Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the quarterly period ended March 31, 2006
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or
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o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from _____________ to
________________
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Commission
file number 001-13619
BROWN
& BROWN, INC.
(Exact
name of Registrant as specified in its charter)
Florida
(State
or other jurisdiction of incorporation or organization)
220
South Ridgewood Avenue, Daytona Beach, FL
(Address
of principal executive offices)
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®
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59-0864469
(I.R.S.
Employer Identification Number)
32114
(Zip
Code)
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Registrant’s
telephone number, including area code: (386) 252-9601
Registrant’s
Website: www.bbinsurance.com
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, and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
Accelerated
filer o
Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
number of shares of the Registrant’s common stock, $.10 par value, outstanding
as of May 5, 2006 was 139,536,943.
BROWN
& BROWN, INC.
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PAGE
NO.
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3
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4
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5
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6
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16
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25
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25
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26
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27
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27
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29
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PART
I
- FINANCIAL INFORMATION
ITEM
1
- FINANCIAL STATEMENTS (UNAUDITED)
BROWN
& BROWN, INC.
INCOME
(UNAUDITED)
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For
the three months
ended
March 31,
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(in
thousands, except per share data)
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2006
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2005
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REVENUES
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Commissions
and fees
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$
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227,915
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$
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200,315
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Investment
income
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2,209
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965
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Other
income, net
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458
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1,094
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Total
revenues
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230,582
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202,374
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EXPENSES
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Employee
compensation and benefits
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100,730
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90,384
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Non-cash
stock-based compensation
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2,330
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891
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Other
operating expenses
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30,969
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27,142
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Amortization
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9,000
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7,535
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Depreciation
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2,595
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2,367
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Interest
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3,522
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3,542
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Total
expenses
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149,146
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131,861
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Income
before income taxes
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81,436
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70,513
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Income
taxes
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31,410
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27,495
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Net
income
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$
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50,026
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$
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43,018
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Net
income per share:
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Basic
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$
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0.36
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$
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0.31
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Diluted
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$
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0.36
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$
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0.31
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Weighted
average number of common shares outstanding:
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Basic
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139,383
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138,324
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Diluted
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140,823
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139,422
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Dividends
declared per share
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$
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0.05
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$
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0.04
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See
accompanying notes to condensed consolidated financial statements.
BROWN
& BROWN, INC.
CONDENSED
CONSOLIDATED
(UNAUDITED)
(in
thousands, except per share data)
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March
31,
2006
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December
31,
2005
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$
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73,683
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$
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100,580
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Restricted
cash and investments
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256,085
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229,872
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Short-term
investments
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2,767
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2,748
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Premiums,
commissions and fees receivable
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245,357
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257,930
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Other
current assets
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29,141
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28,637
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Total
current assets
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607,033
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619,767
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Fixed
assets, net
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41,726
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39,398
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Goodwill
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623,124
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549,040
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Amortizable
intangible assets, net
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387,151
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377,907
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Investments
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9,119
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8,421
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Other
assets
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14,249
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14,127
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Total
assets
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$
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1,682,402
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$
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1,608,660
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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Current
Liabilities:
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Premiums
payable to insurance companies
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$
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419,097
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$
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397,466
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Premium
deposits and credits due customers
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27,048
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34,027
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Accounts
payable
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50,318
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21,161
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Accrued
expenses
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42,870
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74,534
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Current
portion of long-term debt
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73,370
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55,630
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Total
current liabilities
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612,703
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582,818
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Long-term
debt
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210,832
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214,179
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Deferred
income taxes, net
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34,961
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35,489
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Other
liabilities
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13,304
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11,830
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Shareholders’
Equity:
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Common
stock, par value $0.10 per share; authorized
280,000 shares; issued and outstanding
139,516 at 2006 and 139,383 at 2005
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13,952
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13,938
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Additional
paid-in capital
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196,013
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193,313
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Retained
earnings
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595,703
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552,647
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Accumulate
other comprehensive income, net of related income tax effect
of $2,892 at 2006 and $2,606 at 2005
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4,934
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4,446
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Total
shareholders’ equity
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810,602
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764,344
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Total
liabilities and shareholders’ equity
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$
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1,682,402
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$
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1,608,660
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See
accompanying notes to condensed consolidated financial
statements.
BROWN
& BROWN, INC.
CASH
FLOWS
(UNAUDITED)
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For
the three months
ended
March 31,
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(in
thousands)
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2006
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2005
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Cash
flows from operating activities:
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Net
income
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$
|
50,026
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$
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43,018
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|
Adjustments
to reconcile net income to net cash provided by operating
activities:
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Amortization
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9,000
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7,535
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Depreciation
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2,595
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2,367
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Non-cash
stock-based compensation
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2,330
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891
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Deferred
income taxes
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(814
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)
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(207
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)
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Net
gain on sales of investments, fixed assets
and customer accounts
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(14
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)
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(985
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)
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Changes
in operating assets and liabilities, net of effect from
acquisitions and divestitures:
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Restricted
cash and investments (increase)
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(26,213
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)
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(50,649
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)
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Premiums,
commissions and fees receivable decrease (increase)
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13,045
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(42,307
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)
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Other
assets (increase) decrease
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(489
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)
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10,019
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Premiums
payable to insurance companies increase
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12,008
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90,759
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Premium
deposits and credits due customers (decrease)
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(6,979
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)
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(7,558
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)
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Accounts
payable increase
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29,015
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27,362
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Accrued
expenses (decrease)
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(32,952
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)
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(19,973
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)
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Other
liabilities increase
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1,474
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|
236
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Net
cash provided by operating activities
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52,032
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60,508
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Cash
flows from investing activities:
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Additions
to fixed assets
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(4,477
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)
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(3,469
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)
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Payments
for businesses acquired, net of cash acquired
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(59,356
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)
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(201,427
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)
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Proceeds
from sales of fixed assets and customer accounts
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|
158
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|
784
|
|
Purchases
of investments
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|
(23
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)
|
|
(186
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)
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Proceeds
from sales of investments
|
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|
12
|
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|
3
|
|
Net
cash used in investing activities
|
|
|
(63,686
|
)
|
|
(204,295
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)
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|
|
|
|
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|
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Cash
flows from financing activities:
|
|
|
|
|
|
|
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Payments
on long-term debt
|
|
|
(8,657
|
)
|
|
(4,085
|
)
|
Borrowings
on revolving credit facility
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|
-
|
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|
50,000
|
|
Issuances
of common stock for employee stock benefit plans
|
|
|
384
|
|
|
281
|
|
Cash
dividends paid
|
|
|
(6,970
|
)
|
|
(5,533
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(15,243
|
)
|
|
40,663
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(26,897
|
)
|
|
(103,124
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
100,580
|
|
|
188,106
|
|
Cash
and cash equivalents at end of period
|
|
$
|
73,683
|
|
$
|
84,982
|
|
See
accompanying notes to condensed consolidated financial
statements.
BROWN
& BROWN, INC.
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,
brokerage, and services organization that markets and sells to its customers
insurance products and services, primarily in the property and casualty area.
Brown & Brown’s business is divided into four reportable segments: the
Retail Division, which provides a broad range of insurance products and services
to commercial, public entity, professional and individual customers; the
National Programs Division, which is comprised of two units - Professional
Programs, which provides professional liability and related package products
for
certain professionals delivered through nationwide networks of independent
agents, and Special Programs, which markets targeted products and services
designated for specific industries, trade groups, governmental entities and
market niches; the Brokerage Division, which markets and sells excess and
surplus commercial insurance and reinsurance, primarily through independent
agents and brokers; and the Services Division, which provides insurance-related
services, including third-party administration, consulting for the workers’
compensation and managed healthcare services.
NOTE
2 • Basis of Financial Reporting
The
accompanying unaudited, condensed, consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“United States”) 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 generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered 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, 2005.
Results
of operations for the three months ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year ending December
31,
2006.
NOTE
3 • Net Income Per Share
Basic
net
income per share is computed by dividing net income available to shareholders
by
the weighted average number of common shares outstanding for the period. Basic
net income per share excludes dilution. Diluted net income per share reflects
the potential dilution that could occur if stock options or other contracts
to
issue common stock were exercised or converted to common stock.
The
following table sets forth the computation of basic net income per share and
diluted net income per share:
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For
the three months ended March 31,
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(in
thousands, except per share data)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
50,026
|
|
$
|
43,018
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
139,383
|
|
|
138,324
|
|
Dilutive
effect of stock options using the treasury stock method
|
|
|
1,440
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
140,823
|
|
|
139,422
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.31
|
|
All
share
and per share amounts in the consolidated financial statements have been
restated to give effect to the two-for-one common stock split effected by Brown
& Brown on November 28, 2005. The stock split was effected as a stock
dividend.
NOTE
4 • New
Accounting Pronouncements
Stock-Based
Compensation
- The
Company grants stock options and non-vested stock awards (previously referred
to
as “restricted stock”) to its employees, officers and directors. Effective
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123R, Share-Based
Payment (“SFAS
123R”), for its stock-based compensation plans. Among other things, SFAS 123R
requires that compensation expense for all share-based awards be recognized
in
the financial statements based upon the grant-date fair value of those awards.
Prior
to
January 1, 2006, the Company accounted for stock-based compensation using the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting
for Stock Issued to Employees
(“APB
No. 25”), and related interpretations, and disclosure requirements established
by SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
123”), as amended by SFAS No. 148, Accounting
for Stock-Based Compensation-Transitions and Disclosures
(“SFAS
148”).
Under
APB
No. 25, no compensation expense was recognized for either stock options issued
under the Company’s stock compensation plans or for stock purchased under the
Company’s Employee Stock Purchase Plan (“ESPP”). The pro forma effects on net
income and earnings per share for stock options and ESPP awards were instead
disclosed in a footnote to the financial statements. Compensation expense was
previously recognized for awards of non-vested stock, based upon the market
value of the common stock on the date of award, on a straight-line basis over
the requisite service period with the effect of forfeitures recognized as they
occurred.
The
following table represents the pro forma information for the three months ended
March 31, 2005 (as previously disclosed) under the Company’s stock compensation
plans had compensation cost for the stock options and common stock purchased
under the ESPP been determined based on the fair value at the grant-date
consistent with the method prescribed by SFAS No. 123:
(in
thousands, except per share data)
|
|
For
the three months ended
March
31, 2005
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
As
reported
|
|
$
|
43,018
|
|
Add:
Total stock-based compensation included in net
income, net of tax effect
|
|
|
As
reported
|
|
|
544
|
|
Less:
Total stock-based employee compensation expense
determined under fair value method for all
awards, net of tax effect
|
|
|
Pro
forma
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
Pro
forma
|
|
$
|
42,421
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
As
reported
|
|
$
|
0.31
|
|
|
|
|
Pro
forma
|
|
$
|
0.31
|
|
Diluted
earnings per share:
|
|
|
As
reported
|
|
$
|
0.31
|
|
|
|
|
Pro
forma
|
|
$
|
0.31
|
|
The
Company has adopted SFAS 123R using the modified-prospective transition method.
Under this transition method, compensation cost recognized in the first quarter
of 2006 includes:
|
· |
compensation
cost for all share-based awards (expected to vest) granted prior
to, but
not yet vested as of January 1, 2006, based upon grant-date fair
value
estimated in accordance with the original provisions of SFAS 123;
and
|
|
· |
compensation
cost for all share-based awards (expected to vest) granted during
the
three-month period ended March 31, 2006 based upon grant-date fair
value
estimated in accordance with the provisions of SFAS
123R.
|
Results
for prior periods have not been restated.
Upon
adoption of SFAS 123R, the Company continued to use the Black-Scholes valuation
model for valuing all stock options and shares granted under the ESPP.
Compensation for non-vested stock awards is measured at fair value on the
grant-date based upon the number of shares expected to vest and the quoted
market price of the underlying common stock. Compensation cost for all awards
will be recognized in earnings, net of estimated forfeitures, on a straight-line
basis over the requisite service period. The cumulative effect of changing
from
recognizing compensation expense for non-vested stock awards as forfeitures
occurred to recognizing compensation expense for non-vested awards net of
estimated forfeitures was not material.
The
adoption of SFAS 123R had the following effect on the Company for the three
months ended March 31, 2006:
|
· |
Non-cash
stock-based compensation is
$2,330,000
|
|
· |
Provision
for income taxes is reduced by
$899,000
|
|
· |
Net
income is reduced by $1,431,000
|
|
· |
Basic
earnings per share is reduced by
$0.01
|
|
· |
Diluted
earnings per share is reduced by
$0.01
|
|
· |
Deferred
tax assets increased by
$899,000
|
In
addition, prior to the adoption of SFAS 123R, the Company presented tax benefits
resulting from the exercise of stock options as operating cash flows in the
statement of cash flows. SFAS 123R requires that tax benefits associated with
share-based payments be classified under financing activities in the statement
of cash flows. Since no stock option shares were exercised that gave rise to
excess tax deductions during the three months ended March 31, 2006, there is
no
effect of the adoption of SFAS 123R on the cash flow statement for the three
months ended March 31, 2006.
See
Note
5 for additional information regarding the Company’s stock-based compensation
plans and the assumptions used to calculate the fair value of stock-based
awards.
NOTE
5 • Employee
Stock-Based Compensation
Stock
Option Awards
The
Company uses the Black-Scholes option-pricing model to estimate the fair value
of stock options on the grant-date under SFAS 123R, which is the same valuation
technique previously used for pro forma disclosures under SFAS 123. The Company
did not grant any options during the three months ended March 31, 2006, but
did
grant 12,000 shares during the three months ended March 31, 2005. The Company
used the following weighted average assumptions for all options granted during
the three months ended March 31, 2005:
|
|
|
|
|
Risk-free
interest rate
|
|
4.50%
|
|
Expected
life (in years)
|
|
6%
|
|
Expected
volatility
|
|
35%
|
|
Dividend
yield
|
|
0.86%
|
The
risk-free interest rate is based upon the US Treasury yield curve on the date
of
grant with a remaining term approximating the expected term of the option
granted. The expected term of the options granted is derived from historical
data; employees are divided into two groups based upon expected exercise
behavior and are considered separately for valuation purposes. The expected
volatility is based upon the historical volatility of the Company’s common stock
over the period of time equivalent to the expected term of the options granted.
The dividend yield is based upon the Company’s best estimate of future dividend
yield.
A
summary
of stock option activity for the three-month period ended March 31, 2006 is
as
follows:
Stock
Options
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding
at January 1, 2006
|
|
|
2,016,988
|
|
$
|
10.83
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
12,337
|
|
$
|
10.46
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
2,004,651
|
|
$
|
10.83
|
|
|
5.6
|
|
$
|
44,848
|
|
Exercisable
at March 31, 2006
|
|
|
1,295,943
|
|
$
|
8.06
|
|
|
4.9
|
|
$
|
32,577
|
|
The
weighted average grant-date fair value of stock options granted during the
three-months ended March 31, 2006 and 2005 was $-0- and $8.51, respectively.
The
total intrinsic value of options exercised, determined as of the date of
exercise, during the three months ended March 31, 2006 and 2005 was $251,000
and
$378,000, respectively. Aggregate intrinsic value is calculated as the
difference between the exercise price of the underlying awards and the quoted
market price of the Company’s stock for in-the-money stock options at March 31,
2006.
Non-Vested
Stock Awards (“Performance Stock” or “PSP”)
The
Company uses a lattice option-pricing model to estimate the fair value of PSP
grants on the grant-date under SFAS 123R.
A
summary of PSP activity for the three months ended March 31, 2006 is as
follows:
Performance
Stock
|
|
Shares
|
|
Weighted
Average Grant-Date
Fair Value
|
|
Outstanding
at January 1, 2006
|
|
|
5,842,376
|
|
$
|
8.59
|
|
Granted
|
|
|
16,345
|
|
$
|
30.54
|
|
Vested
|
|
|
-
|
|
$
|
— |
|
Forfeited
|
|
|
141,062
|
|
$
|
6.73
|
|
Outstanding
at March 31, 2006
|
|
|
5,717,659
|
|
$
|
8.71
|
|
The
weighted average grant-date fair value of PSP grants for the three months ended
March 31, 2006 and 2005, was $30.54 and $22.34, respectively. The total fair
value of PSP grants that vested during each of the three months ended March
31,
2006 and 2005 was $-0-.
Employee
Stock Purchase Plan (“ESPP”)
The
Company has a shareholder approved ESPP. Employees of the Company who regularly
work more than 20 hours per week are eligible to participate in the plan.
Participants, through payroll deductions, may subscribe to purchase Company
stock up to 10% of their compensation, to a maximum of $25,000, during each
annual subscription period at a cost of 85% of the lower of the stock price
as
of the beginning or ending of the stock subscription period. During the three
months ended March 31, 2006 and 2005, 194,090 and 144,696 shares of common
stock
(from authorized but unissued shares), respectively, were subscribed to by
employees participating in the Company’s ESPP for proceeds of approximately
$3,584,847 and $2,552,694, respectively.
As
of
March 31, 2006, there was approximately $40,636,000 of unrecognized compensation
expense related to all non-vested share-based compensation arrangements granted
under the Company’s stock compensation plans. That expense is expected to be
recognized over a weighted-average period of 6.0 years.
NOTE
6 • Business Combinations
Acquisitions
in 2006
For
the
three months ended March 31, 2006, Brown & Brown acquired the assets and
assumed certain liabilities of three insurance intermediaries. The aggregate
purchase price of these acquisitions was $72,144,000, including $61,994,000
of
net cash payments, the issuance of $82,000 in notes payable and the assumption
of $10,068,000 of liabilities. All of these acquisitions were acquired
primarily to expand Brown & Brown’s core businesses and to attract and
obtain high-quality individuals. Acquisition purchase prices are based primarily
on a multiple of average annual operating profits earned over a one- to
three-year period within a minimum and maximum price range. The initial asset
allocation of an acquisition is based on the minimum purchase price, and any
subsequent earn-out payment is allocated to goodwill.
All
of
these acquisitions have been accounted for as business combinations and are
as
follows:
(in
thousands)
Name
|
|
Business
Segment
|
|
2006
Date
of
Acquisition
|
|
Net
Cash
Paid
|
|
Notes
Payable
|
|
Recorded
Purchase
Price
|
Axiom
Intermediaries, LLC
|
|
Brokerage
|
|
January
1
|
|
$
|
60,292
|
|
$
|
-
|
|
$
|
60,292
|
Other
|
|
Various
|
|
Various
|
|
|
1,702
|
|
|
82
|
|
|
1,784
|
Total
|
|
|
|
|
|
|
|
$
|
61,994
|
|
$
|
82
|
|
$
|
62,076
|
The
following table summarizes the estimated fair values of the aggregate assets
and
liabilities acquired as of the date of each acquisition:
(in
thousands)
|
|
Axiom
|
|
Other
|
|
Total
|
|
Fiduciary
cash
|
|
$
|
9,598
|
|
$
|
-
|
|
$
|
9,598
|
|
Other
current assets
|
|
|
372
|
|
|
100
|
|
|
472
|
|
Fixed
assets
|
|
|
435
|
|
|
25
|
|
|
460
|
|
Purchased
customer accounts
|
|
|
17,363
|
|
|
858
|
|
|
18,221
|
|
Noncompete
agreements
|
|
|
31
|
|
|
43
|
|
|
74
|
|
Goodwill
|
|
|
42,478
|
|
|
768
|
|
|
43,246
|
|
Other
assets
|
|
|
73
|
|
|
-
|
|
|
73
|
|
Total
assets acquired
|
|
|
70,350
|
|
|
1,794
|
|
|
72,144
|
|
Other
current liabilities
|
|
|
(10,058
|
)
|
|
(10
|
)
|
|
(10,068
|
|
Total
liabilities assumed
|
|
|
(10,058
|
)
|
|
(10
|
)
|
|
(10,068
|
|
Net
assets acquired
|
|
$
|
60,292
|
|
$
|
1,784
|
|
$
|
62,076
|
|
The
results of operations for the acquisitions completed during 2006 have been
combined with those of the Company since their respective acquisitions dates.
If
the acquisitions had occurred as of January 1, 2005, the Company’s results of
operations would be as shown in the following table:
(UNAUDITED)
|
|
For
the three months ended March 31,
|
|
(in
thousands, except per share data)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
230,687
|
|
$
|
208,194
|
|
Income
before income taxes
|
|
$
|
81,461
|
|
$
|
72,028
|
|
Net
income
|
|
$
|
50,041
|
|
$
|
43,943
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
$
|
0.32
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
139,383
|
|
|
138,324
|
|
Diluted
|
|
|
140,823
|
|
|
139,422
|
|
These
proforma results are not necessarily indicative of the actual results of
operations that would have occurred had the acquisitions actually been made
at
the beginning of the respective periods.
Additional
consideration paid to sellers as a result of purchase price “earn-out”
provisions are recorded as adjustments to intangible assets when the
contingencies are settled. The net additional consideration paid by the Company
in 2006 as a result of these adjustments totaled $30,913,000, of which
$30,838,000 was allocated to goodwill. Of the $30,913,000 net additional
consideration paid, $6,960,000 was paid in cash, $22,968,000 was issued in
notes
payable and $985,000 was assumed as net liabilities. As of March 31, 2006,
the
maximum future contingency payments related to acquisitions totaled
$145,539,000.
NOTE
7 • Goodwill
Goodwill
is subject to at least an annual assessment for impairment by applying a fair
value-based test. Brown & Brown completed its most recent annual assessment
as of November 30, 2005 and identified no impairment as a result of the
evaluation.
The
changes in goodwill for the three months ended March 31, 2006 are as follows:
(in
thousands)
|
|
Retail
|
|
National
Programs
|
|
Brokerage
|
|
Service
|
|
Total
|
Balance
as of January 1, 2006
|
|
$
|
292,212
|
|
$
|
119,022
|
|
$
|
137,750
|
|
$
|
56
|
|
$
|
549,040
|
Goodwill
of acquired businesses
|
|
|
25,205
|
|
|
2,227
|
|
|
46,652
|
|
|
-
|
|
|
74,084
|
Goodwill
disposed of relating to sales of businesses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Balance
as of March 31, 2006
|
|
$
|
317,417
|
|
$
|
121,249
|
|
$
|
184,402
|
|
$
|
56
|
|
$
|
623,124
|
NOTE
8 • Amortizable Intangible Assets
Amortizable
intangible assets at March 31, 2006 and December 31, 2005 consisted of the
following:
|
|
March
31, 2006
|
|
December
31, 2005
|
(in
thousands) |
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
|
Weighted
Average Life (years)
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
|
Weighted
Average
Life
(years)
|
Purchased
customer accounts
|
|
$
|
516,645
|
|
$
|
(134,465)
|
|
$
|
382,180
|
|
|
14.9
|
|
$
|
498,580
|
|
$
|
(126,161)
|
|
$
|
372,419
|
|
|
14.9
|
Noncompete
agreements
|
|
|
34,319
|
|
|
(29,348)
|
|
|
4,971
|
|
|
7.0
|
|
|
34,154
|
|
|
(28,666)
|
|
|
5,488
|
|
|
7.0
|
Total
|
|
$
|
550,964
|
|
$
|
(163,813)
|
|
$
|
387,151
|
|
|
|
|
$
|
532,734
|
|
$
|
(154,827)
|
|
$
|
377,907
|
|
|
|
Amortization
expense for other amortizable intangible assets for the years ending December
31, 2006, 2007, 2008, 2009 and 2010 is estimated to be $35,632,000, $35,026,000,
$34,140,000, $33,672,000, and $33,016,000 respectively.
NOTE
9 • Long-Term Debt
Long-term
debt at March 31, 2006 and December 31, 2005 consisted of the following:
(in
thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Unsecured
Senior Notes
|
|
$
|
200,000
|
|
$
|
200,000
|
|
Acquisition
notes payable
|
|
|
61,506
|
|
|
43,889
|
|
Term
loan agreements
|
|
|
22,500
|
|
|
25,714
|
|
Revolving
credit facility
|
|
|
-
|
|
|
-
|
|
Other
notes payable
|
|
|
196
|
|
|
206
|
|
Total
debt
|
|
|
284,202
|
|
|
269,809
|
|
Less
current portion
|
|
|
(73,370
|
)
|
|
(55,630
|
)
|
Long-term
debt
|
|
$
|
210,832
|
|
$
|
214,179
|
|
In
July
2004, Brown & Brown completed a private placement of $200.0 million of
unsecured senior notes (the Notes). The $200.0 million Notes are divided into
two series: Series A, for $100.0 million due in 2011 and bearing interest at
5.57% per year; and Series B, for $100.0 million due in 2014 and bearing
interest at 6.08% per year. The closing on the Series B Notes occurred on July
15, 2004. The closing on the Series A Notes occurred on September 15, 2004.
Brown & Brown has used the proceeds from the Notes for general corporate
purposes, including acquisitions and repayment of existing debt. As of March
31,
2006 and December 31, 2005 there was an outstanding balance of $200.0 million
on
the Notes.
In
September 2003, Brown & Brown established an unsecured revolving credit
facility with a national banking institution that provided for available
borrowings of up to $75.0 million, with a maturity date of October 2008, bearing
an interest rate based upon the 30-, 60- or 90-day London InterBank Offered
Rate
(LIBOR) plus 0.625% to 1.625%, depending upon the Company’s quarterly ratio of
funded debt to earnings before interest, taxes, depreciation, amortization
and
non-cash stock grant compensation. A commitment fee of 0.175% to 0.375% per
annum is assessed on the unused balance. The 90-day LIBOR was 4.98% and 4.53%
as
of March 31, 2006 and December 31, 2005, respectively. There were no borrowings
against this facility at March 31, 2006 or December 31, 2005.
In
January 2001, Brown & Brown entered into a $90.0 million unsecured
seven-year term loan agreement with a national banking institution, bearing
an
interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.50% to 1.00%,
depending upon Brown & Brown’s quarterly ratio of funded debt to earnings
before interest, taxes, depreciation, amortization and non-cash stock grant
compensation. The 90-day LIBOR was 4.98% and 4.53% as of March 31, 2006 and
December 31, 2005, respectively. The loan was fully funded on January 3, 2001
and as of March 31, 2006 had an outstanding balance of $22,500,000. This loan
is
to be repaid in equal quarterly installments of $3,200,000 through December
2007.
All
three
of these credit agreements require Brown & Brown to maintain certain
financial ratios and comply with certain other covenants. Brown & Brown was
in compliance with all such covenants as of March 31, 2006 and December 31,
2005.
To
hedge
the risk of increasing interest rates from January 2, 2002 through the remaining
six years of its seven-year $90 million term loan, Brown & Brown entered
into an interest rate exchange (“swap”) agreement that effectively converted the
floating rate LIBOR-based interest payments to fixed interest rate payments
at
4.53%. This agreement did not affect the required 0.50% to 1.00% credit risk
spread portion of the term loan. In accordance with SFAS No. 133, as amended,
the fair value of the interest rate swap of approximately $87,000, net of
related income taxes of approximately $51,000, was recorded in other assets
as
of March 31, 2006, and $36,000, net of related income taxes of approximately
$22,000, was recorded in other asset as of December 31, 2005; with the related
change in fair value reflected as other comprehensive income. Brown & Brown
has designated and assessed the derivative as a highly effective cash flow
hedge.
Acquisition
notes payable represent debt incurred to former owners of certain insurance
operations acquired by Brown & Brown. These notes and future contingent
payments are payable in monthly, quarterly and annual installments through
February 2014, including interest in the range from 3.0% to 8.05%.
NOTE
10 • Supplemental Disclosures of Cash Flow Information
|
|
For
the three months
ended
March 31,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,187
|
|
$
|
6,365
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
4,430
|
|
$
|
415
|
|
Brown
& Brown’s significant non-cash investing and financing activities are
summarized as follows:
|
|
For
the three months
ended
March 31,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
Unrealized
holding gain (loss) on available-for-sale securities, net of tax
effect of
$256 for 2006; net of tax benefit of $243 for 2005
|
|
$
|
438
|
|
$
|
(783
|
)
|
Net
gain on cash-flow hedging derivative, net of tax effect of $30 for
2006,
net of tax effect of $167 for 2005
|
|
$
|
50
|
|
$
|
300
|
|
Notes
payable issued or assumed for purchased customer accounts
|
|
$
|
23,050
|
|
$
|
35,468
|
|
Notes
received on the sale of fixed assets and customer accounts
|
|
$
|
-
|
|
$
|
582
|
|
NOTE
11 • Comprehensive Income
The
components of comprehensive income, net of related income tax effects, are
as
follows:
|
|
For
the three months
ended
March 31,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
50,026
|
|
$
|
43,018
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gain (loss) on available-for-sale
securities
|
|
|
438
|
|
|
(783
|
)
|
|
|
|
|
|
|
|
|
Net
gain on cash-flow hedging derivative
|
|
|
50
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
50,514
|
|
$
|
42,535
|
|
NOTE
12 • Legal and Regulatory Proceedings
As
previously disclosed, the Company (a) is one of numerous defendants to putative
class action lawsuits purporting to be brought on behalf of policyholders
and
consolidated and transferred to a New Jersey federal court by the Judicial
Panel
on Multi-District Litigation (the “Antitrust Actions”), (b) has received a
shareholder demand, and (c) has supplied information to various governmental
agencies in response to verbal and written requests and subpoenas, all
concerning issues related to compensation, and specifically related to the
payment of contingent commissions and override commissions to insurance
intermediaries, including the Company, by insurance carriers. The Company
cannot
currently predict the impact or resolution of the Antitrust Actions, the
shareholder demand or the various governmental inquiries or lawsuits and
thus
cannot reasonably estimate a range of possible loss, which could be material,
or
whether the resolution of these matters may harm the Company’s business and/or
lead to a decrease in or elimination of contingent commissions and override
commissions, which could have a material adverse impact on the Company’s
consolidated financial condition.
The
Company is involved in numerous pending or threatened proceedings by or against
Brown & Brown, Inc. or one or more of its subsidiaries that arise in the
ordinary course of business. The damages that may be claimed against the Company
in these various proceedings are substantial, including in many instances claims
for punitive or extraordinary damages. Some of these claims and lawsuits have
been resolved, others are in the process of being resolved, and others are
still
in the investigation or discovery phase. The Company will continue to respond
appropriately to these claims and lawsuits, and to vigorously protect its
interests. Although the ultimate outcome of the matters referenced in this
paragraph cannot be ascertained and liabilities in indeterminate amounts may
be
imposed on Brown & Brown, Inc. or its subsidiaries, on the basis of present
information, availability of insurance and legal advice received, it is the
opinion of management that the disposition or ultimate determination of such
claims will not have a material adverse effect on the Company’s consolidated
financial position. However, (i) as one or more of the Company’s insurance
carriers could take the position that portions of these claims are not covered
by the Company’s insurance, (ii) to the extent that payments are made to resolve
claims and lawsuits, applicable insurance policy limits are eroded, and (iii)
as
the claims and lawsuits relating to these matters are continuing to develop,
it
is possible that future results of operations or cash flows for any particular
quarterly or annual period could be materially and adversely affected by
unfavorable resolutions of these matters.
For
a more complete discussion of the foregoing
matters, please see Item 3 of Part I of our Annual Report on Form 10-K filed
with the Securities and Exchange Commission for our fiscal year ended December
31, 2005 and Note 13 to the Consolidated Financial Statements contained in
Item
8 of Part II thereof.
NOTE
13 • Segment Information
Brown
& Brown’s business is divided into four reportable segments: the Retail
Division, which provides a broad range of insurance products and services to
commercial, governmental, professional and individual customers; the National
Programs Division, which is comprised of two units - Professional Programs,
which provides professional liability and related package products for certain
professionals delivered through nationwide networks of independent agents,
and
Special Programs, which markets targeted products and services designated for
specific industries, trade groups, governmental entities, and market niches;
the
Services Division, which provides insurance-related services, including
third-party administration, consulting for the workers’ compensation and
employee benefit self-insurance markets, and managed healthcare services; and
the Brokerage Division, which markets and sells excess and surplus commercial
and personal lines insurance, and reinsurance, primarily through independent
agents and brokers. Brown & Brown conducts all of its operations within the
United States of America.
Summarized
financial information concerning Brown & Brown’s reportable segments for the
three months ended March 31, 2006 and 2005 is shown in the following table.
The
“Other” column includes any income and expenses not allocated to reportable
segments and corporate-related items, including the inter-company interest
expense charge to the reporting segment.
|
|
For
the three months ended March 31, 2006
|
|
|
|
Retail
|
|
National
Programs
|
|
|
|
|
|
Other
|
|
Total
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
142,551
|
|
$ |
39,001
|
|
$ |
40,982
|
|
$ |
6,658
|
|
$ |
1,390
|
|
$ |
230,582
|
|
Investment
income
|
|
|
22
|
|
|
97
|
|
|
906
|
|
|
13
|
|
|
1,171
|
|
|
2,209
|
|
Amortization
|
|
|
4,828
|
|
|
2,188
|
|
|
1,962
|
|
|
11
|
|
|
11
|
|
|
9,000
|
|
Depreciation
|
|
|
1,374
|
|
|
536
|
|
|
419
|
|
|
105
|
|
|
161
|
|
|
2,595
|
|
Interest
expense
|
|
|
4,784
|
|
|
2,617
|
|
|
4,441
|
|
|
1
|
|
|
(8,321
|
)
|
|
3,522
|
|
Income
before income taxes
|
|
|
47,170
|
|
|
12,034
|
|
|
7,986
|
|
|
1,531
|
|
|
12,715
|
|
|
81,436
|
|
Total
assets
|
|
|
1,037,773
|
|
|
466,322
|
|
|
566,478
|
|
|
18,862
|
|
|
(407,033
|
)
|
|
1,682,402
|
|
Capital
expenditures
|
|
|
1,506
|
|
|
1,406
|
|
|
377
|
|
|
120
|
|
|
1,068
|
|
|
4,477
|
|
|
|
For
the three months ended March 31, 2005
|
|
|
|
Retail
|
|
National
Programs
|
|
Brokerage
|
|
Services
|
|
Other
|
|
Total
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
137,321
|
|
$
|
33,048 |
|
$
|
23,649
|
|
$
|
6,384
|
|
$
|
1,972
|
|
$
|
202,374
|
|
Investment
income
|
|
|
23
|
|
|
75
|
|
|
15
|
|
|
-
|
|
|
852
|
|
|
965
|
|
Amortization
|
|
|
4,723
|
|
|
2,031
|
|
|
755
|
|
|
11
|
|
|
15
|
|
|
7,535
|
|
Depreciation
|
|
|
1,416
|
|
|
471
|
|
|
202
|
|
|
106
|
|
|
172
|
|
|
2,367
|
|
Interest
expense
|
|
|
5,374
|
|
|
2,673
|
|
|
1,789
|
|
|
1
|
|
|
(6,295
|
)
|
|
3,542
|
|
Income
before income taxes
|
|
|
43,445
|
|
|
8,495
|
|
|
7,060
|
|
|
1,405
|
|
|
10,108
|
|
|
70,513
|
|
Total
assets
|
|
|
899,441
|
|
|
396,397
|
|
|
402,876
|
|
|
14,454
|
|
|
(251,643
|
)
|
|
1,461,525
|
|
Capital
expenditures
|
|
|
2,175
|
|
|
763
|
|
|
220
|
|
|
84
|
|
|
227
|
|
|
3,469
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF
OPERATIONS.
|
THE
FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN THE COMPANY’S 2005 ANNUAL
REPORT ON FORM 10-K, AND THE TWO DISCUSSIONS SHOULD BE READ
TOGETHER.
GENERAL
We
are a
general insurance and brokerage agency that commenced business in 1939 and
are
headquartered in Daytona Beach and Tampa, Florida. We market and sell to our
customers insurance products and services, primarily in the property, casualty
and the employee benefits markets. As an agent and broker, we do not assume
underwriting risks. Instead, we provide our customers with quality insurance
contracts, as well as other targeted, customized risk management products and
services.
Our
commissions and fees revenue are comprised of commissions paid by insurance
companies and fees paid directly by customers. Commission revenues generally
represent a percentage of the premium paid by the insured and are materially
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, sales and payroll levels) so as to determine
what
premium to charge the insured. These premium rates are established by insurance
companies based upon many factors, including reinsurance rates, none of which
we
control. Beginning in 1986 and continuing through 1999, commission revenues
were
adversely influenced by a consistent decline in premium rates resulting from
intense competition among property and casualty insurance companies for market
share. Among other factors, this condition of a prevailing decline in premium
rates, commonly referred to as a “soft market,” generally resulted in flat to
reduced commissions on renewal business. The effect of this softness in rates
on
our commission revenues was somewhat offset by our acquisitions and net new
business production. As a result of increasing “loss ratios” (the comparison of
incurred losses plus adjustment expenses against earned premiums) of insurance
companies through 1999, there was a general increase in premium rates beginning
in the first quarter of 2000 and continuing into 2003. During 2003, the
increases in premium rates began to moderate, and in certain lines of insurance,
premium rates decreased. In 2004, as general premium rates continued to
moderate, the insurance industry experienced the worst hurricane season since
1992 when Hurricane Andrew hit south Florida. The insured losses from the 2004
hurricane season were absorbed relatively easily by the insurance industry
and
the general insurance premium rates continued to soften during 2005. During
the
third quarter of 2005, the insurance industry experienced the worst hurricane
season ever recorded. Primarily as a result of these hurricanes, including
Hurricanes Katrina, Rita and Wilma, the total insured losses are estimated
to be
in excess of $50 billion. The full impact that the 2005 insured losses will
have
on the insurance premium rates charged by insurance companies for 2006 is
unknown, however, there appears to be a general consensus that there will be
upward pressure on at least the insurance premium rates on coastal property,
primarily in the southeastern part of the United States. In other parts of
the
country, premium rates continue to be generally “soft”.
We
also
earn “contingent commissions,” which are profit-sharing commissions based
primarily on underwriting results, but may also reflect considerations for
volume, growth and/or retention. These commissions are primarily received in
the
first and second quarters of each year, based on underwriting results and other
aforementioned considerations for the prior year(s), and, over the last three
years, have averaged approximately 6.0% of the previous year’s total commissions
and fees revenue. Contingent commissions are included in our total commissions
and fees in the Consolidated Statements of Income in the year received. The
term
“core commissions and fees” excludes contingent commissions and therefore
represents the revenues earned directly from specific insurance policies sold,
and specific fee-based services rendered.
Fee
revenues are generated primarily by our Services Division, which provides
insurance-related services, including third-party administration and consulting
for the self-funded workers’ compensation markets.
Investment
income consists primarily of interest earnings on premiums and advance premiums
collected and held in a fiduciary capacity before being remitted to insurance
companies. Our policy is to invest available funds in high-quality, short-term
fixed income investment securities. Investment income also includes gains and
losses realized from the sale of investments.
Critical
Accounting Policies
Our
Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses. We continually evaluate our estimates, which are based on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. These estimates form the basis for our judgments about
the carrying values of our assets and liabilities, which values are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
The
more
critical accounting and reporting policies include our accounting for revenue
recognition, business acquisitions and purchase price allocations, intangible
assets impairments, reserves for litigation and derivative interests. In
particular, the accounting for these areas requires significant judgments to
be
made by management. Different assumptions in the application of these
policies could result in material changes in our consolidated financial position
or consolidated results of operations. Refer to Note 1 in the “Notes to
Consolidated Financial Statements” in our 2005 Annual Report on Form 10-K on
file with the Securities and Exchange Commission for details regarding all
of
our critical and significant accounting policies.
All
share
and per share information has been restated to give effect to a two-for-one
common stock split that become effective November 28, 2005.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND
2005
The
following discussion and analysis regarding results of operations and liquidity
and capital resources should be considered in conjunction with the accompanying
Consolidated Financial Statements and related Notes.
Financial
information relating to our Condensed Consolidated Financial Results for the
three month periods ended March 31, 2006 and 2005 is as follows (in thousands,
except percentages):
|
|
2006
|
|
2005
|
|
Percent
Change
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
194,448
|
|
$
|
172,471
|
|
12.7%
|
|
Contingent
commissions
|
|
|
33,467
|
|
|
27,844
|
|
20.2%
|
|
Investment
income
|
|
|
2,209
|
|
|
965
|
|
128.9%
|
|
Other
income, net
|
|
|
458
|
|
|
1,094
|
|
(58.1)%
|
|
Total
revenues
|
|
|
230,582
|
|
|
202,374
|
|
13.9%
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
100,730
|
|
|
90,384
|
|
11.4%
|
|
Non-cash
stock-based compensation
|
|
|
2,330
|
|
|
891
|
|
161.5%
|
|
Other
operating expenses
|
|
|
30,969
|
|
|
27,142
|
|
14.1%
|
|
Amortization
|
|
|
9,000
|
|
|
7,535
|
|
19.4%
|
|
Depreciation
|
|
|
2,595
|
|
|
2,367
|
|
9.6%
|
|
Interest
|
|
|
3,522
|
|
|
3,542
|
|
(0.6)%
|
|
Total
expenses
|
|
|
149,146
|
|
|
131,861
|
|
13.1%
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
81,436
|
|
$
|
70,513
|
|
15.5%
|
|
|
|
|
|
|
|
|
|
|
|
Net
internal growth rate - core commissions and fees
|
|
|
1.2%
|
|
|
3.5%
|
|
|
|
Employee
compensation and benefits ratio
|
|
|
43.7%
|
|
|
44.7%
|
|
|
|
Other
operating expenses ratio
|
|
|
13.4%
|
|
|
13.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
4,477
|
|
$
|
3,469
|
|
|
|
Total
assets at March 31
|
|
$
|
1,682,402
|
|
$
|
1,461,525
|
|
|
|
Commissions
and Fees
Commissions
and fees revenue for the three month period ended March 31, 2006, including
contingent commissions, increased $27.6 million, or 13.8%, over the same period
in 2005. Core commissions and fees revenue, excluding divestitures, increased
$22.5 million, or 13.1%, in the first quarter of 2006 over the first quarter
of
2005. Of this increase in core commissions and fees revenue, approximately
$20.3
million represents core commissions and fees from agencies acquired since the
second quarter of 2005, and $2.2 million represents net new business production.
Profit-sharing contingent commissions for the first quarter of 2006 increased
$5.6 million over the first quarter of 2005.
Investment
Income
Investment
income for the three month period ended March 31, 2006 increased $1.2 million,
or 128.9%, over the same period in 2005, due primarily to the higher investment
yields earned in 2006 than during 2005.
Other
Income, net
Other
income consists primarily of gains and losses from the sale and disposition
of
assets. In the first quarter of 2006, gains of less than $0.1 million were
recognized from the sale of customer accounts as compared with $1.0 million
in
the first quarter of 2005. Although we are not in the business of selling
customer accounts, we periodically will sell an office or a book of business
(one or more customer accounts) that does not produce reasonable margins or
demonstrate a potential for growth.
Employee
Compensation and Benefits
Employee
compensation and benefits for the three month period ended March 31, 2006
increased approximately $10.3 million, or 11.4%, over the same period in 2005.
This increase is primarily the result of acquisitions and increases in
commissions paid on net new business. Employee compensation and benefits as
a
percentage of total revenues decreased to 43.7% in the first quarter of 2006,
as
compared with 44.7% in the same period of 2005. This improved ratio for the
three month period was primarily the result of higher profit-sharing contingent
commissions received in the 2006 quarter and a cost savings on our self-funded
medical plan of approximately $1.2 million.
Non-Cash
Stock-Based Compensation
Non-cash
stock-based compensation for the three months ended March 31, 2006 increased
approximately $1.4 million, or 161.5%. As more fully described in Note 4 and
5
of the Condensed Consolidated Financial Statements, the increase was due to
the
implementation of Statement of Financial Accounting Standards No. 123R,
Share-Based Payment. The majority of the increased cost primarily
relates to the expensing of the 15% discount granted to employee under the
Company’s Employee Stock Purchase Plan.
Other
Operating Expenses
As
a
percentage of total revenues, other operating expenses remained flat at 13.4%
in
both quarters of 2006 and 2005. Although legal claims and related expenses
increased $1.6 million and travel & entertainment expenses increased $1.0
million in first quarter of 2006 over the first quarter of 2005, the overall
expenses as a percent of total revenue remained flat, in part, due to the
increased profit-sharing contingent commissions.
Amortization
Amortization
expense increased $1.5 million, or 19.4%, in the first quarter of 2006 over
the
same quarter in 2005 due to the amortization of additional intangible assets
as
a result of new acquisitions.
Depreciation
Depreciation
increased $0.2 million, or 9.6%, in the first quarter of 2006 over the same
quarter in 2005 due primarily to the purchase of new computers, related
equipment and software, and the depreciation associated with new
acquisitions.
Interest
Expense
Interest
expense remained relatively constant at $3.5 million for the first quarter
of
2006, primarily reflecting the carrying cost of the $200 million of unsecured
senior Notes borrowed in the third quarter of 2004.
RESULTS
OF OPERATIONS - SEGMENT INFORMATION
As
discussed in Note 13 of the Notes to Condensed Consolidated Financial
Statements, we operate in four reportable segments: the Retail, National
Programs, Brokerage and Service Divisions. On a divisional basis, increases
in
amortization, depreciation and interest expenses are the result of new
acquisitions within that division in a particular year. Likewise, other income
in each division primarily reflects net gains on sales of customer accounts
and
fixed assets. In evaluating the operational efficiency of a division, management
places greater emphasis on the net internal growth rate of core commissions
and
fees revenue, the gradual improvement of the ratio of employee compensation
and
benefits to total revenues, and the gradual improvement of the ratio of other
operating expenses to total revenues.
Retail
Division
The
Retail Division provides a broad range of insurance products and services to
commercial, public entity, professional and individual insured customers. Since
the majority of our operating expenses do not change as premiums fluctuate,
we
believe that most of any fluctuation in the commissions, net of related
compensation, that we receive will be reflected in our pre-tax income.
Financial
information relating to Brown & Brown’s Retail Division for the three month
periods ended March 31, 2006 and 2005 is as follows (in thousands, except
percentages):
|
|
2006
|
|
2005
|
|
Percent
Change
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
115,444
|
|
$
|
112,215
|
|
|
2.9
|
%
|
Contingent
commissions
|
|
|
26,763
|
|
|
24,362
|
|
|
9.9
|
%
|
Investment
income
|
|
|
22
|
|
|
23
|
|
|
(4.3
|
)%
|
Other
income, net
|
|
|
322
|
|
|
721
|
|
|
(55.3
|
)%
|
Total
revenues
|
|
|
142,551
|
|
|
137,321
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
62,631
|
|
|
60,751
|
|
|
3.1
|
%
|
Non-cash
stock-based compensation
|
|
|
739
|
|
|
547
|
|
|
35.1
|
%
|
Other
operating expenses
|
|
|
21,025
|
|
|
21,065
|
|
|
(0.2
|
)%
|
Amortization
|
|
|
4,828
|
|
|
4,723
|
|
|
2.2
|
%
|
Depreciation
|
|
|
1,374
|
|
|
1,416
|
|
|
(3.0
|
)%
|
Interest
|
|
|
4,784
|
|
|
5,374 |
|
|
(11.0
|
)%
|
Total
expenses
|
|
|
95,381
|
|
|
93,876 |
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
47,170
|
|
|
43,445 |
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
internal growth rate - core commissions and fees
|
|
|
(0.9
|
)%
|
|
1.2
|
%
|
|
|
|
Employee
compensation and benefits ratio
|
|
|
43.9
|
%
|
|
44.2
|
%
|
|
|
|
Other
operating expenses ratio
|
|
|
14.7
|
%
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
1,506
|
|
$
|
2,175
|
|
|
|
|
Total
assets at March 31
|
|
$
|
1,037,773
|
|
$
|
899,441
|
|
|
|
|
The
Retail Division’s total revenues during the three month period ended March 31,
2006 increased 3.8%, or $5.2 million, to $142.6 million. Profit-sharing
contingent commissions for the quarter increased $2.4 million over the first
quarter of 2005. Of the increase in revenues, approximately $4.7 million related
to the core commissions and fees from acquisitions that had no comparable
revenues in the same period of 2005. Commissions and fees recorded in the first
quarter of 2005 from business divested prior to 2006 was $0.5 million. The
remaining net decrease is primarily due to net lost business in core commissions
and fees. As such, the Retail Division’s internal growth rate for core
commissions and fees was (0.9)% for the first quarter of 2006.
Income
before income taxes for the three months ended March 31, 2006 increased 8.6%,
or
$3.7 million, to $47.2 million. This increase is primarily due to the earnings
from acquisitions and improvement in other operating expenses.
National
Programs Division
The
National Programs Division is comprised of two units: Professional Programs,
which provides professional liability and related package products for certain
professionals delivered through nationwide networks of independent agents;
and
Special Programs, which markets targeted products and services designated for
specific industries, trade groups, public entities and market niches. Like
the
Retail Division, the National Programs Division’s revenues are primarily
commission-based.
Financial
information relating to our National Programs Division for the three month
periods ended March 31, 2006 and 2005 is as follows (in thousands, except
percentages):
|
|
2006
|
|
2005
|
|
Percent
Change
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
37,116
|
|
$
|
31,689
|
|
|
17.1
|
%
|
Contingent
commissions
|
|
|
1,777
|
|
|
1,147
|
|
|
54.9
|
%
|
Investment
income
|
|
|
97
|
|
|
75
|
|
|
29.3
|
%
|
Other
income, net
|
|
|
11
|
|
|
137
|
|
|
(92.0
|
)%
|
Total
revenues
|
|
|
39,001
|
|
|
33,048
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
15,672 |
|
|
13,975 |
|
|
12.1
|
%
|
Non-cash
stock-based compensation
|
|
|
131 |
|
|
91 |
|
|
44.0
|
%
|
Other
operating expenses
|
|
|
5,823 |
|
|
5,312 |
|
|
9.6
|
%
|
Amortization
|
|
|
2,188 |
|
|
2,031 |
|
|
7.7
|
%
|
Depreciation
|
|
|
536 |
|
|
471 |
|
|
13.8
|
%
|
Interest
|
|
|
2,617 |
|
|
2,673 |
|
|
(2.1
|
)%
|
Total
expenses
|
|
|
26,967 |
|
|
24,553 |
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
12,034
|
|
$
|
8,495
|
|
|
41.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
internal growth rate - core commissions and fees
|
|
|
6.8
|
%
|
|
7.0 |
% |
|
|
|
Employee
compensation and benefits ratio
|
|
|
40.2
|
%
|
|
42.3 |
% |
|
|
|
Other
operating expenses ratio
|
|
|
14.9
|
%
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
1,406
|
|
$
|
763
|
|
|
|
|
Total
assets at March 31
|
|
$
|
466,322
|
|
$
|
396,397
|
|
|
|
|
Total
revenues for National Programs for the three month period ended March 31, 2006
increased 18.0%, or $6.0 million, to $39.0 million. Profit-sharing contingent
commissions for the first quarter of 2006 increased $0.6 million over the first
quarter of 2005. Of the increase in revenues, approximately $2.5 million related
to core commissions and fees from acquisitions that had no comparable revenues
in the same period of 2005. The remaining increase is primarily due to net
new
business growth. Therefore, the National Programs Division internal growth
rate
for the core commissions and fees was 6.8%. Although the Professional Programs
Unit had a decrease of 5.7% in internal growth rate due to the continued
softening of professional liability rates, it was offset by a 13.3% internal
growth rate in our Special Programs Unit which was led by increased premium
rates in our condominium program at our Florida Intracoastal Underwriters
(“FIU”) profit center and net new business in our public entity business.
Income
before income taxes for the three months ended March 31, 2006 increased 41.7%,
or $3.5 million, to $12.0 million, over the same period in 2005, which is
primarily due to net new business growth and earnings from acquisitions
completed since the second quarter of 2005.
Brokerage
Division
The
Brokerage Division markets and sells excess and surplus commercial and personal
lines insurance and reinsurance, primarily through independent agents and
brokers. Like the Retail and National Programs Divisions, the Brokerage
Division’s revenues are primarily commission-based.
Financial
information relating to our Brokerage Division for the three month periods
ended
March 31, 2006 and 2005 is as follows (in thousands, except
percentages):
|
|
2006
|
|
2005
|
|
Percent
Change
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
35,143
|
|
$
|
21,366
|
|
|
64.5
|
%
|
Contingent
commissions
|
|
|
4,927
|
|
|
2,260
|
|
|
118.0
|
%
|
Investment
income
|
|
|
906
|
|
|
15
|
|
|
NMF
|
%
|
Other
income, net
|
|
|
6
|
|
|
8
|
|
|
(25.0
|
)%
|
Total
revenues
|
|
|
40,982
|
|
|
23,649 |
|
|
73.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
18,610
|
|
|
10,462
|
|
|
77.9
|
%
|
Non-cash
stock-based compensation
|
|
|
130
|
|
|
41
|
|
|
217.1
|
%
|
Other
operating expenses
|
|
|
7,434
|
|
|
3,340
|
|
|
122.6
|
%
|
Amortization
|
|
|
1,962
|
|
|
755
|
|
|
159.9
|
%
|
Depreciation
|
|
|
419
|
|
|
202 |
|
|
107.4
|
%
|
Interest
|
|
|
4,441
|
|
|
1,789
|
|
|
148.2
|
%
|
Total
expenses
|
|
|
32,996
|
|
|
16,589
|
|
|
98.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
7,986
|
|
$
|
7,060
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
internal growth rate - core commissions and fees
|
|
|
3.3
|
%
|
|
15.5
|
%
|
|
|
|
Employee
compensation and benefits ratio
|
|
|
45.4
|
%
|
|
44.2
|
%
|
|
|
|
Other
operating expenses ratio
|
|
|
18.1
|
%
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
377
|
|
$
|
220
|
|
|
|
|
Total
assets at March 31
|
|
$
|
566,478
|
|
$
|
402,876
|
|
|
|
|
The
Brokerage Division’s total revenues for the three month period ended March 31,
2006 increased 73.3%, or $17.3 million, to $41.0 million over the same period
in
2005. Proft-sharing contingent commissions for the first quarter of 2006
increased $2.7 million from the same quarter of 2005. Of the increase in
revenues, approximately $13.1 million related to core commissions and fees
from
acquisitions that had no comparable revenues in the same period of 2005.
The remaining increase is primarily due to net new business growth in core
commissions and fees.
Income
before income taxes for the three months ended March 31, 2006 increased 13.1%,
or $0.9 million, to $8.0 million over the same period in 2005, primarily
due to
acquisitions and net new business.
Services
Division
The
Services Division provides insurance-related services, including third-party
administration, consulting for the workers’ compensation and employee benefit
self-insurance markets, and managed healthcare services. Unlike our other
segments, approximately 96% of the Services Division’s 2006 commissions and fees
revenue is generated from fees, which are not significantly affected by
fluctuations in general insurance premiums.
Financial
information relating to our Services Division for the three month periods ended
March 31, 2006 and 2005 is as follows (in thousands, except
percentages):
|
|
2006
|
|
2005
|
|
Percent
Change
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
6,644
|
|
$
|
6,384
|
|
|
4.1
|
%
|
Contingent
commissions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Investment
income
|
|
|
13
|
|
|
-
|
|
|
NMF
|
|
Other
income, net
|
|
|
1
|
|
|
-
|
|
|
NMF
|
|
Total
revenues
|
|
|
6,658
|
|
|
6,384
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
3,900
|
|
|
3,805
|
|
|
2.5
|
%
|
Non-cash
stock-based compensation
|
|
|
30
|
|
|
31
|
|
|
(3.2
|
)%
|
Other
operating expenses
|
|
|
1,080
|
|
|
1,025
|
|
|
5.4
|
%
|
Amortization
|
|
|
11
|
|
|
11
|
|
|
-
|
%
|
Depreciation
|
|
|
105
|
|
|
106
|
|
|
(0.9
|
)%
|
Interest
|
|
|
1
|
|
|
1
|
|
|
-
|
%
|
Total
expenses
|
|
|
5,127
|
|
|
4,979
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
1,531
|
|
$
|
1,405
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
internal growth rate - core commissions and fees
|
|
|
4.1
|
%
|
|
11.3
|
%
|
|
|
|
Employee
compensation and benefits ratio
|
|
|
58.6
|
%
|
|
59.6
|
%
|
|
|
|
Other
operating expenses ratio
|
|
|
16.2
|
%
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
120
|
|
$
|
84
|
|
|
|
|
Total
assets at March 31
|
|
$
|
18,862
|
|
$
|
14,454
|
|
|
|
|
The
Service Division’s total revenues for the three month period ended March 31,
2006 increased 4.3%, or $0.3 million, to $6.7 million from the same period
in
2005. Core commissions and fees reflect an internal growth rate of 4.1% for
the
first quarter of 2006.
Income
before income taxes for the three month period ended March 31, 2006 increased
9.0%, or $0.1 million, to $1.5 million from the same period in 2005, primarily
as a result of net new business.
Other
As
discussed in Note 13 of the Notes to Consolidated Financial Statements, the
“Other” column in the Segment Information table includes any income and expenses
not allocated to reportable segments, and corporate-related items, including
the
inter-company interest expense charged to the reporting
segment.
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash
and cash equivalents of $73.7 million at March 31, 2006 reflected a decrease
of
$26.9 million from the $100.6 million balance at December 31, 2005. For the
three month period ended March 31, 2006, $52.0 million of cash was provided
from
operating activities. Also during this period, $59.4 million of cash was used
for acquisitions, $4.5 million was used for additions to fixed assets, $8.7
million was used for payments on long-term debt and $7.0 million was used for
payment of dividends.
Contractual
Cash Obligations
As
of
March 31, 2006, our contractual cash obligations were as follows:
(in
thousands)
|
|
Total
|
|
Less
Than
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
284,187
|
|
$
|
73,363
|
|
$
|
10,497
|
|
$
|
297
|
|
$
|
200,030
|
|
Capital
lease obligations
|
|
|
15
|
|
|
7
|
|
|
8
|
|
|
-
|
|
|
-
|
|
Other
long-term liabilities
|
|
|
13,304
|
|
|
10,600
|
|
|
930
|
|
|
654
|
|
|
1,120
|
|
Operating
leases
|
|
|
80,639
|
|
|
19,852
|
|
|
31,108
|
|
|
20,947
|
|
|
8,732
|
|
Interest
obligations
|
|
|
82,191
|
|
|
12,697
|
|
|
23,607
|
|
|
23,320
|
|
|
22,567
|
|
Maximum
future acquisition
|
|
|
145,539
|
|
|
85,326
|
|
|
60,204
|
|
|
9
|
|
|
-
|
|
contingency
payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations
|
|
$
|
605,875
|
|
$
|
201,845
|
|
$
|
126,354
|
|
$
|
45,227
|
|
$
|
232,449
|
|
In
July
2004, we completed a private placement of $200.0 million of unsecured senior
notes (the “Notes”). The $200.0 million Notes are divided into two series:
Series A, for $100.0 million due in 2011 and bearing interest at 5.57% per
year;
and Series B, for $100.0 million due in 2014 and bearing interest at 6.08%
per
year. The closing on the Series B Notes occurred on July 15, 2004. The closing
on the Series A Notes occurred on September 15, 2004. We have used the proceeds
from the Notes for general corporate purposes, including acquisitions and
repayment of existing debt. As of March 31, 2006, there was an outstanding
balance of $200.0 million on the Notes.
In
September 2003, we established an unsecured revolving credit facility with
a
national banking institution that provided for available borrowings of up to
$75.0 million, with a maturity date of October 2008, bearing an interest rate
based upon the 30-, 60- or 90-day London Interbank Offered Rate, (LIBOR) plus
0.625% to 1.625%, depending upon our quarterly ratio of funded debt to earnings
before interest, taxes, depreciation, amortization and non-cash stock grant
compensation. A commitment fee of 0.175% to 0.375% per annum was assessed on
the
unused balance. The 90-day LIBOR was 4.98% as of March 31, 2006. There were
no
borrowings against this facility at March 31, 2006.
In
January 2001, we entered into a $90.0 million, unsecured seven-year term loan
agreement with a national banking institution. Borrowings under this facility
bear interest based upon the 30-, 60- or 90-day LIBOR plus a credit risk spread
ranging from 0.50% to 1.00%, depending upon our quarterly ratio of funded debt
to earnings before interest, taxes, depreciation, amortization and non-cash
stock grant compensation. The 90-day LIBOR was 4.98% as of March 31, 2006.
The
loan was fully funded on January 3, 2001, and a balance of $22.5 million
remained outstanding as of March 31, 2006. This loan is to be repaid in equal
quarterly principal installments of $3.2 million through December 2007.
Effective January 2, 2002, we entered into an interest rate exchange (swap)
agreement with a national banking institution to lock in an effective fixed
interest rate of 4.53% for the remaining six years of the term loan, excluding
our credit risk spread of between 0.50% and 1.00%.
All
of
our credit agreements require us to maintain certain financial ratios and comply
with certain other covenants. We were in compliance with all such covenants
as
of March 31, 2006 and December 31, 2005.
Neither
we nor our subsidiaries has ever incurred off-balance sheet obligations through
the use of, or investment in, off-balance sheet derivative financial instruments
or structured finance or special purpose entities organized as corporations,
partnerships or limited liability companies or trusts.
We
believe that our existing cash, cash equivalents, short-term investment
portfolio and funds generated from operations, together with our unsecured
revolving credit facility described above, will be sufficient to satisfy our
normal liquidity needs through at least the end of 2006. Additionally, we
believe that funds generated from future operations will be sufficient to
satisfy our normal liquidity needs, including the required annual principal
payments on our long-term debt.
Historically,
much of our cash has been used for acquisitions. If additional acquisition
opportunities should become available that exceed our current cash flow, we
believe that given our relatively low debt-to-total capitalization ratio, we
would have the ability to raise additional capital through either the private
or
public debt markets.
Disclosure
Regarding Forward-Looking Statements
We
make
“forward-looking statements” within the “safe harbor” provision of the Private
Securities Litigation Reform Act of 1995 throughout this report and in the
documents we incorporate by reference into this report. You can identify these
statements by forward-looking words such as “may,” “will,” “expect,”
“anticipate,” “believe,” “estimate,” “plan” and “continue” or similar words. We
have based these statements on our current expectations about future events.
Although we believe that our expectations reflected in or suggested by our
forward-looking statements are reasonable, our actual results may differ
materially from what we currently expect. Important factors which could cause
our actual results to differ materially from the forward-looking statements
in
this report include:
|
·
|
material
adverse changes in economic conditions in the markets we
serve;
|
|
·
|
future
regulatory actions and conditions in the states in which we conduct
our
business;
|
|
·
|
competition
from others in the insurance agency and brokerage
business;
|
|
·
|
a
significant portion of business written by Brown & Brown is for
customers located in Arizona, California, Florida, Georgia, New Jersey,
New York, Pennsylvania and Washington. Accordingly, the occurrence
of
adverse economic conditions, an adverse regulatory climate, or a
disaster
in any of these states could have a material adverse effect on our
business, although no such conditions have been encountered in the
past;
|
|
·
|
the
integration of our operations with those of businesses or assets
we have
acquired or may acquire in the future and the failure to realize
the
expected benefits of such integration;
and
|
|
·
|
other
risks and uncertainties as may be detailed from time to time in our
public announcements and Securities and Exchange Commission (“SEC”)
filings.
|
You
should carefully read this report completely and with the understanding that
our
actual future results may be materially different from what we expect. All
forward-looking statements attributable to us are expressly qualified by these
cautionary statements.
We
do not undertake any obligation to publicly update or revise any forward-looking
statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and equity prices. We are exposed to market
risk
through our investments, revolving credit line and term loan
agreements.
Our
invested assets are held as cash and cash equivalents, restricted cash,
available-for-sale marketable equity securities, non-marketable equity
securities and certificates of deposit. These investments are subject to
interest rate risk and equity price risk. The fair values of our cash and cash
equivalents, restricted cash, and certificates of deposit at March 31, 2006
and December 31, 2005 approximated their respective carrying values due to
their
short-term duration and therefore such market risk is not considered to be
material.
We
do not
actively invest or trade in equity securities. In addition, we generally dispose
of any significant equity securities received in conjunction with an acquisition
shortly after the acquisition date. However, we have no current intentions
to
add to or dispose of any of the 559,970 common stock shares of Rock-Tenn
Company, a publicly-held New York Stock Exchange listed company, which we have
owned for more than ten years. The investment in Rock-Tenn Company accounted
for 71% and 68% of the total value of available-for-sale marketable equity
securities, non-marketable equity securities and certificates of deposit as
of
March 31, 2006 and December 31, 2005, respectively. Rock-Tenn Company's closing
stock price at March 31, 2006 and December 31, 2005 was $14.99 and $13.65
respectively. Our exposure to equity price risk is primarily related to the
Rock-Tenn Company investment. As of March 31, 2006, the value of the Rock-Tenn
Company investment was $8,394,000.
To
hedge
the risk of increasing interest rates from January 2, 2002 through the remaining
six years of our seven-year $90 million term loan, on December 5, 2001 we
entered into an interest rate swap agreement that effectively converted the
floating rate interest payments based on LIBOR to fixed interest rate payments
at 4.53%. This agreement did not impact or change the required 0.50% to 1.00%
credit risk spread portion of the term loan. We do not otherwise enter into
derivatives, swaps or other similar financial instruments for trading or
speculative purposes.
At
March
31, 2006, the interest rate swap agreement was as follows:
|
|
|
|
|
(in
thousands, except percentages)
|
Contractual/
Notional
Amount
|
Fair
Value
|
Weighted
Average
Pay
Rates
|
Weighted
Average
Received
Rates
|
|
|
|
|
|
Interest
rate swap agreement
|
$22,500
|
$138
|
4.53%
|
4.25%
|
ITEM
4.
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation (the “Evaluation”) required by Rules 13a-15 and
15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), under the supervision and with the participation of our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15 and 15d-15
under the Exchange Act (“Disclosure Controls”). Based on the Evaluation, our CEO
and CFO concluded that the design and operation of our Disclosure Controls
provide reasonable assurance that the Disclosure Controls, as described in
this
Item 4, are effective in alerting them timely to material information
required to be included in our periodic SEC reports.
Changes
in Internal Controls
There
has
not been any change in our internal control over financial reporting identified
in connection with the Evaluation that occurred during the quarter ended March
31, 2006 that has materially affected, or is reasonably likely to materially
affect, those controls.
Inherent
Limitations of Internal Control Over Financial Reporting
Our
management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.
The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
CEO
and CFO Certifications
Exhibits
31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively.
The
Certifications are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item of this
report, which you are currently reading, is the information concerning the
Evaluation referred to in the Section 302 Certifications and this
information should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.
ITEM
1.
LEGAL PROCEEDINGS
As
previously disclosed, the Company (a) is one of numerous defendants to putative
class action lawsuits purporting to be brought on behalf of policyholders and
consolidated and transferred to a New Jersey federal court by the Judicial
Panel
on Multi-District Litigation (the “Antitrust Actions”), (b) has received a
shareholder demand, and (c) has supplied information to various governmental
agencies in response to verbal and written requests and subpoenas, all
concerning issues related to compensation, and specifically related to the
payment of contingent commissions and override commissions to insurance
intermediaries, including the Company, by insurance carriers. The Company cannot
currently predict the impact or resolution of the Antitrust Actions, the
shareholder demand or the various governmental inquiries or lawsuits and thus
cannot reasonably estimate a range of possible loss, which could be material,
or
whether the resolution of these matters may harm the Company’s business and/or
lead to a decrease in or elimination of contingent commissions and override
commissions, which could have a material adverse impact on the Company’s
consolidated financial condition.
The
Company is involved in numerous pending or threatened proceedings by or against
Brown & Brown, Inc. or one or more of its subsidiaries that arise in the
ordinary course of business. The damages that may be claimed against the Company
in these various proceedings are substantial, including in many instances claims
for punitive or extraordinary damages. Some of these claims and lawsuits have
been resolved, others are in the process of being resolved, and others are
still
in the investigation or discovery phase. The Company will continue to respond
appropriately to these claims and lawsuits, and to vigorously protect its
interests. Although the ultimate outcome of the matters referenced in this
paragraph cannot be ascertained and liabilities in indeterminate amounts may
be
imposed on Brown & Brown, Inc. or its subsidiaries, on the basis of present
information, availability of insurance and legal advice received, it is the
opinion of management that the disposition or ultimate determination of such
claims will not have a material adverse effect on the Company’s consolidated
financial position. However, (i) as one or more of the Company’s insurance
carriers could take the position that portions of these claims are not covered
by the Company’s insurance, (ii) to the extent that payments are made to resolve
claims and lawsuits, applicable insurance policy limits are eroded, and (iii)
as
the claims and lawsuits relating to these matters are continuing to develop,
it
is possible that future results of operations or cash flows for any particular
quarterly or annual period could be materially and adversely affected by
unfavorable resolutions of these matters.
For
a more complete discussion of the foregoing
matters, please see Item 3 of Part I of our Annual Report on Form 10-K filed
with the Securities and Exchange Commission for our fiscal year ended December
31, 2005 and Note 13 to the Consolidated Financial Statements contained in
Item
8 of Part II thereof.
There
were no material changes from the risk factors previously disclosed in Item
1A,
“Risk Factors” included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005.
ITEM
6.
EXHIBITS AND REPORTS ON FORM 8-K
|
(a)
|
EXHIBITS
|
|
|
|
|
|
|
|
The
following exhibits are filed as a part of this Report:
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|
|
|
|
|
|
3.1
|
Articles
of Amendment to Articles of Incorporation (adopted April 24, 2003)
(incorporated by reference to Exhibit 3a to Form 10-Q for the quarter
ended March 31, 2003), and Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3a to Form 10-Q for the quarter
ended March 31, 1999).
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|
|
|
|
|
|
3.2
|
Bylaws
(incorporated by reference to Exhibit 3b to Form 10-K for the year
ended
December 31, 2002).
|
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|
|
|
|
4.1
|
Note
Purchase Agreement, dated as of July 15, 2004, among the Company
and the
listed Purchasers of the 5.57% Series A Senior Notes due September
15,
2011 and 6.08% Series B Senior Notes due July 15, 2014. (incorporated
by
reference to Exhibit 4.1 to Form 10-Q for the quarter ended June
30,
2004).
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|
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|
|
|
|
31.1
|
Rule 13a-14(a)/15d-14(a)
Certification by the Chief Executive Officer of the
Registrant.
|
|
|
|
|
|
|
31.2
|
Rule 13a-14(a)/15d-14(a)
Certification by the Chief Financial Officer of the
Registrant.
|
|
|
|
|
|
|
32.1
|
Section 1350
Certification by the Chief Executive Officer of the
Registrant.
|
|
|
|
|
|
|
32.2
|
Section 1350
Certification by the Chief Financial Officer of the
Registrant.
|
|
|
|
|
|
(b)
|
REPORTS
ON FORM 8-K
|
|
|
|
|
|
The
Company filed a current report on Form 8-K on February 10, 2006.
This
current report reported Item 12, which
announced that the Company issued a press release on February 9,
2006,
relating to the Company’s earnings for
the fourth quarter of fiscal year
2005.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
BROWN
& BROWN, INC.
|
|
|
|
|
|
/S/
CORY T. WALKER
|
Date:
May 10, 2006
|
Cory
T. Walker
Sr.
Vice President, Chief Financial Officer and
Treasurer
(duly
authorized officer, principal financial officer
and principal accounting
officer)
|
29