Brown & Brown, Inc. — Q2 2014 Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services divisions. The company markets property and casualty insurance products and provides wholesale brokerage, managing general agency, claims administration, and related services. The unaudited report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Change |
|---|
| Total revenues | $397.8 million | $325.8 million | 22.1% |
| Income before taxes | $101.8 million | $86.2 million | 18.0% |
| Net income | $61.8 million | $52.0 million | 18.7% |
| Diluted EPS | $0.42 | $0.36 | 16.7% |
| Net margin | 15.5% | 16.0% | Down approximately 50 bps |
| Income before tax margin | 25.6% | 26.5% | Down approximately 90 bps |
| Metric | Six months 2014 | Six months 2013 | Change |
|---|
| Total revenues | $761.4 million | $660.8 million | 15.2% |
| Income before taxes | $188.6 million | $185.7 million | 1.6% |
| Net income | $114.2 million | $112.1 million | 1.8% |
| Diluted EPS | $0.78 | $0.77 | 1.3% |
| Net margin | 15.0% | 17.0% | Down approximately 200 bps |
| Income before tax margin | 24.8% | 28.1% | Down approximately 330 bps |
- Six-month commissions and fees were $756.7 million, up 15.0%. Core commissions and fees increased 15.5% to $717.2 million.
- Second-quarter core organic commissions and fees increased 3.1%; excluding prior-year Hurricane Sandy revenue, growth was 3.8%. Six-month organic growth was 0.8%, or 3.9% excluding Hurricane Sandy effects.
- Operating cash flow was $177.6 million for the first six months, compared with $221.9 million in 2013.
- Cash and cash equivalents were $309.1 million at June 30, 2014, versus $203.0 million at December 31, 2013. The current ratio improved to 1.15 from 1.02.
- Capital expenditures were $12.6 million for the first six months, compared with $7.1 million in 2013. Dividends paid were $29.0 million.
- Total debt was $1.175 billion at June 30, 2014, including $799.7 million of senior notes and $375.0 million drawn on revolving credit facilities. Interest expense increased 38.8% for the six-month period.
- The company had $925.0 million outstanding under its new credit facility and remained in compliance with debt covenants.
Material changes versus the prior comparable period
- Brown & Brown acquired The Wright Insurance Group effective May 1, 2014, including a flood insurance carrier, for cash consideration of approximately $610.2 million. The transaction substantially expanded the National Programs Division and contributed to higher goodwill, intangible assets, debt, and amortization.
- Total 2014 acquisitions and purchase-price adjustments had an aggregate purchase price of $1.140 billion, compared with $16.8 million for the comparable 2013 period. Cash paid for acquisitions was $720.1 million.
- Goodwill increased to $2.509 billion from $2.006 billion at December 31, 2013, and amortizable intangible assets increased to $829.0 million from $618.9 million.
- Revenue growth was acquisition-driven: approximately $67.2 million of Q2 core commission and fee growth and $94.7 million of six-month growth came from acquisitions, before divestitures.
- Profit-sharing contingent commissions declined 65.0% in Q2 because of timing and the recognition of certain revenue in the first quarter, but increased 4.8% for the first six months.
- Services Division six-month revenue declined 7.7% and pretax income declined 52.7%, primarily because the 2013 period included non-recurring Hurricane Sandy claims revenue.
- Employee compensation, other operating expenses, amortization, and interest increased substantially, reflecting acquired operations, increased debt, and integration-related cost structure. Six-month compensation and benefits rose to 50.0% of revenue from 48.9%.
- The company repurchased 845,000 shares for $25.0 million during the quarter under a completed repurchase program and subsequently received authorization for an additional $200 million of repurchases.
Guidance, outlook, commentary, risks, and unusual items
- Management did not provide formal quantitative earnings or revenue guidance. It stated that, if premium rates and insurable exposure units continue to improve, positive quarterly internal revenue growth is expected for the remainder of 2014.
- Management expects existing cash, investments, operating cash flow, and available credit capacity to satisfy normal liquidity needs through at least the end of 2014, including the planned $200 million share repurchase program.
- The Series B senior notes matured on July 15, 2014 and were repaid with a $100 million draw on the JPMorgan revolving facility. The revolving facility balance subsequently totaled $475 million of the $800 million commitment.
- Maximum future acquisition contingency payments totaled $153.0 million at June 30, 2014, including $52.7 million of recorded estimated earn-out payables. Changes in earn-out estimates produced a $6.3 million expense in the first six months.
- Key risks include integration and realization of benefits from Wright and other acquisitions, acquisition earn-out estimates, premium-rate and exposure-unit fluctuations, competition, regulatory changes, policy cancellations, legal proceedings, and economic or catastrophe exposure in major operating states.
- The Wright flood business is exposed to uncertainty surrounding the federal National Flood Insurance Program, including changing federal requirements and potential conflicts with state regulation. Although flood exposure is reinsured, the company remains primarily liable to policyholders.
- Management stated that pending litigation is not expected to materially affect consolidated financial position, but unfavorable resolutions could materially affect results or cash flow in a particular period.
- Management concluded that disclosure controls were effective as of June 30, 2014 and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Wright and other acquisitions deliver the expected revenue growth, profitability, and integration synergies.
- The effect of higher debt and variable-rate borrowings on interest expense, leverage, covenant compliance, and future free cash flow.
- Organic growth excluding Hurricane Sandy, acquisition contributions, divestitures, and the timing of contingent commissions.
- The sustainability of margins after acquisition-related compensation, amortization, earn-out charges, and other operating costs.
- Progress and funding of the newly authorized $200 million share repurchase program alongside acquisition spending and debt repayment.
- Future contingent commission performance, insurance premium rates, insurable exposure units, policy cancellations, and catastrophe-related activity.
- Changes in NFIP rules, flood program economics, reinsurance recoverability, and the company’s remaining exposure to flood-related claims.
