UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-13619
BROWN & BROWN, INC.
(Exact name of Registrant as specified in its charter)
|
Florida |
|
|
|
59-0864469 |
|
(State or other jurisdiction of incorporation or organization) |
|
|
(I.R.S. Employer Identification Number) |
|
|
220 South Ridgewood Avenue, Daytona Beach, FL |
|
|
32114 |
|
|
(Address of principal executive offices) |
|
|
(Zip Code) |
Registrant’s telephone number, including area code: (386) 252-9601
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
Common Stock, $0.10 Par Value |
BRO |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☒ |
|
Accelerated filer |
☐ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
☐ |
|
|
|
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the Registrant’s common stock, $0.10 par value, outstanding as of April 28, 2020 was 283,403,675 .
BROWN & BROWN, INC.
INDEX
2
Disclosure Regarding Forward-Looking Statements
Brown & Brown, Inc., together with its subsidiaries (collectively, “we,” “Brown & Brown” or the “Company”), makes “forward-looking statements” within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995, as amended, throughout this report and in the documents we incorporate by reference into this report , including those relating to the potential effects of the COVID-19 pandemic on the Company’s business, operations, financial performance and prospects. You can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “plan” and “continue” or similar words. We have based these statements on our current expectations about potential future events. Although we believe the expectations expressed in the forward-looking statements included in this Quarterly Report on Form 10-Q and the reports, statements, information and announcements incorporated by reference into this report are based upon reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. Further, statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, insurance carriers, third parties and us. Many of these factors have previously been identified in filings or statements made by us or on our behalf. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include but are not limited to the following items, in addition to those matters described in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:
|
|
• |
The COVID-19 pandemic and the resulting governmental and societal responses, the severity and duration of the pandemic, and the resulting impact on the U.S. economy, the global economy, and the Company’s business, liquidity, customers, insurance carriers and third parties; |
|
|
• |
The inability to retain or hire qualified employees, as well as the loss of any of our executive officers or other key employees; |
|
|
• |
Acquisition-related risks that could negatively affect the success of our growth strategy, including the possibility that we may not be able successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, and expand into new markets; |
|
|
• |
A cybersecurity attack or any other interruption in information technology and/or data security and/or outsourcing relationships; |
|
|
• |
The requirement for additional resources and time to adequately respond to dynamics resulting from rapid technological change; |
|
|
• |
Changes in data privacy and protection laws and regulations or any failure to comply with such laws and regulations; |
|
|
• |
The loss of or significant change to any of our insurance company relationships, which could result in additional expense, loss of market share or material decrease in our profit-sharing contingent commissions, guaranteed supplemental commissions or incentive commissions; |
|
|
• |
Adverse economic conditions, natural disasters, or regulatory changes in states where we have a high concentration of our business; |
|
|
• |
The inability to maintain our culture or a change in management, management philosophy or our business strategy; |
|
|
• |
Risks facing us in our Services Segment, including our third-party claims administration operations, that are distinct from those we face in our insurance intermediary operations; |
|
|
• |
Our failure to comply with any covenants contained in our debt agreements; |
|
|
• |
The possibility that covenants in our debt agreements could prevent use from engaging in certain potentially beneficial activities; |
|
|
• |
Changes in estimates, judgments or assumptions used in the preparation of our financial statements; |
|
|
• |
Improper disclosure of confidential information; |
|
|
• |
The limitations of our system of disclosure and internal controls and procedures in preventing errors or fraud, or in informing management of all material information in a timely manner; |
|
|
• |
The potential adverse effect of certain actual or potential claims, regulatory actions or proceedings on our businesses, results of operations, financial condition or liquidity; |
|
|
• |
Changes in the U.S.-based credit markets that might adversely affect our business, results of operations and financial condition; |
|
|
• |
The significant control certain existing shareholders have over the Company; |
3
|
|
• |
Risks related to our international operations, which may require more time and expense than our domestic options to achieve or maintain profitability; |
|
|
• |
Risks associated with the current interest rate environment and to the extent we use debt to finance our investments, changes in interest rates will affect our cost of capital and net investment income; |
|
|
• |
Disintermediation within the insurance industry, including increased competition from insurance companies, technology companies and the financial services industry, as well as the shift away from traditional insurance markets; |
|
|
• |
Changes in current U.S. or global economic conditions; |
|
|
• |
Effects related to pandemics, epidemics, or outbreaks of infectious diseases; |
|
|
• |
Conditions that result in reduced insurer capacity; |
|
|
• |
Quarterly and annual variations in our commissions that result from the timing of policy renewals and the net effect of new and lost business production; |
|
|
• |
The possibility that one of the financial institutions we use fails or is taken over by the U.S. Federal Deposit Insurance Corporation (FDIC); |
|
|
• |
Uncertainty in our business practices and compensation arrangements due to potential changes in regulations; |
|
|
• |
Regulatory changes that could reduce our profitability or growth by increasing compliance costs, technology compliance, restricting the products or services we may sell, the markets we may enter, the methods by which we may sell our products and services, or the prices we may charge for our services and the form of compensation we may accept from our customers, carriers and third-parties; |
|
|
• |
Intangible asset risk, including the possibility that our goodwill may become impaired in the future; |
|
|
• |
A decrease in demand for liability insurance as a result of tort reform litigation; |
|
|
• |
Changes in our credit ratings; |
|
|
• |
Volatility in our stock price; and |
|
|
• |
Other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission (“SEC”) filings. |
Assumptions as to any of the foregoing and all statements are not based upon historical fact, but rather reflect our current expectations concerning future results and events. Forward-looking statements that we make or that are made by others on our behalf are based upon a knowledge of our business and the environment in which we operate, but because of the factors listed above, among others, actual results may differ from those in the forward-looking statements. Consequently, these cautionary statements qualify all of the forward-looking statements we make herein. We cannot assure you that the results or developments anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We assume no obligation to update any of the forward-looking statements.
4
PART I — FINANCIAL INFORMATION
ITEM 1 — Financial Statements (Unaudited)
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
For the three months ended March 31, |
|
|||||
|
(in thousands, except per share data) |
|
2020 |
|
|
2019 |
|
||
|
REVENUES |
|
|
|
|
|
|
|
|
|
Commissions and fees |
|
$ |
696,503 |
|
|
$ |
617,463 |
|
|
Investment income |
|
|
1,161 |
|
|
|
1,081 |
|
|
Other income, net |
|
|
831 |
|
|
|
736 |
|
|
Total revenues |
|
|
698,495 |
|
|
|
619,280 |
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
|
349,624 |
|
|
|
332,837 |
|
|
Other operating expenses |
|
|
107,132 |
|
|
|
88,783 |
|
|
(Gain)/loss on disposal |
|
|
(260 |
) |
|
|
505 |
|
|
Amortization |
|
|
26,391 |
|
|
|
26,192 |
|
|
Depreciation |
|
|
6,021 |
|
|
|
6,035 |
|
|
Interest |
|
|
15,291 |
|
|
|
15,198 |
|
|
Change in estimated acquisition earn-out payables |
|
|
(10,957 |
) |
|
|
1,210 |
|
|
Total expenses |
|
|
493,242 |
|
|
|
470,760 |
|
|
Income before income taxes |
|
|
205,253 |
|
|
|
148,520 |
|
|
Income taxes |
|
|
52,853 |
|
|
|
34,624 |
|
|
Net income |
|
$ |
152,400 |
|
|
$ |
113,896 |
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.54 |
|
|
$ |
0.41 |
|
|
Diluted |
|
$ |
0.54 |
|
|
$ |
0.40 |
|
|
Dividends declared per share |
|
$ |
0.085 |
|
|
$ |
0.080 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
(in thousands, except per share data) |
|
March 31, 2020 |
|
|
December 31, 2019 |
|
|||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
385,788 |
|
|
$ |
542,174 |
|
|
|
Restricted cash and investments |
|
|
389,390 |
|
|
|
420,801 |
|
|
|
Short-term investments |
|
|
16,595 |
|
|
|
12,325 |
|
|
|
Premiums, commissions and fees receivable |
|
|
1,000,120 |
|
|
|
942,834 |
|
|
|
Reinsurance recoverable |
|
|
33,556 |
|
|
|
58,505 |
|
|
|
Prepaid reinsurance premiums |
|
|
333,806 |
|
|
|
366,021 |
|
|
|
Other current assets |
|
|
124,582 |
|
|
|
152,142 |
|
|
|
Total current assets |
|
|
2,283,837 |
|
|
|
2,494,802 |
|
|
|
Fixed assets, net |
|
|
159,361 |
|
|
|
148,627 |
|
|
|
Operating lease assets |
|
|
193,591 |
|
|
|
184,288 |
|
|
|
Goodwill |
|
|
3,881,576 |
|
|
|
3,746,094 |
|
|
|
Amortizable intangible assets, net |
|
|
932,874 |
|
|
|
916,768 |
|
|
|
Investments |
|
|
23,340 |
|
|
|
27,378 |
|
|
|
Other assets |
|
|
107,766 |
|
|
|
104,864 |
|
|
|
Total assets |
|
$ |
7,582,345 |
|
|
$ |
7,622,821 |
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
Premiums payable to insurance companies |
|
$ |
974,297 |
|
|
$ |
1,014,317 |
|
|
|
Losses and loss adjustment reserve |
|
|
33,553 |
|
|
|
58,505 |
|
|
|
Unearned premiums |
|
|
333,806 |
|
|
|
366,021 |
|
|
|
Premium deposits and credits due customers |
|
|
127,641 |
|
|
|
113,841 |
|
|
|
Accounts payable |
|
|
151,674 |
|
|
|
99,960 |
|
|
|
Accrued expenses and other liabilities |
|
|
210,898 |
|
|
|
337,717 |
|
|
|
Current portion of long-term debt |
|
|
58,750 |
|
|
|
55,000 |
|
|
|
Total current liabilities |
|
|
1,890,619 |
|
|
|
2,045,361 |
|
|
|
Long-term debt less unamortized discount and debt issuance costs |
|
|
1,483,355 |
|
|
|
1,500,343 |
|
|
|
Operating lease liabilities |
|
|
176,748 |
|
|
|
167,855 |
|
|
|
Deferred income taxes, net |
|
|
323,404 |
|
|
|
328,277 |
|
|
|
Other liabilities |
|
|
228,378 |
|
|
|
230,706 |
|
|
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.10 per share; authorized 560,000 shares; issued 298,934 shares and outstanding 283,441 shares at 2020, issued 297,106 shares and outstanding 281,655 shares at 2019 - in thousands. |
|
|
29,893 |
|
|
|
29,711 |
|
|
|
Additional paid-in capital |
|
|
718,261 |
|
|
|
716,049 |
|
|
|
Treasury stock, at cost at 15,493 shares at 2020, 15,451 shares at 2019, respectively - in thousands |
|
|
(537,672 |
) |
|
|
(536,243 |
) |
|
|
Retained earnings |
|
|
3,269,359 |
|
|
|
3,140,762 |
|
|
|
Total shareholders’ equity |
|
|
3,479,841 |
|
|
|
3,350,279 |
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
7,582,345 |
|
|
$ |
7,622,821 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
6
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
(in thousands, except per share data) |
|
Shares |
|
|
Par Value |
|
|
Additional Paid-In Capital |
|
|
Treasury Stock |
|
|
Retained Earnings |
|
|
Total |
|
|||||||
|
Balance at December 31, 2019 |
|
|
297,106 |
|
|
$ |
29,711 |
|
|
$ |
716,049 |
|
|
$ |
(536,243 |
) |
|
$ |
3,140,762 |
|
|
$ |
3,350,279 |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,400 |
|
|
|
152,400 |
|
|
|
Net unrealized holding (loss) gain on available-for- sale securities |
|
|
|
|
|
|
|
|
|
|
194 |
|
|
|
|
|
|
99 |
|
|
|
293 |
|
||
|
Common stock issued for employee stock benefit plans |
|
|
1,828 |
|
|
|
182 |
|
|
|
2,018 |
|
|
|
|
|
|
|
|
|
|
|
2,200 |
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,429 |
) |
|
|
|
|
|
|
(1,429 |
) |
|
|
Cash dividends paid ($0.085 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,902 |
) |
|
|
(23,902 |
) |
|
|
Balance at March 31, 2020 |
|
|
298,934 |
|
|
$ |
29,893 |
|
|
$ |
718,261 |
|
|
$ |
(537,672 |
) |
|
$ |
3,269,359 |
|
|
$ |
3,479,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
|
293,380 |
|
|
$ |
29,338 |
|
|
$ |
615,180 |
|
|
$ |
(477,572 |
) |
|
$ |
2,833,622 |
|
|
$ |
3,000,568 |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,896 |
|
|
|
113,896 |
|
|
|
Net unrealized holding (loss) gain on available-for- sale securities |
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
Common stock issued for employee stock benefit plans |
|
|
2,465 |
|
|
|
246 |
|
|
|
5,963 |
|
|
|
|
|
|
|
|
|
|
|
6,209 |
|
|
|
Cash dividends paid ($0.080 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,348 |
) |
|
|
(22,348 |
) |
|
|
Balance at March 31, 2019 |
|
|
295,845 |
|
|
$ |
29,584 |
|
|
$ |
621,249 |
|
|
$ |
(477,572 |
) |
|
$ |
2,925,170 |
|
|
$ |
3,098,431 |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
7
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
Three months ended March 31, |
|
|||||
|
(in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
152,400 |
|
|
$ |
113,896 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
26,391 |
|
|
|
26,192 |
|
|
Depreciation |
|
|
6,021 |
|
|
|
6,035 |
|
|
Non-cash stock-based compensation |
|
|
9,047 |
|
|
|
12,994 |
|
|
Change in estimated acquisition earn-out payables |
|
|
(10,957 |
) |
|
|
1,210 |
|
|
Deferred income taxes |
|
|
(4,974 |
) |
|
|
(14,875 |
) |
|
Amortization of debt discount and disposal of deferred financing costs |
|
|
512 |
|
|
|
456 |
|
|
Accretion (amortization) of discounts and premiums, investment |
|
|
7 |
|
|
|
(7 |
) |
|
Net gain/(loss) on sales of investments, fixed assets and customer accounts |
|
|
(196 |
) |
|
|
799 |
|
|
Payments on acquisition earn-outs in excess of original estimated payables |
|
|
(337 |
) |
|
|
— |
|
|
Changes in operating assets and liabilities, net of effect from acquisitions and divestitures: |
|
|
|
|
|
|
|
|
|
Premiums, commissions and fees receivable (increase) decrease |
|
|
(53,090 |
) |
|
|
(6,484 |
) |
|
Reinsurance recoverables (increase) decrease |
|
|
24,949 |
|
|
|
14,040 |
|
|
Prepaid reinsurance premiums (increase) decrease |
|
|
32,215 |
|
|
|
23,557 |
|
|
Other assets (increase) decrease |
|
|
24,623 |
|
|
|
(29,521 |
) |
|
Premiums payable to insurance companies increase (decrease) |
|
|
(53,622 |
) |
|
|
(61,229 |
) |
|
Premium deposits and credits due customers increase (decrease) |
|
|
13,149 |
|
|
|
(11,362 |
) |
|
Losses and loss adjustment reserve increase (decrease) |
|
|
(24,952 |
) |
|
|
(13,856 |
) |
|
Unearned premiums increase (decrease) |
|
|
(32,215 |
) |
|
|
(23,557 |
) |
|
Accounts payable increase (decrease) |
|
|
56,981 |
|
|
|
56,436 |
|
|
Accrued expenses and other liabilities increase (decrease) |
|
|
(126,786 |
) |
|
|
(97,689 |
) |
|
Other liabilities increase (decrease) |
|
|
(5,349 |
) |
|
|
8,321 |
|
|
Net cash provided by operating activities |
|
|
33,817 |
|
|
|
5,356 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Additions to fixed assets |
|
|
(16,458 |
) |
|
|
(23,186 |
) |
|
Payments for businesses acquired, net of cash acquired |
|
|
(153,291 |
) |
|
|
(95,081 |
) |
|
Proceeds from sales of fixed assets and customer accounts |
|
|
385 |
|
|
|
32 |
|
|
Purchases of investments |
|
|
(1,513 |
) |
|
|
(31 |
) |
|
Proceeds from sales of investments |
|
|
1,668 |
|
|
|
2,392 |
|
|
Net cash used in investing activities |
|
|
(169,209 |
) |
|
|
(115,874 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Payments on acquisition earn-outs |
|
|
(6,477 |
) |
|
|
(579 |
) |
|
Proceeds from long-term debt |
|
|
— |
|
|
|
350,000 |
|
|
Payments on long-term debt |
|
|
(13,750 |
) |
|
|
(8,750 |
) |
|
Deferred debt issuance costs |
|
|
— |
|
|
|
(3,698 |
) |
|
Payments on revolving credit facilities |
|
|
— |
|
|
|
(350,000 |
) |
|
Issuances of common stock for employee stock benefit plans |
|
|
— |
|
|
|
16 |
|
|
Repurchase shares to fund tax withholdings for non-cash stock-based compensation |
|
|
(6,847 |
) |
|
|
(6,832 |
) |
|
Purchase of treasury stock |
|
|
(1,429 |
) |
|
|
— |
|
|
Cash dividends paid |
|
|
(23,902 |
) |
|
|
(22,348 |
) |
|
Net cash provided by (used in) financing activities |
|
|
(52,405 |
) |
|
|
(42,191 |
) |
|
Net increase (decrease) in cash and cash equivalents inclusive of restricted cash |
|
|
(187,797 |
) |
|
|
(152,709 |
) |
|
Cash and cash equivalents inclusive of restricted cash at beginning of period |
|
|
962,975 |
|
|
|
777,596 |
|
|
Cash and cash equivalents inclusive of restricted cash at end of period |
|
$ |
775,178 |
|
|
$ |
624,887 |
|
See accompanying Notes to Condensed Consolidated Financial Statements. Refer to Note 10 for the reconciliations of cash and cash equivalents inclusive of restricted cash and investments.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 Nature of Operations
Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and service organization that markets and sells insurance products and services, primarily in the property, casualty and employee benefits areas. Brown & Brown’s business is divided into four reportable segments. The Retail Segment provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual insured customers, and non-insurance risk-mitigating products through our automobile dealer services (“F&I”) businesses. The National Programs Segment, which acts as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through a nationwide network of independent agents, including Brown & Brown retail agents. The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents. The Services Segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare Set-aside services, Social Security disability and Medicare benefits advocacy services and claims adjusting services.
NOTE 2 Basis of Financial Reporting
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of recurring accruals) necessary for a fair presentation have been included. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities, at the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the available expedients provided by the new standard.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The standard removes specific exceptions in the current rules and eliminates the need for an organization to analyze whether the following apply in a given period: (a) exception to the incremental approach for intra-period tax allocation; (b) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (c) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The standard also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (a) franchise taxes that are partially based on income; (b) transactions with a government that result in a step-up in the tax basis of goodwill; (c) separate financial statements of legal entities that are not subject to tax and (d) enacted changes in tax laws in interim periods. The standard takes effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the impact this standard will have on the Company’s financial position.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which provides guidance for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-15 effective January 1, 2020. The impact of adoption of these standards on our consolidated financial statements, including accounting policies, processes, and systems, was not material.
9
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates Step 2 of the goodwill impairment test. The updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and will be applied prospectively. The Company adopted ASU 2017-04 effective January 1, 2020, with interim or annual goodwill impairment tests now comparing the fair value of a reporting unit with its carrying value and no longer performing Step 2 of the goodwill impairment test. No impairment charges were recorded as a result of adopting ASU 2017-04.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The new guidance adds an impairment model, known as the current expected credit loss (CECL) model that is based on expected losses rather than incurred losses. These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable forward-looking information, which is intended to result in more timely recognition of such losses. All related guidance has been codified into, and is now known as, ASC 326 – Financial Instruments—Credit Losses. The new standard is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods therein. The Company adopted ASU 2016-13 effective January 1, 2020 and has determined there is not a material impact on the Company’s Financial Statements given that historical trend analysis and assessments for forward-looking qualitative analysis are already integrated into financial assessments for the Company where possible.
NOTE 3 Revenues
The following tables present the revenues disaggregated by revenue source:
|
|
|
Three months ended March 31, 2020 |
|
|||||||||||||||||||||
|
(in thousands) |
|
Retail |
|
|
National Programs |
|
|
Wholesale Brokerage |
|
|
Services |
|
|
Other (8) |
|
|
Total |
|
||||||
|
Base commissions (1) |
|
$ |
315,888 |
|
|
$ |
88,582 |
|
|
$ |
55,563 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
460,033 |
|
|
Fees (2) |
|
|
57,483 |
|
|
|
34,659 |
|
|
|
15,641 |
|
|
|
44,452 |
|
|
|
(322 |
) |
|
|
151,913 |
|
|
Incentive commissions (3) |
|
|
52,802 |
|
|
|
197 |
|
|
|
3,759 |
|
|
|
— |
|
|
|
1 |
|
|
|
56,759 |
|
|
Profit-sharing contingent commissions (4) |
|
|
16,095 |
|
|
|
5,711 |
|
|
|
2,136 |
|
|
|
— |
|
|
|
— |
|
|
|
23,942 |
|
|
Guaranteed supplemental commissions (5) |
|
|
4,432 |
|
|
|
(1,013 |
) |
|
|
437 |
|
|
|
— |
|
|
|
— |
|
|
|
3,856 |
|
|
Investment income (6) |
|
|
83 |
|
|
|
263 |
|
|
|
50 |
|
|
|
— |
|
|
|
765 |
|
|
|
1,161 |
|
|
Other income, net (7) |
|
|
706 |
|
|
|
13 |
|
|
|
112 |
|
|
|
— |
|
|
|
— |
|
|
|
831 |
|
|
Total Revenues |
|
$ |
447,489 |
|
|
$ |
128,412 |
|
|
$ |
77,698 |
|
|
$ |
44,452 |
|
|
$ |
444 |
|
|
$ |
698,495 |
|
|
|
|
Three months ended March 31, 2019 |
|
|||||||||||||||||||||
|
(in thousands) |
|
Retail |
|
|
National Programs |
|
|
Wholesale Brokerage |
|
|
Services |
|
|
Other (8) |
|
|
Total |
|
||||||
|
Base commissions (1) |
|
$ |
287,200 |
|
|
$ |
77,178 |
|
|
$ |
54,173 |
|
|
$ |
— |
|
|
$ |
(12 |
) |
|
$ |
418,539 |
|
|
Fees (2) |
|
|
43,877 |
|
|
|
30,246 |
|
|
|
12,510 |
|
|
|
49,444 |
|
|
|
(288 |
) |
|
|
135,789 |
|
|
Incentive commissions (3) |
|
|
42,775 |
|
|
|
919 |
|
|
|
373 |
|
|
|
— |
|
|
|
111 |
|
|
|
44,178 |
|
|
Profit-sharing contingent commissions (4) |
|
|
11,547 |
|
|
|
860 |
|
|
|
2,915 |
|
|
|
— |
|
|
|
— |
|
|
|
15,322 |
|
|
Guaranteed supplemental commissions (5) |
|
|
3,240 |
|
|
|
4 |
|
|
|
391 |
|
|
|
— |
|
|
|
— |
|
|
|
3,635 |
|
|
Investment income (6) |
|
|
— |
|
|
|
316 |
|
|
|
40 |
|
|
|
48 |
|
|
|
677 |
|
|
|
1,081 |
|
|
Other income, net (7) |
|
|
592 |
|
|
|
37 |
|
|
|
107 |
|
|
|
— |
|
|
|
— |
|
|
|
736 |
|
|
Total Revenues |
|
$ |
389,231 |
|
|
$ |
109,560 |
|
|
$ |
70,509 |
|
|
$ |
49,492 |
|
|
$ |
488 |
|
|
$ |
619,280 |
|
|
(1) |
Base commissions generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control. |
|
(2) |
Fee revenues relate to fees for services other than securing coverage for our customers, fees negotiated in lieu of commissions, and F&I. |
|
(3) |
Incentive commissions include additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties. |
|
(4) |
Profit-sharing contingent commissions are based primarily on underwriting results, but may also reflect considerations for volume, growth and/or retention. |
|
(5) |
Guaranteed supplemental commissions represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions. |
|
(6) |
Investment income consists primarily of interest on cash and investments. |
|
(7) |
Other income consists primarily of legal settlements and other miscellaneous income. |
|
(8) |
Fees within other reflects the elimination of intercompany revenues. |
10
Contract Assets and Liabilities
The balances of contract assets and contract liabilities arising from contracts with customers as of March 31, 2020 and December 31, 2019 were as follows:
|
(in thousands) |
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
|
Contract assets |
|
$ |
357,567 |
|
|
$ |
289,609 |
|
|
Contract liabilities |
|
$ |
53,791 |
|
|
$ |
58,126 |
|
Unbilled receivables (contract assets) arise when the Company recognizes revenue for amounts which have not yet been billed in the Company's systems and are reflected in premiums, commissions and fee receivables in the Company's Condensed Consolidated Balance Sheet. Deferred revenue (contract liabilities) relates to payments received in advance of performance under the contract before the transfer of a good or service to the customer. Deferred revenue is reflected within accrued expenses and other liabilities for those to be recognized in less than 12 months and in other liabilities for those to be recognized more than 12 months from the date presented in the Company's Condensed Consolidated Balance Sheet.
As of March 31, 2020, deferred revenue consisted of $37.2 million as current portion to be recognized within one year and $16.6 million in long term to be recognized beyond one year. As of December 31, 2019, deferred revenue consisted of $41.2 million as current portion to be recognized within one year and $16.9 million in long-term deferred revenue to be recognized beyond one year.
During the three months ended March 31, 2020, the amount of revenue recognized related to performance obligations satisfied in a previous period, was $9.0 million. This revenue is primarily related to variable consideration and is inclusive of changes due to estimates.
Other Assets and Deferred Cost
Incremental cost to obtain - The Company defers certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans in the Retail Segment, in which the Company pays an incremental amount of compensation on new business. These incremental costs are deferred and amortized over a 15-year period. The cost to obtain balance within the other assets caption in the Company's Condensed Consolidated Balance Sheet was $31.1 million and $26.9 million as of March 31, 2020 and December 31, 2019, respectively. For the three months ended March 31, 2020, the Company deferred $4.7 million of incremental cost to obtain customer contracts. The Company recorded an expense of $0.5 million associated with the incremental cost to obtain customer contracts for the three months ended March 31, 2020.
Cost to fulfill - The Company defers certain costs to fulfill contracts and recognizes these costs as the associated performance obligations are fulfilled. The cost to fulfill balance within the other current assets caption in the Company's Condensed Consolidated Balance Sheet was $62.9 million and $73.3 million as of March 31, 2020 and December 31, 2019, respectively. For the three months ended March 31, 2020, the Company had net expense of $10.4 million related to the release of previously deferred contract fulfillment costs associated with performance obligations that were satisfied in the period, net of current year deferrals for costs incurred that related to performance obligations yet to be fulfilled.
NOTE 4 Net Income Per Share
Basic net income per share is computed based on the weighted average number of common shares (including participating securities) issued and outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares issued and outstanding plus equivalent shares, assuming the exercise of stock options. The dilutive effect of stock options is computed by application of the treasury-stock method. The following is a reconciliation between basic and diluted weighted average shares outstanding:
|
|
|
For the three months ended March 31, |
|
|||||
|
(in thousands, except per share data) |
|
2020 |
|
|
2019 |
|
||
|
Net income |
|
$ |
152,400 |
|
|
$ |
113,896 |
|
|
Net income attributable to unvested awarded performance stock |
|
|
(5,192 |
) |
|
|
(3,201 |
) |
|
Net income attributable to common shares |
|
$ |
147,208 |
|
|
$ |
110,695 |
|
|
Weighted average number of common shares outstanding – basic |
|
|
282,397 |
|
|
|
280,564 |
|
|
Less unvested awarded performance stock included in weighted average number of common shares outstanding – basic |
|
|
(9,621 |
) |
|
|
(7,885 |
) |
|
Weighted average number of common shares outstanding for basic net income per common share |
|
|
272,776 |
|
|
|
272,679 |
|
|
Dilutive effect of stock options |
|
|
2,085 |
|
|
|
2,335 |
|
|
Weighted average number of shares outstanding – diluted |
|
|
274,861 |
|
|
|
275,014 |
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.54 |
|
|
$ |
0.41 |
|
|
Diluted |
|
$ |
0.54 |
|
|
$ |
0.40 |
|
11
NOTE 5 Business Combinations
During the three months ended March 31, 2020, Brown & Brown acquired the assets and assumed certain liabilities of five insurance intermediaries. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Condensed Consolidated Statements of Income when incurred.
The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.
Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the three months ended March 31, 2020, adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $0.1 million relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the three months ended March 31, 2020 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments primarily impacted goodwill, with no effect on earnings or cash in the current period.
Cash paid for acquisitions was $153.3 million in the three-month period ended March 31, 2020. The Company completed five acquisitions (excluding book of business purchases) in the three-month period ended March 31, 2020. The Company completed eight acquisitions (excluding book of business purchases) in the three-month period ended March 31, 2019.
The following table summarizes the purchase price allocations made as of the date of each acquisition for current year acquisitions and adjustments made during the measurement period for prior year acquisitions. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. These adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Business segment |
|
Effective date of acquisition |
|
Cash paid |
|
|
Other payable |
|
|
Recorded earn-out payable |
|
|
Net assets acquired |
|
|
Maximum potential earn- out payable |
|
|||||
|
Special Risk Insurance Managers Ltd. (Special Risk) |
|
National Programs |
|
January 1, 2020 |
|
$ |
68,812 |
|
|
$ |
— |
|
|
$ |
4,884 |
|
|
$ |
73,696 |
|
|
$ |
14,650 |
|
|
Texas All Risk General Agency, Inc. et al (Texas Risk) |
|
Wholesale Brokerage |
|
January 1, 2020 |
|
|
10,511 |
|
|
|
135 |
|
|
|
310 |
|
|
|
10,980 |
|
|
|
1,150 |
|
|
The Colonial Group, Inc. et al (Colonial) |
|
Wholesale Brokerage |
|
March 1, 2020 |
|
|
29,037 |
|
|
|
10 |
|
|
|
5,639 |
|
|
|
35,203 |
|
|
|
10,150 |
|
|
RLA Insurance Intermediaries, LLC (RLA) |
|
Wholesale Brokerage |
|
March 1, 2020 |
|
|
42,496 |
|
|
|
100 |
|
|
|
2,951 |
|
|
|
46,233 |
|
|
|
22,500 |
|
|
Other |
|
Various |
|
Various |
|
|
2,435 |
|
|
|
1,291 |
|
|
|
194 |
|
|
|||||||