10-QPeriod: Q2 FY2006

BROWN & BROWN, INC. Quarterly Report for Q2 Ended Jun 30, 2006

Filed August 9, 2006For Securities:BRO

Summary

Brown & Brown, Inc. (BRO) reported solid financial performance for the second quarter and first half of 2006, demonstrating continued growth driven by both organic contributions and strategic acquisitions. Total revenues increased by 12.7% for the quarter and 13.3% for the six-month period, reflecting strength in their core commissions and fees, particularly from the Retail and Brokerage divisions. The company also saw a significant jump in investment income, more than doubling for both periods, attributed to higher yield rates. Profitability improved across key metrics, with net income rising 20.0% for the quarter and 18.0% for the six months ended June 30, 2006. Diluted earnings per share also saw a healthy increase, reaching $0.32 for the quarter and $0.67 for the six months. The company continued its active acquisition strategy, integrating 11 new entities in the first half of 2006, which contributed substantially to revenue growth. Despite ongoing legal and regulatory investigations related to contingent commissions, the company maintains a strong balance sheet and positive operating cash flow, indicating resilience and a focused approach to business development.

Key Highlights

  • 1Total revenues increased by 12.7% in Q2 2006 and 13.3% for the first six months of 2006 compared to the prior year.
  • 2Net income rose by 20.0% for Q2 2006 and 18.0% for the first six months of 2006.
  • 3Diluted earnings per share improved to $0.32 in Q2 2006 and $0.67 for the first six months of 2006.
  • 4The company completed 11 acquisitions in the first half of 2006, contributing significantly to revenue growth.
  • 5Investment income more than doubled in both the second quarter and the first six months of 2006, driven by higher yields.
  • 6Operating expenses, while increasing due to acquisitions, grew at a slower pace than revenues in many segments, improving expense ratios.
  • 7The company generated strong operating cash flow of $115.1 million for the first six months of 2006, supporting its growth and debt obligations.

Frequently Asked Questions

Brown & Brown's revenue growth is primarily driven by a combination of core commissions and fees from net new business production and the inclusion of revenues from recent acquisitions. The Retail and Brokerage divisions showed particularly strong performance in this regard.

The adoption of SFAS 123R, 'Share-Based Payment,' effective January 1, 2006, led to an increase in non-cash stock-based compensation expense. This was largely due to expensing the discount granted to participants in the Employee Stock Purchase Plan. While it increased reported expenses, the company's net income and EPS still showed healthy growth.

Brown & Brown is actively defending itself against allegations in the Antitrust Actions and is responding to inquiries from various state governmental agencies regarding compensation practices. The company disputes the allegations and cannot currently predict the impact or resolution of these matters, which could be material. They are evaluating and adopting recommendations related to disclosure of compensation and business practices.

The company maintains a solid liquidity position with $33.1 million in cash and cash equivalents at June 30, 2006, and a revolving credit facility. While the company has significant contractual cash obligations, including long-term debt and future acquisition contingency payments, it generated $115.1 million in operating cash flow in the first six months of 2006. Management believes its existing cash, future operations, and access to debt markets are sufficient to meet its obligations and fund future growth, including acquisitions.