10-QPeriod: Q3 FY2006

BROWN & BROWN, INC. Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 9, 2006For Securities:BRO

Summary

Brown & Brown, Inc. reported solid financial results for the nine months ended September 30, 2006, with net income increasing by 17.3% to $134.7 million, or $0.96 per diluted share, compared to the same period in 2005. This growth was driven by a 12.6% increase in total revenues, largely attributable to strong performance in commissions and fees, which rose 12.2% year-over-year. The company also saw a significant 96.1% increase in investment income, primarily due to higher investment yields. Acquisition activity remained robust, with 30 entities acquired during the first nine months of 2006, totaling approximately $153.6 million in purchase price. These acquisitions contributed significantly to revenue growth, particularly within the Retail and Brokerage divisions. Despite increased operating expenses associated with these acquisitions and higher stock-based compensation due to SFAS 123R adoption, the company demonstrated improved expense management, with employee compensation and benefits as a percentage of revenue decreasing year-over-year across most segments. While the company faces ongoing legal proceedings related to antitrust actions and regulatory investigations concerning compensation practices, management believes the outcome of these matters will not have a material adverse effect on the consolidated financial position. The company also maintains a strong liquidity position, with sufficient cash flows from operations and available credit facilities to meet its obligations and fund future growth opportunities, including continued acquisitions.

Key Highlights

  • 1Net income increased by 17.3% to $134.7 million for the nine months ended September 30, 2006, compared to $114.8 million in the prior year.
  • 2Total revenues grew by 12.6% to $663.4 million for the nine-month period, driven by a 12.2% increase in commissions and fees.
  • 3The company completed 30 acquisitions in the first nine months of 2006, with an aggregate purchase price of approximately $153.6 million, contributing to revenue growth.
  • 4Investment income saw a substantial increase of 96.1% to $8.4 million for the nine-month period, reflecting higher yields.
  • 5Employee compensation and benefits as a percentage of revenue improved, decreasing to 45.9% for the nine months ended September 30, 2006, from 47.3% in the prior year, indicating improved operational efficiency.
  • 6Goodwill increased significantly from $549 million to $677.8 million, reflecting the impact of recent acquisitions.
  • 7Despite ongoing legal and regulatory proceedings, management believes they will not have a material adverse effect on the company's financial position.

Frequently Asked Questions

The primary driver of revenue growth was the increase in commissions and fees, which rose by 12.2% to $653.9 million for the nine-month period. This growth was fueled by both acquisitions and organic net new business production across various segments.

The adoption of SFAS 123R, effective January 1, 2006, resulted in increased non-cash stock-based compensation expense. For the nine months ended September 30, 2006, this expense increased by $2.2 million, or 95.0%, primarily due to the expensing of the discount granted under the Employee Stock Purchase Plan.

Brown & Brown actively pursues acquisitions to expand its core businesses and attract talent. During the first nine months of 2006, the company acquired 30 entities for approximately $153.6 million, demonstrating a consistent strategy of inorganic growth. Management expects to continue using cash flow and potentially debt to fund future acquisitions.

Brown & Brown is involved in antitrust actions and various state regulatory investigations concerning insurance compensation practices. While the company is vigorously defending itself and management believes these matters will not have a material adverse effect, the potential impact and resolution remain uncertain and could be material.