10-QPeriod: Q1 FY2005

BROWN & BROWN, INC. Quarterly Report for Q1 Ended Mar 31, 2005

Filed May 10, 2005For Securities:BRO

Summary

Brown & Brown, Inc. reported strong financial performance for the first quarter of 2005, with net income increasing by 18.4% to $43.0 million, or $0.62 per diluted share, compared to $36.3 million, or $0.53 per diluted share, in the prior year. This growth was primarily driven by a significant 22.2% increase in total revenues, reaching $202.4 million, fueled by a 24.5% rise in commissions and fees. The company's aggressive acquisition strategy continues to be a major growth driver, as evidenced by the substantial increase in goodwill and amortizable intangible assets. Investments in acquired businesses contributed significantly to revenue growth across the Retail, National Programs, and Brokerage divisions. Despite increased expenses, including a notable rise in interest expense due to recent debt issuances for acquisitions, Brown & Brown managed to improve its employee compensation and benefits as a percentage of total revenue. Investors should note the ongoing legal proceedings and industry scrutiny surrounding contingent commissions. While Brown & Brown is not currently facing direct charges, the resolution of these matters could materially impact future earnings. The company's liquidity remains solid, supported by operating cash flows and a revolving credit facility, though cash reserves decreased due to significant investment in acquisitions.

Key Highlights

  • 1Net income rose 18.4% to $43.0 million ($0.62/share) in Q1 2005 from $36.3 million ($0.53/share) in Q1 2004.
  • 2Total revenues increased by 22.2% to $202.4 million, driven by a 24.5% surge in commissions and fees.
  • 3Significant investment in acquisitions is evident, with payments for businesses acquired totaling $201.4 million in the quarter, leading to a substantial increase in goodwill.
  • 4Amortization expense increased by 56.4% to $7.5 million, primarily due to recent acquisitions and a change in amortization period for purchased customer accounts.
  • 5Interest expense more than quadrupled to $3.5 million, mainly due to the $200 million notes issued in the latter half of 2004 for corporate purposes, including acquisitions.
  • 6The company is actively involved in several legal proceedings, including a putative class action lawsuit related to insurance pricing and placement practices.
  • 7Brown & Brown continues to engage in contingent commission agreements, despite industry scrutiny and settlements by larger competitors.

Frequently Asked Questions

The primary driver of revenue growth is the significant increase in commissions and fees, up 24.5% year-over-year. This growth is substantially fueled by acquisitions completed since the second quarter of 2004, which contributed approximately $31.6 million in core commissions and fees, alongside net new business production.

Acquisitions have a significant impact, leading to a substantial increase in goodwill (up to $511.1 million from $360.8 million) and amortizable intangible assets. Cash flow statements show large payments for businesses acquired ($201.4 million in the quarter). Expenses such as amortization and employee compensation and benefits have also increased due to these acquisitions.

The filing highlights that contingent commissions are under scrutiny by government entities, leading to lawsuits and settlements by larger competitors. While Brown & Brown continues to engage in these agreements, an elimination or significant decrease in their payment could have a material adverse impact on the company's results of operations and financial condition.

The company issued $200 million in senior notes in July and September 2004. This has led to a significant increase in interest expense, which rose by 398.2% to $3.5 million in the first quarter of 2005 compared to the prior year. Long-term debt has increased accordingly.