Business context and reporting period
Goosehead Insurance, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company distributes personal and commercial property and casualty insurance through its Corporate and Franchise channels. It reported 1,139 operating franchise locations, 12 company-owned locations, and 948,000 policies in force at quarter-end.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages. Comparisons are with the corresponding 2020 period.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $41.7 | $32.0 | $111.1 | $82.4 |
| Operating income | $3.5 | $7.0 | $6.5 | $14.8 |
| Net income | $5.4 | $6.7 | $7.4 | $13.8 |
| Net income attributable to Goosehead | $4.0 | $3.3 | $5.1 | $6.5 |
| Adjusted EBITDA (non-GAAP) | $6.6 | $9.3 | $15.5 | $20.3 |
| Adjusted EBITDA margin (non-GAAP) | 16% | 29% | 14% | 25% |
| Diluted EPS | $0.19 | $0.17 | $0.25 | $0.36 |
Q3 revenue rose 30%; core revenue, a company-defined non-GAAP measure, grew 41% to $37.2 million. Nine-month revenue increased 35%, and core revenue increased 42% to $98.7 million. Growth reflected higher policy volumes, agent headcount, operating franchises, and renewals. Total written premium grew 44% in Q3 to $434.8 million and 46% for the nine months to $1.153 billion.
Profitability weakened: Q3 operating income fell about 49%, and adjusted EBITDA declined 29%. Higher compensation, general and administrative costs, and lower contingent commissions weighed on results. The reported income tax benefit was $2.6 million in Q3 and $2.6 million for the nine months, compared with benefits of $0.3 million and $0.6 million, respectively, in 2020. The filing attributes the lower effective tax rate primarily to excess tax deductions from employee stock-option exercises. This tax benefit helped net income attributable to Goosehead rise in Q3 despite lower pretax income.
For the first nine months, operating cash flow was $26.8 million, versus $15.0 million in 2020; investing cash outflow was $10.1 million, and financing cash outflow was $16.2 million. Financing included a $60 million extraordinary dividend, partly offset by new borrowings. Cash and restricted cash totaled $26.7 million at September 30. Current assets were $42.4 million and current liabilities $25.6 million. Total liabilities were $322.8 million, versus assets of $247.1 million; total equity was negative $75.7 million.
Debt included $119.6 million of long-term notes and $3.8 million current. A July refinancing established a $100 million term loan and a $50 million revolving facility; $25 million was drawn on the revolver and $24.8 million remained available after a letter of credit. Borrowings bear variable LIBOR-based rates; the company reported covenant compliance at quarter-end. The tax receivable agreement liability was approximately $93.5 million, including $2.0 million current.
Material changes versus the prior comparable period
- Franchise-channel expansion supported growth: operating franchises increased 38% year over year to 1,139; total franchises increased 55% to 1,958. Corporate sales headcount rose 35% to 502.
- Policies in force increased 44% to 948,000. Client retention improved to 89% from 88%; premium retention was 92% for the trailing twelve months.
- Renewal revenue grew 51% in Q3 to $24.2 million, while new business revenue grew 26% to $13.1 million.
- Contingent commissions fell to $2.4 million from $4.2 million in Q3 and to $6.8 million from $9.2 million for the nine months. Management cited higher loss ratios versus historically low 2020 levels.
- Q3 general and administrative expense increased 73% to $10.1 million; employee compensation rose 46% to $26.1 million. Management cited business growth, office openings, technology investment, and lower pandemic-related spending in 2020.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management expects available cash, working capital, operating cash flow, and the revolving facility to fund working-capital needs and commitments for the foreseeable future. Anticipated cash needs include growth investment, operating costs, debt service, tax receivable agreement payments, taxes, and any dividends approved by the board.
The $60 million extraordinary dividend was declared in July and paid in August 2021. The company states that future extraordinary dividends are at the board’s discretion. The company’s variable-rate debt exposes it to interest-rate risk, and it expects the credit agreement to transition from LIBOR to SOFR if LIBOR is phased out. Management says the pandemic’s future effects remain uncertain, particularly through its potential impact on home sales and consumer spending, but reported no material pandemic-related impact to date on access to capital, receivable collectability, new business, or franchise and policy retention. Management said outstanding legal matters were not probable or reasonably estimable and did not expect their resolution to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether revenue and written-premium growth convert into improved operating income and adjusted EBITDA as hiring and franchise-related costs rise.
- Whether contingent commissions recover, given their sensitivity to carrier underwriting results and loss ratios.
- Debt balances, variable interest costs, covenant headroom, and the $68.1 million term-note maturity shown for 2026.
- The timing and amount of payments under the tax receivable agreement, which entitles former LLC members to 85% of realized tax savings.
- The sustainability and funding of dividends; the Q3 $60 million distribution was a significant financing cash use.
- Receivables and credit quality: franchisee receivables rose to $26.6 million, while bad-debt expense also increased.