10-QPeriod: Q2 FY2008

BROWN & BROWN, INC. Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 11, 2008For Securities:BRO

Summary

Brown & Brown, Inc. (BRO) reported mixed financial results for the six months ended June 30, 2008. Total revenues saw a slight decrease of 1.3% to $498.4 million, primarily driven by a significant drop in investment income and other income, offset by modest growth in commissions and fees. Net income declined by 17.5% to $92.2 million, impacted by higher operating expenses, particularly employee compensation and benefits, and increased amortization. The company continued its aggressive acquisition strategy, spending $187 million on acquisitions in the first six months of 2008, contributing to a substantial increase in goodwill and amortizable intangible assets. This expansion, however, led to negative internal growth in core commissions and fees, indicating challenges in organic growth within existing operations, particularly in the Retail and Wholesale Brokerage divisions. Liquidity remains a focus, with cash and cash equivalents at $0, but the company has significant available credit facilities. Management believes existing resources and credit lines are sufficient to meet liquidity needs, but a substantial portion of future contractual obligations relates to potential acquisition contingency payments, highlighting the ongoing reliance on strategic M&A.

Key Highlights

  • 1Total revenues decreased 1.3% to $498.4 million for the six months ended June 30, 2008, compared to $505.2 million in the prior year.
  • 2Net income decreased 17.5% to $92.2 million ($0.65 per diluted share) for the six months ended June 30, 2008, compared to $111.7 million ($0.79 per diluted share) in the prior year.
  • 3The company made significant investments in acquisitions, with $187 million spent in the first six months of 2008, leading to an increase in goodwill to $978.8 million.
  • 4Core commissions and fees experienced negative internal growth of (6.1%) for the first six months of 2008, indicating organic challenges.
  • 5Employee compensation and benefits as a percentage of total revenue increased to 48.5% for the six months ended June 30, 2008, from 44.2% in the prior year.
  • 6Investment income and other income saw substantial declines, largely due to the sale of the Rock-Tenn Company investment in the prior year.
  • 7The company's cash and cash equivalents balance was $0 as of June 30, 2008, with significant available credit facilities providing liquidity.

Frequently Asked Questions

The primary drivers for the decline in net income for the six months ended June 30, 2008, were a decrease in total revenues (primarily due to lower investment and other income from the prior year's significant gain on sale of investments), coupled with an increase in operating expenses, particularly employee compensation and benefits, and higher amortization expenses related to recent acquisitions.

Despite a cash and cash equivalents balance of $0 at June 30, 2008, Brown & Brown has significant liquidity through its available credit facilities, including a $50 million revolving loan agreement and a $200 million master shelf facility. Management believes these, along with cash generated from operations, are sufficient to meet liquidity needs.

Brown & Brown continues to actively pursue acquisitions, investing $187 million in the first six months of 2008. While these acquisitions contribute to overall revenue growth and expand the company's footprint, they also increase goodwill and intangible assets, and have contributed to higher compensation and amortization expenses. Importantly, the company is experiencing negative internal growth in core commissions and fees, suggesting that organic growth within existing operations is challenged and growth is heavily reliant on new acquisitions.

Key risks include material adverse changes in economic conditions in their served markets, future regulatory actions, competition in the insurance agency and brokerage business, concentration of business in certain states, and the successful integration of acquired businesses. The company also notes ongoing governmental investigations related to insurance compensation practices.