, short-term investments, and investments, reported liquid and investment assets were approximately $667.3 million.
- Total debt was $1.139 billion, down from $1.145 billion at December 31, 2015. The company reported $522.5 million outstanding under its term loan and no revolving-loan borrowings.
- Net cash used in investing activities was $44.9 million, including $40.6 million for acquisitions. Net cash used in financing activities was $28.6 million, including $17.0 million of dividends and $11.3 million of treasury-stock purchases.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected acquisitions, net new business, and higher profit-sharing contingent commissions, partly offset by lower guaranteed supplemental commissions and divestitures.
- Income before taxes benefited from acquisitions, net new business, the change in estimated acquisition earn-out payables, and higher disposal gains. The earn-out adjustment was a $0.8 million credit in Q1 2016 versus a $1.4 million charge in Q1 2015.
- Other income increased to $1.4 million from $0.3 million, primarily because of a $1.0 million benefit from company-owned life insurance.
- The company completed three acquisitions during the quarter, including Social Security Advocates for the Disabled. Cash paid for acquisitions was $42.7 million, and the acquired businesses contributed $2.5 million of revenue and $0.6 million of pretax income during the quarter.
- Segment pretax income increased 7.3% in Retail, 45.7% in National Programs, 0.5% in Wholesale Brokerage, and 12.2% in Services. Internal growth was positive in all four segments, ranging from 0.7% in Retail to 3.4% in Wholesale Brokerage.
- The company completed the remaining settlement of its $75 million accelerated share repurchase program in January 2016. It had authorization to repurchase up to $375 million of additional stock at March 31, 2016.
- The company adopted debt issuance-cost presentation guidance retrospectively, reclassifying $8.3 million from other assets to long-term debt in the 2015 balance sheet.
Guidance, Outlook, Risks, and Unusual Items
Management provided no formal earnings or revenue guidance. It stated that, if gradual increases in insurable exposure units continue and premium-rate changes are similar to 2015, the company expects positive quarterly internal revenue growth during 2016.
- Management believes cash, short-term investments, operating cash generation, and available revolving-credit capacity will satisfy normal liquidity needs, including debt principal payments, for at least the next twelve months. The revolving credit facility provided up to $800 million of available capacity, with no borrowings outstanding.
- Scheduled debt obligations include $13.8 million due June 30, 2016 and the $25 million Series C senior notes due in December 2016. The company was in compliance with its debt covenants.
- Total contractual cash obligations were $1.765 billion, including $1.148 billion of long-term debt, $205.0 million of operating leases, $217.9 million of interest obligations, and maximum future acquisition-contingency payments of $128.5 million.
- Key operating risks include commercial property and casualty premium pressure, changes in exposure units, economic and regulatory conditions, competition, employee retention, acquisition integration, acquisition valuations, policy cancellations, and legal proceedings.
- Wright Flood remains primarily liable to policyholders even when losses are reinsured. Reinsurance recoverables were $337.9 million at March 31, 2016, including $58.1 million of unpaid-loss recoverables and $279.8 million of prepaid reinsurance premiums.
- The company reported ordinary-course litigation and claims but stated that no current proceeding was expected to have a material adverse effect on financial condition, operations, or cash flows. Future unfavorable resolutions could nevertheless affect results, cash flow, and liquidity.
- Unusual items included the $1.0 million company-owned-life-insurance benefit, premium-tax credits, acquisition earn-out remeasurement, and acquisition-related activity. These items may affect comparability.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2016, and reported no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the 1.3% core organic growth rate improves from the lower Q1 level and whether premium-rate pressure, particularly in catastrophe-prone property markets, persists.
- The contribution, integration, and eventual earn-out obligations associated with the 2016 acquisitions, including the provisional purchase-price allocation for Social Security Advocates for the Disabled.
- Cash conversion and working-capital trends, given operating cash flow of $31.9 million versus $50.7 million in the prior-year quarter.
- The company’s ability to fund the June 2016 debt payment, the December 2016 notes maturity, acquisitions, dividends, and potential share repurchases while maintaining liquidity.
- Exposure to floating-rate debt, reinsurance recoverability and concentration, regulatory requirements applicable to Wright Flood, and the outcome of ongoing litigation.
- The effect of future accounting standards for revenue recognition, leases, employee share-based payments, and deferred-tax classification.