Brown & Brown, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2012, compared with the same periods in 2011. Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and services organization operating through Retail, National Programs, Wholesale Brokerage and Services divisions.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenues | $303.8 million | $260.4 million | $897.2 million | $769.4 million |
| Income before taxes | $81.6 million | $72.7 million | $235.6 million | $210.8 million |
| Net income | $49.5 million | $44.2 million | $141.4 million | $127.5 million |
| Diluted EPS | $0.34 | $0.30 | $0.97 | $0.88 |
| Net margin | 16.3% | 17.0% | 15.8% | 16.6% |
| Operating cash flow | Not separately provided | Not separately provided | $189.0 million | $201.2 million |
Commissions and fees increased 17.5% in the quarter and 16.2% year to date. Core organic commissions and fees grew 1.0% in the quarter and 1.7% year to date. Employee compensation and benefits represented 49.3% of revenue in the quarter and 50.2% year to date, compared with 48.7% and 49.3%, respectively, in the comparable periods.
Cash and cash equivalents were $244.6 million at September 30, 2012, down from $286.3 million at December 31, 2011. Restricted cash and investments were $198.1 million. The current ratio was 1.26, down from 1.47 at year-end 2011.
Total debt was $450.1 million, including $450.0 million of unsecured senior notes and $0.1 million of acquisition notes payable, compared with $251.3 million at December 31, 2011. The Company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue growth was driven principally by acquisitions, including Arrowhead, acquired in January 2012. Acquisitions completed in 2012 contributed $37.8 million of third-quarter revenue and $96.0 million of nine-month revenue.
- 2012 acquisitions had an aggregate purchase price of $620.1 million, including $443.5 million of cash payments. Goodwill increased to $1.69 billion from $1.32 billion at year-end 2011.
- National Programs revenue rose 58.8% in the quarter and 53.4% year to date, while Services revenue rose 66.6% and 66.0%, respectively, largely due to acquisitions.
- Wholesale Brokerage pretax income increased 20.2% in the quarter and 15.5% year to date. Retail pretax income declined 4.7% in the quarter but increased 2.6% year to date.
- Profit-sharing contingent commissions and guaranteed supplemental commissions declined 7.2% year to date, partly because two national insurers discontinued guaranteed supplemental commission contracts and reverted to loss-ratio-based arrangements.
- Operating cash flow decreased by $12.2 million year to date, while acquisition cash spending increased to $384.6 million from $99.1 million.
- Capital expenditures increased to $18.9 million year to date from $9.5 million. Dividends declared increased to $0.085 per share in the quarter and $0.255 per share year to date.
Outlook, commentary, risks and unusual items
Management reported that insurable exposure units appeared to stabilize and that modest increases in insurance premium rates supported positive internal growth in the first nine months. Management stated that it could continue to see positive core organic commissions and fees growth for the remainder of 2012. No specific earnings or revenue guidance was provided.
- A special one-time production bonus for qualifying Retail producers is estimated to cost approximately $6 million to $8 million for 2012 and is payable in the first quarter of 2013.
- The change in estimated acquisition earn-out payables produced a $0.9 million expense in the third quarter and a $0.1 million benefit for the nine-month period. Estimated earn-out payables were $58.2 million at September 30, 2012, with maximum future acquisition contingency payments of $149.0 million.
- Other income included gains on sales of books of business and increased legal-settlement receipts; third-quarter other income was lower than in 2011 because the prior-year quarter included a lawsuit settlement.
- The Master Agreement expired September 30, 2012 and was not extended. On October 12, 2012, the Company entered into a new $125 million private, uncommitted shelf facility.
- Contractual cash obligations totaled $837.0 million, including $450.1 million of debt, $134.6 million of operating leases, $57.5 million of interest obligations and $149.0 million of maximum acquisition contingencies.
- Management believes existing cash, investments and operating cash generation are sufficient for normal liquidity needs for at least the next 12 months. The Company remains exposed to insurance premium rates, exposure units, policy cancellations, competition, regulation, economic conditions and acquisition integration risks.
- Pending and threatened legal proceedings arise in the ordinary course. Management does not expect a material adverse effect on consolidated financial position based on current information, although unfavorable outcomes could materially affect a particular period’s results or cash flows.
- The Company stated that there were no material changes to previously disclosed risk factors and that disclosure controls were effective as of September 30, 2012.
Important facts for investors to verify
- Separate organic growth from acquisition-driven growth, particularly the contribution and integration performance of Arrowhead.
- Future levels and timing of profit-sharing contingent commissions and guaranteed supplemental commissions.
- Debt maturities, interest-rate exposure, covenant compliance and the replacement of the expired Master Agreement.
- Cash conversion after substantial acquisition spending and the effect of restricted cash on available liquidity.
- The cost and timing of the special producer bonus and potential acquisition earn-out payments.
- Goodwill and acquired intangible asset balances, including future impairment risk and scheduled amortization.
- Developments in litigation, regulatory matters, insurance premium rates and customer exposure units.