Brown & Brown, Inc. — Form 10-Q Summary
Business context and reporting period
Brown & Brown is a diversified U.S.-focused insurance intermediary providing retail insurance, wholesale brokerage, national insurance programs, and insurance-related services. The filing covers the unaudited three months ended March 31, 2011, compared with the three months ended March 31, 2010.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $262.2 million | $252.3 million | 3.9% |
| Commissions and fees | $261.5 million | $250.7 million | 4.3% |
| Core commissions and fees | $232.6 million | $218.4 million | 6.5% |
| Income before income taxes | $76.7 million | $73.1 million | 4.9% |
| Net income | $46.3 million | $44.1 million | 4.9% |
| Diluted EPS | $0.32 | $0.31 | Increase |
| Operating cash flow | $51.6 million | $73.8 million | Decrease of $22.2 million |
| Cash and cash equivalents | $265.7 million | $273.0 million at Dec. 31, 2010 | Decrease of $7.3 million |
| Total debt | $251.3 million | $251.7 million at Dec. 31, 2010 | Slight decrease |
| Current ratio | 1.42 | 1.39 at Dec. 31, 2010 | Improved |
Net income margin was approximately 17.7%, compared with approximately 17.5% in the prior-year quarter. Pretax margin was approximately 29.2%, compared with approximately 29.0%.
- Profit-sharing contingent commissions declined 10.4% to $28.9 million, primarily because of lower 2010 written premiums at Proctor Financial.
- Employee compensation and benefits increased 3.6%, while the ratio to revenue improved slightly to 48.3% from 48.4%.
- Other operating expenses declined 0.7%, and the ratio improved to 13.8% from 14.4%.
- Non-cash stock-based compensation increased 41.8% to $2.8 million.
- Amortization increased 7.6% to $13.5 million, primarily from recent acquisitions.
- The company paid $11.4 million in dividends and declared a quarterly dividend of $0.08 per share, compared with $0.0775 in the prior-year quarter.
Material changes versus the prior comparable period
- Reported revenue and earnings growth was acquisition-driven. Including acquisitions, total revenue increased 3.9%; excluding acquisitions, profit-sharing commissions, and divestitures, core commissions and fees had negative internal growth of 2.3%, an improvement from negative 8.6% in Q1 2010.
- The company completed 15 acquisitions in Q1 2011, compared with five in Q1 2010. Aggregate 2011 purchase price was $54.1 million, including $43.9 million of cash, $0.5 million of notes payable, assumed liabilities of $0.8 million, and $8.9 million of recorded earn-out payables.
- Services Division revenue increased 75.9% to $15.8 million, primarily from an acquired Social Security disability and Medicare benefits advocacy business. Its internal growth remained slightly negative at 0.3%.
- Retail revenue increased 5.7% and pretax income increased 9.9%, but retail core commissions and fees had negative internal growth of 3.0%.
- National Programs revenue declined 8.6% and pretax income declined 13.4%, principally because of lower Proctor Financial results and lower contingent commissions.
- Wholesale Brokerage revenue declined 0.7%, but pretax income increased 52.8% because of lower intercompany interest allocations and operating efficiencies.
- Goodwill increased to $1.225 billion from $1.195 billion at year-end 2010, primarily due to acquisitions. Management reported no goodwill impairment in its most recent annual assessment.
Cash flow, debt, liquidity, and commitments
- Operating activities generated $51.6 million of cash. Investing activities used $46.5 million, primarily for acquisitions, and financing activities used $12.5 million, primarily for dividends and debt payments.
- Cash, restricted cash and investments, and short-term investments totaled approximately $388.8 million at March 31, 2011, before considering other current assets.
- Debt consisted principally of $250.0 million of unsecured senior notes and $1.3 million of acquisition notes. No borrowings were outstanding under the revolving credit facility at March 31, 2011.
- The company entered into an agreement to issue $100 million of 4.5% Series E Senior Notes due September 15, 2018, intended to refinance the $100 million Series A notes maturing in 2011. The Series A balance was classified as long-term debt based on management’s stated intent and ability to refinance.
- Management stated that existing cash, investments, operating cash flow, and available credit facilities should satisfy normal liquidity needs through at least the end of 2011. The company was in compliance with its debt covenants.
- Total contractual cash obligations were $517.4 million, including $251.3 million of debt, $96.8 million of operating leases, $35.8 million of interest obligations, and maximum future acquisition earn-out payments of $121.1 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management observed that insurance premium declines were slowing and expected a gradual improvement in insurable exposure units during 2011, but did not provide formal revenue or earnings guidance.
- Proctor Financial’s commissions and fees for the remaining nine months of 2011 were expected to be $1.0 million to $2.0 million below the comparable 2010 period.
- Management estimated approximately $5.1 million of incremental 2011 expense from new performance-based stock incentive grants.
- Insurance pricing, exposure units, policy cancellations, economic conditions, regulatory developments, competition, and weather or catastrophe events in several important states remain significant business risks.
- Maximum future acquisition earn-out payments were $121.1 million, while estimated earn-out liabilities recorded on the balance sheet were $38.1 million. Earn-out valuations depend on acquired-business performance estimates.
- The company is involved in ordinary-course legal proceedings. Management did not expect a material adverse effect on consolidated financial position, but unfavorable developments could materially affect results or cash flow in a particular period.
- There were no material changes to previously disclosed risk factors and no new material legal proceedings reported for the quarter.
- Subsequent to quarter-end, the company granted a $400,000 performance cash incentive award to Regional President C. Roy Bridges, contingent on EPS growth, continued employment, and compliance with restrictive covenants.
Investor verification items
- Verify the timing and terms of the $100 million Series E refinancing and the repayment of the Series A notes.
- Monitor internal core revenue growth, especially in Retail and National Programs, rather than relying solely on acquisition-related reported growth.
- Assess whether Proctor Financial’s weaker results and lower contingent commissions continue through the remainder of 2011.
- Review the performance and integration of the 2011 acquisitions, including the $121.1 million maximum earn-out exposure.
- Track operating cash conversion, acquisition spending, dividends, and the decline in operating cash flow compared with Q1 2010.
- Evaluate the effect of continued soft insurance pricing, exposure-unit trends, Florida regulatory conditions, and legal proceedings on future revenue and margins.