Goosehead Insurance, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Goosehead distributes personal and commercial property and casualty insurance through company-owned agencies and franchises. Results consolidate Goosehead Financial, LLC, while a substantial share of its economics is attributable to non-controlling LLC members.
Financial performance
| Metric | Q2 2019 | Six months 2019 | Comparison |
|---|---|---|---|
| Total revenue | $19.4 million | $42.5 million | Up 31% and 45%, respectively |
| Commissions and agency fees | $10.8 million | $26.9 million | Up 23% and 47% |
| Franchise revenue | $8.5 million | $15.3 million | Up 42% and 41% |
| Net income (loss), consolidated | $2.8 million | $10.1 million | Versus losses of $23.9 million and $20.1 million |
| Net income attributable to Goosehead Insurance, Inc. | $0.9 million | $3.4 million | Versus a $9.2 million loss in each prior-year period |
| Adjusted EBITDA (non-GAAP) | $4.7 million | $14.2 million | Up 17% and 56% |
| Adjusted EBITDA margin (non-GAAP) | 24% | 33% | 27% and 31% in prior-year periods |
| Basic EPS attributable to Goosehead | $0.06 | $0.23 | Prior-year loss per share was $0.68 |
Q2 operating income was $3.9 million; interest expense was $0.6 million and tax expense was $0.4 million. Six-month operating income was $12.6 million, interest expense $1.3 million and tax expense $1.2 million. Adjusted EPS, a non-GAAP measure, was $0.07 for Q2 and $0.25 for the six months.
Cash, liquidity and debt
- Cash and cash equivalents were $8.4 million at June 30, 2019; restricted cash was $0.6 million. Combined cash and restricted cash fell $10.0 million during the first half.
- Six-month operating cash flow was $10.7 million, investing cash outflow $1.9 million, and financing cash outflow $18.8 million. Financing outflows included a $15.0 million extraordinary dividend and tax distributions to pre-IPO LLC members.
- Debt principal consisted of a $38.0 million term loan and $10.0 million drawn on the revolving facility. The balance sheet reports $47.6 million of notes payable, net of unamortized fees. Revolver availability was $2.6 million after a letter of credit.
- Debt bears variable interest at LIBOR plus 2.00% at the company’s then-current leverage tier. The term loan and revolver mature August 3, 2021, with a $32.5 million term-loan principal maturity in 2021. The company reported covenant compliance at quarter-end.
- Current assets were $14.0 million and current liabilities $7.8 million. Total liabilities were $68.6 million; reported total equity was negative $30.5 million, including negative non-controlling interests.
Growth and period-to-period changes
- Total written premium placed grew 46% to $194.0 million in Q2 and $340.9 million for the first half. Policies in force reached 408,000, up 45% year over year; operating franchises reached 535, up 39%.
- Renewal revenue and franchise royalties contributed to growth. Q2 renewal revenue grew 38% to $11.0 million; renewal royalty fees rose 63% to $5.1 million. Corporate sales headcount increased 44% to 213.
- Q2 2018 included $26.1 million of Class B unit compensation associated with the pre-IPO structure. Its absence in 2019 is a key reason the reported year-over-year net-income comparison improved sharply; it is not a like-for-like operating cost change.
- General and administrative expense rose 39% in Q2 and 60% for the first half, reflecting growth in franchises and employees, technology investment, and public-company costs. Bad-debt expense also increased, attributed to higher agency and initial franchise fee sales.
- Six-month adjusted EBITDA margin increased to 33% from 31%, while Q2 margin declined to 24% from 27%. Management attributed margin expansion year to date mainly to renewal and contingent-commission growth, partly offset by hiring, technology, and public-company costs.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said it expects cash on hand, working capital, operating cash flow and revolver capacity to fund foreseeable needs, including growth, operating costs, debt service, taxes and tax receivable agreement payments.
- The tax receivable agreement requires payment to pre-IPO members of 85% of certain realized tax savings. The recorded liability was $10.8 million at June 30, 2019; its eventual amount and timing depend on tax savings, redemptions and future taxable income.
- Operating lease commitments totaled $23.3 million through 2029. The company anticipated a potentially significant balance-sheet effect from adopting the new lease accounting standard in 2020.
- Debt is secured by substantially all company assets, including future commission rights, and carries variable rates. A large term-loan balloon is due in 2021; covenant and change-of-control provisions could restrict distributions or accelerate repayment.
- Management said outstanding legal claims were not probable or reasonably estimable and expected their resolution would not materially affect financial position or results. It reported no material changes to previously disclosed risk factors or market-risk exposure.
- Management identified timing of contingent commissions as a source of period variability. The company was evaluating new revenue-recognition guidance expected to affect the timing of commission and franchise-fee recognition.
Important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus the prior-year IPO-related unit-compensation charge, and how adjusted measures reconcile to GAAP.
- Whether premium, policy and franchise growth translates into durable renewal revenue, and how retention trends develop; client retention was 88% and premium retention 92% for the stated trailing periods.
- Cash generation and liquidity after dividends, tax distributions and investment spending, including remaining revolver availability.
- Debt repayment capacity and refinancing plans ahead of the August 2021 maturity, given variable interest rates and secured borrowing.
- Future cash obligations under the tax receivable agreement and the effect of anticipated accounting-standard changes.