BRP GROUP, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A. Risk Factors and Note Regarding Forward-Looking Statements included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K. THE COMPANYBRP Group, Inc. ("BRP Group ," the "Company," "we," "us" or "our") is a rapidly growing independent insurance distribution firm delivering solutions that give our Clients the peace of mind to pursue their purpose, passion and dreams. We support our Clients, Colleagues,Insurance Company Partners and communities through the deployment of vanguard resources and capital to drive organic and inorganic growth. We are innovating the industry by taking a holistic and tailored approach to risk management, insurance and employee benefits. Our growth plan includes increased geographic representation across theU.S. , expanded client value propositions and new lines of insurance to meet the needs of evolving lifestyles, business risks and healthcare funding. We are a destination employer supported by an award-winning culture, powered by exceptional people and fueled by industry-leading growth and innovation. We represent over 450,000 Clients acrossthe United States and internationally. Our more than 700 Colleagues include approximately 200Risk Advisors , who are fiercely independent, relentlessly competitive and "insurance geeks." We have over 50 offices, all of which are equipped to provide diversified products and services to empower our clients at every stage through our four Operating Groups. • Middle Market provides expertly-designed private risk management, commercial risk management and employee benefits solutions for mid-to-large-size businesses and high net worth individuals, as well as their families.
• MainStreet offers personal insurance, commercial insurance and life and
health solutions to individuals and businesses in their communities.
• Medicare offers consultation for government assistance programs andsolutions to seniors and Medicare-eligible individuals through a network
of agents.
• Specialty delivers specialty insurers, professionals, individuals andniche industry businesses expanded access to exclusive specialty markets,
capabilities and programs requiring complex underwriting and placement.
In 2011, we adopted the "Azimuth" as our corporate constitution. Named after a historical navigation tool used to find "true north," the Azimuth asserts our core values, business basics and stakeholder promises. The ideals encompassed by the Azimuth support our mission to deliver indispensable, tailored insurance and risk management insights and solutions to our clients. We strive to be regarded as the preeminent insurance advisory firm fueled by relationships, powered by people and exemplified by client adoption and loyalty. This type of environment is upheld by the distinct vernacular we use to describe our services and culture. We are a firm, instead of an agency; we have Colleagues, instead of employees; we haveRisk Advisors , instead of producers/agents. We serve clients instead of customers and we refer to our acquisitions as Partnerships. The insurance brokerage market is seasonal and our results of operations are somewhat affected by seasonal trends. Our Adjusted EBITDA and Adjusted EBITDA Margins are typically highest in the first quarter and lowest in the fourth quarter. This variation is primarily due to fluctuations in our revenues, while overhead remains consistent throughout the year. Our revenues are generally highest in the first quarter due to the impact of contingent payments received in the first quarter fromInsurance Company Partners that we cannot readily estimate before receipt without the risk of significant reversal and a higher degree of first quarter policy commencements and renewals in Medicare and certain Middle Market lines of business such as employee benefits and commercial. In addition, a higher proportion of our first quarter revenue is derived from our highest margin businesses. As discussed further below, the COVID-19 pandemic may skew these general trends due to reduced amounts of new business and reductions in business from existing Clients related to the pandemic. Partnerships can significantly impact Adjusted EBITDA and Adjusted EBITDA Margins in a given year and may increase the amount of seasonality within the business, especially results attributable to Partnerships that have not been fully integrated into our business or owned by us for a full year.
24
--------------------------------------------------------------------------------
PARTNERSHIPS
We utilize strategic acquisitions, which we refer to as Partnerships, to complement and expand our business. The financial impact of Partnerships may affect the comparability of our results from period to period. Our acquisition strategy also entails certain risks, including the risks that we may not be able to successfully source, close, integrate and effectively manage businesses that we acquire. To mitigate that risk, we have a professional team focused on finding new Partners and integrating new Partnerships. We plan to execute on numerous Partnerships annually as it is a key pillar in our long-term growth strategy over the next ten years. We completed four Partnerships for an aggregate purchase price of$59.7 million during the three months endedMarch 31, 2020 and one Partnership for an aggregate purchase price of$37.0 million during the three months endedMarch 31, 2019 . The most significant Partnerships that we have completed during 2020 are discussed in greater detail below. For additional information on the Partnerships that we have completed during 2020, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1. Financial Statements of this report. EffectiveJanuary 1, 2020 , we purchased certain assets and intellectual and intangible rights and assumed certain liabilities of Lanier, a Middle Market Partner for cash consideration of$24.5 million and fair value of noncontrolling interest of$6.1 million and fair value of contingent earnout consideration of$1.6 million . The Partnership was made to expand our Middle Market presence in the healthcare, higher education, construction, property and non-profit businesses throughoutFlorida and other states. EffectiveJanuary 1, 2020 , we purchased certain assets and intellectual and intangible rights and assumed certain liabilities of Highland, a Specialty Partner, for cash consideration of$6.6 million , fair value of noncontrolling interest of$4.5 million and fair value of contingent earnout consideration of$788,000 . The Partnership was made to expand our Specialty presence in the healthcare and cyber insurance businesses and to add capabilities within the real estate business. NOVEL CORONAVIRUS (COVID-19) InMarch 2020 , theWorld Health Organization declared a novel strain of the coronavirus, COVID-19, a pandemic. This COVID-19 outbreak has become increasingly widespread and severely restricted the level of economic activity around the world. In response to this outbreak, the governments of many countries, states, cities and other geographic regions, including inthe United States , have taken preventive or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forgo their time outside of their homes. Inthe United States , temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. Our Clients and Colleagues are our first priority and we have taken steps to ensure their safety by implementing a remote work environment for the majority of our Colleagues without disruption to Client service. We have funded theBRP True North Colleague Fund to assist with relief for COVID-19 and other qualifying disasters for our Colleagues experiencing extraordinary hardship. We are currently matching Colleague donations dollar-for dollar. We intend to continue to execute on our strategic plans and operational initiatives during the pandemic. However, given the uncertainty regarding the spread and severity of COVID-19, the duration and scope of the government shutdowns, the nature of societal responses and the adverse effects on the national and global economy, the related financial impact on our business cannot be accurately predicted at this time. The national and global economies have rapidly contracted as a result of COVID-19. The decreased level of economic activity is leading to, and is likely to continue to lead to, a decline in exposure units and rising unemployment. In addition, the uncertainties associated with the protective and preventive measures being put in place or recommended by both governmental entities and other businesses, among other uncertainties, may result in delays or modifications to our plans and initiatives. See Part II, Item 1A. "Risk Factors - The ongoing novel coronavirus (COVID-19) pandemic could result in declines in business and increases in claims that could adversely affect our business, financial condition and results of operations." RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDEDMARCH 31, 2020 AND 2019 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements for the three months endedMarch 31, 2020 and the related notes and other financial information included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Part II, Item 1A. Risk Factors. 25
--------------------------------------------------------------------------------
The following is a discussion of our consolidated results of operations for each
of the three months ended
For the Three Months Ended March
31,
(in thousands) 2020 2019 Variance
Revenues:
Commissions and fees $ 54,159 $ 29,837 $ 24,322
Operating expenses:
Commissions, employee compensation and benefits 34,548 16,286 18,262
Other operating expenses 8,885 4,002 4,883
Amortization expense 3,596 876 2,720
Change in fair value of contingent consideration 1,661 (2,786 ) 4,447
Depreciation expense 165 127 38
Total operating expenses 48,855 18,505 30,350
Operating income 5,304 11,332 (6,028 )
Interest expense, net (585 ) (1,590 ) 1,005
Income before income taxes 4,719 9,742 (5,023 )
Income tax provision 12 - 12
Net income 4,707 9,742 (5,035 )
Less: net income attributable to noncontrolling
interests 3,239 9,742 (6,503 )
Net income attributable to BRP Group, Inc. $ 1,468 $
-
Commissions and Fees We earn commissions and fees by facilitating the arrangement betweenInsurance Company Partners and individuals or businesses for the carrier to provide insurance to the insured party. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depends on the type of insurance, the particular Insurance Company Partner and the nature of the services provided. Under certain arrangements with clients, we earn pre-negotiated service fees in lieu of commissions. Additionally, we may also receive fromInsurance Company Partners a profit-sharing commission, or straight override, which represent forms of variable consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for volume, growth or retention. Commissions and fees increased by$24.3 million for the three months endedMarch 31, 2020 as compared to the same period of 2019. This increase was primarily attributable to commissions and fees attributable to Partners acquired during 2019 and 2020 prior to their having reached the twelve-month owned mark (such commissions and fees, the "Partnership Contribution"), which accounted for$22.9 million commissions and fees, in addition to$1.5 million of organic growth.
26
--------------------------------------------------------------------------------
Major Sources of Commissions and Fees The following table sets forth our commissions and fees by major source by amount for the periods indicated:
For the Three Months Ended
March 31,
(in thousands) 2020 2019 Variance
Direct bill revenue $ 28,109 $ 19,602 $ 8,507
Agency bill revenue 16,429 4,570 11,859
Profit-sharing revenue 5,124 4,453 671
Policy fee and installment fee revenue 3,382 - 3,382
Consulting and service fee revenue 715 647 68
Other income 400 565 (165 )
Total commissions and fees $ 54,159 $ 29,837 $ 24,322
Direct bill revenue represents commission revenue earned by providing insurance
placement services to clients, primarily for private risk management, commercial
risk management, employee benefits and Medicare insurance types. Direct bill
revenue increased by $8.5 million for the three months ended March 31, 2020 as
compared to the same period of 2019. This increase was primarily attributable to
the Partnership Contribution, which accounted for $6.9 million direct bill
revenue, in addition to organic growth. Organic growth for direct bill revenue
was negatively impacted by $0.2 million as a result of incremental cancellation
reserves related to COVID-19.
Agency bill revenue primarily represents commission revenue earned by providing
insurance placement services to clients wherein we act as an agent on behalf of
the Client. Agency bill revenue increased by $11.9 million for the three months
ended March 31, 2020 as compared to the same period of 2019. This increase was
primarily attributable to the Partnership Contribution, which accounted for
$11.1 million agency bill revenue, in addition to organic growth. Organic growth
for agency bill revenue was negatively impacted by $0.1 million as a result of
incremental cancellation reserves related to COVID-19.
Profit-sharing revenue represents bonus-type revenue that is earned by us as a
sales incentive provided by certain Insurance Company Partners . Profit-sharing
revenue increased by $0.7 million for the three months ended March 31, 2020 as
compared to the same period of 2019. This increase was primarily attributable to
the Partnership Contribution, which accounted for $1.3 million profit-sharing
revenue, offset in part by a decrease of $0.6 million in profit sharing revenue
generated by legacy businesses as a result of expected higher loss ratios in our
Middle Market and MainStreet Operating Groups. We expect higher loss ratios to
continue to reduce contingent revenue for our MainStreet business through June
2020 and increase base commissions and fees towards the end of 2020 and into
2021.
Policy fee and installment fee revenue represents revenue earned for acting in
the capacity of an MGA and providing payment processing and services and other
administrative functions on behalf of Insurance Company Partners . We earned $3.4
million of policy fee and installment fee revenue during the three months ended
March 31, 2020 from our "MGA of the Future," which was acquired April 1, 2019
and resides in our Specialty Operating Group .
Commissions, Employee Compensation and Benefits
Commissions, employee compensation and benefits is our largest expense. It
consists of (a) base compensation comprising salary, bonuses and benefits paid
and payable to Colleagues, commissions paid to Colleagues and outside
commissions paid to others; and (b) equity-based compensation associated with
the grants of restricted interest awards to senior management, Risk Advisors and
executives. We expect to continue to experience a general rise in commissions,
employee compensation and benefits expense commensurate with expected growth in
our sales and headcount and as a result of increasing employee compensation
related to ongoing public company costs. We operate in competitive markets for
human capital and need to maintain competitive compensation levels as we expand
geographically and create new products and services.
Our compensation arrangements with our employees contain significant bonus or
commission components driven by the results of our operations. Therefore, as we
grow commissions and fees, we expect compensation costs to rise.
Commissions, employee compensation and benefits expenses increased by $18.3
million for the three months ended March 31, 2020 as compared to the same period
of 2019. This increase was primarily attributable to the Partnership
Contribution, which accounted for $14.5 million commissions, employee
compensation and benefits. In addition, we had increased compensation of $1.6
million as a result of 2019 hiring for new roles necessary as a public company
and $1.0 million related to share-based compensation expense.
27
--------------------------------------------------------------------------------
Other Operating Expenses Other operating expenses include travel, accounting, legal and other professional fees, placement fees, rent, office expenses, depreciation and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. In addition, we are investing in the expansion of ourTampa offices to accommodate our growth plans, which will result in an increase to rent expense beginning inApril 2020 . Certain corporate expenses are allocated to the Operating Groups. Other operating expenses increased by$4.9 million for the three months endedMarch 31, 2020 as compared to the same period of 2019. This increase was primarily attributable to operating expenses such as additional rent and increased software costs, professional fees, travel, and other expenses from the Partnership Contribution, which accounted for$2.0 million other operating expenses. In the first quarter of 2020, we had public company costs of$0.7 million and higher professional fees related to being a public company. Amortization Expense Amortization expense increased by$2.7 million for the three months endedMarch 31, 2020 as compared to the same period of 2019. This increase was driven by amortization of$1.8 million related to intangible assets capitalized in connection with theMillennial Specialty Insurance LLC "MSI" Partner, in addition to amortization related to other Partners acquired since the first quarter of 2019. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration was$1.7 million for the three months endedMarch 31, 2020 as compared to$(2.8) million for the same period of 2019. The change in fair value of contingent consideration results from fluctuations in the value of the relevant measurement basis, normally revenue or EBITDA, of our Partners. We had significantly higher estimates for the contingent earnout liabilities of theMSI and Foundation Insurance of Florida , LLC ("Foundation Insurance ") Partners during the first quarter of 2020 related to growth of their business during the period under consolidation. We had lower estimates for the contingent earnout liabilities of certain Partners during the first quarter of 2019, particularly in the Middle Market business. Interest Expense, Net Interest expense, net decreased by$1.0 million for the three months endedMarch 31, 2020 as compared to the same period of 2019. This decrease was attributable to a lower overall debt balance during the first quarter of 2020 compared to the same period of 2019 as a result of our having paid off one of our credit facilities inOctober 2019 in connection with our initial public offering. NON-GAAP FINANCIAL MEASURES Adjusted EBITDA, Adjusted EBITDA Margin, Organic Revenue, Organic Revenue Growth, Adjusted Net Income and Adjusted Diluted Earnings Per Share ("EPS"), are not measures of financial performance under GAAP and should not be considered substitutes for GAAP measures, including commissions and fees (for Organic Revenue and Organic Revenue Growth), net income (loss) (for Adjusted EBITDA and Adjusted EBITDA Margin) net income (loss) attributable toBRP Group, Inc. (for Adjusted Net Income) or diluted EPS (for Adjusted Diluted EPS), which we consider to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these non-GAAP financial measures in isolation or as substitutes for commissions and fees, net income (loss) or other consolidated income statement data prepared in accordance with GAAP. Other companies in our industry may define or calculate these non-GAAP financial measures differently than we do, and accordingly these measures may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA eliminates the effects of financing, depreciation, amortization and change in fair value of contingent consideration. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization, change in fair value of contingent consideration and certain items of income and expense, including share-based compensation expense, transaction-related expenses related to Partnerships including severance, and certain non-recurring costs, including those related to our initial public offering and loss on modification and extinguishment of debt. We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance, and that the presentation of this measure enhances an investor's understanding of our financial performance.
28
--------------------------------------------------------------------------------
Adjusted EBITDA Margin is Adjusted EBITDA divided by commissions and fees.
Adjusted EBITDA is a key metric used by management and our board of directors to
assess our financial performance. We believe that Adjusted EBITDA is an
appropriate measure of operating performance because it eliminates the impact of
expenses that do not relate to business performance, and that the presentation
of this measure enhances an investor's understanding of our financial
performance. We believe that Adjusted EBITDA Margin is helpful in measuring
profitability of operations on a consolidated level.
Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as
analytical tools. For example, Adjusted EBITDA and Adjusted EBITDA Margin:
• do not reflect any cash capital expenditure requirements for the assets
being depreciated and amortized that may have to be replaced in the
future;
• do not reflect changes in, or cash requirements for, our working capital
needs;
• do not reflect the impact of certain cash charges resulting from matters
we consider not to be indicative of our ongoing operations;
• do not reflect the interest expense or the cash requirements necessary to
service interest or principal payments on our debt;
• do not reflect stock-based compensation expense and other non-cash
charges; and
• exclude certain tax payments that may represent a reduction in cash
available to us.
We calculate Organic Revenue Growth based on commissions and fees for the
relevant period by excluding the first twelve months of commissions and fees
generated from new Partners. Organic Revenue Growth is the change in Organic
Revenue period-to-period, with prior period results adjusted for Organic
Revenues that were excluded in the prior period because the relevant Partners
had not yet reached the twelve-month owned mark, but which have reached the
twelve-month owned mark in the current period. For example, revenues from a
Partner acquired on June 1, 2019 are excluded from Organic Revenue for 2019.
However, after June 1, 2020 , results from June 1, 2019 to December 31, 2019 for
such Partners are compared to results from June 1, 2020 to December 31, 2020 for
purposes of calculating Organic Revenue Growth in 2020. Organic Revenue Growth
is a key metric used by management and our board of directors to assess our
financial performance. We believe that Organic Revenue and Organic Revenue
Growth are appropriate measures of operating performance as they allow investors
to measure, analyze and compare growth in a meaningful and consistent manner.
Adjusted Net Income is presented for the purpose of calculating Adjusted Diluted
EPS. We define Adjusted Net Income as net income (loss) adjusted for
amortization, change in fair value of contingent consideration and certain items
of income and expense, including costs related to our initial public offering,
share-based compensation expense, transaction-related expenses related to
Partnerships including severance, and certain non-recurring costs that, in the
opinion of management, significantly affect the period-over-period assessment of
operating results, and the related tax effect of those adjustments.
Adjusted Diluted EPS measures our per share earnings excluding certain expenses
as discussed above and assuming all shares of Class B common stock were
exchanged for Class A common stock. Adjusted Diluted EPS is calculated as
Adjusted Net Income divided by adjusted dilutive weighted-average shares
outstanding. We believe Adjusted Diluted EPS is useful to investors because it
enables them to better evaluate per share operating performance across reporting
periods.
29--------------------------------------------------------------------------------
Adjusted EBITDA and Adjusted EBITDA Margin
The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to net
income, which we consider to be the most directly comparable GAAP financial
measure to Adjusted EBITDA and Adjusted EBITDA Margin:
For the Three Months Ended March 31,
(in thousands, except percentages) 2020 2019
Commissions and fees $ 54,159 $ 29,837
Net income $ 4,707 $ 9,742
Adjustments to net income:
Amortization expense 3,596 876
Change in fair value of contingent consideration 1,661 (2,786 )
Share-based compensation 1,139 130
Interest expense, net 585 1,590
Depreciation expense 165 127
Transaction-related Partnership expenses 1,848 257
Severance related to Partnership activity 53 -
Offering expenses - 38
Income tax provision 12 -
Other 266 155
Adjusted EBITDA $ 14,032 $ 10,129
Adjusted EBITDA Margin 26 % 34 %
Organic Revenue and Organic Revenue Growth
The following table reconciles Organic Revenue to commissions and fees, which we
consider to be the most directly comparable GAAP financial measure to Organic
Revenue:
For the Three Months Ended March 31,
(in thousands, except percentages) 2020
2019
Commissions and fees $ 54,159 $
29,837
Partnership commissions and fees (1) (22,868 ) (5,358 ) Organic Revenue $ 31,291 $
24,479
Organic Revenue Growth (2) $ 1,454 $
2,693
Organic Revenue Growth % (2) 5 %
12 %
__________
(1) Includes the first twelve months of such commissions and fees generated from
newly acquired Partners.
(2) Organic Revenue for the three months ended
Organic Revenue Growth for the three months ended
million, which is adjusted to reflect revenues from Partnerships that reached
the twelve-month owned mark during the three months ended March 31, 2020 .
30--------------------------------------------------------------------------------
Adjusted Net Income and Adjusted Diluted EPS The following table reconciles Adjusted Net Income to net income attributable toBRP Group, Inc. and reconciles Adjusted Diluted EPS to diluted earnings per share attributable toBRP Group, Inc. Class A common stock: For the Three Months (in thousands, except per share data) EndedMarch 31, 2020 Net income attributable toBRP Group, Inc. $
1,468
Net income attributable to noncontrolling interests
3,239
Amortization expense
3,596
Change in fair value of contingent consideration
1,661
Share-based compensation
1,139
Transaction-related Partnership expenses
1,848
Amortization of deferred financing costs
76
Severance related to Partnership activity 53 Other 266 Adjusted pre-tax income 13,346 Adjusted income taxes (1) 1,321 Adjusted Net Income $ 12,025
Weighted-average shares of Class A common stock outstanding - diluted
19,816
Exchange of Class B shares (2)
43,541
Adjusted dilutive weighted-average shares outstanding 63,357 Adjusted Diluted EPS $ 0.19 Diluted earnings per share $
0.07
Effect of exchange of Class B shares and net income attributable to noncontrolling interests per share
-
Other adjustments to net income per share
0.14
Adjusted income taxes per share (0.02 ) Adjusted Diluted EPS $ 0.19 ___________
(1) Represents corporate income taxes at assumed effective tax rate of 9.9%
applied to adjusted pre-tax income.
(2) Assumes the full exchange of Class B shares for Class A common stock pursuant
to the Amended LLC Agreement.
31--------------------------------------------------------------------------------
RESULTS OF OPERATIONS BY OPERATING GROUP Commissions and Fees In the Middle Market, MainStreet and Specialty Operating Groups, the Company generates commissions and fees from insurance placement under both agency bill and direct bill arrangements. In addition, the Company generates profit-sharing income in each of those segments based on either the underlying Book of Business or performance, such as loss ratios. In theMiddle Market Operating Group only, the Company generates fees from service fee and consulting arrangements. Service fee arrangements are in place with certain customers in lieu of commission arrangements. In theMedicare Operating Group , BRP generates commissions and fees in the form of direct bill insurance placement and marketing income. Marketing income is earned through co-branded marketing campaigns with the Company'sInsurance Company Partners . The following table sets forth our commissions and fees byOperating Group by amount and as a percentage of our commissions and fees: For the Three Months Ended March 31, 2020 2019 Variance Percent Change from Prior (in thousands) Amount Percent of Business Amount Percent of Business Amount Year Commissions and fees by Operating Group Middle Market$ 22,032 41 %$ 16,539 55 %$ 5,493 33 % Specialty 17,416 32 % 2,831 9 % 14,585 n/m MainStreet 8,308 15 % 6,531 22 % 1,777 27 % Medicare 6,403 12 % 3,936 13 % 2,467 63 %$ 54,159 $ 29,837 $ 24,322 __________ n/m not meaningful Commissions and fees increased across all Operating Groups for the three months endedMarch 31, 2020 as compared to the same period of 2019. These increases were primarily attributable to the Partnership Contribution, which accounted for$5.0 million ,$13.9 million ,$1.4 million and$2.6 million commissions and fees in the Middle Market, Specialty, MainStreet and Medicare Operating Groups, respectively, during 2020. The remaining variances are attributable to organic growth. OurMiddle Market Operating Group is most likely to feel the impact of the pandemic should the economic contraction persist and businesses act to further reduce their workforces.The Specialty Operating Group had higher contingent revenue related to organic growth during the first quarter of 2020 as a result of its 2019 Partnership, while the Middle Market and MainStreet Operating Groups had lower contingent revenue related to organic growth during the same period related to poor loss trends in ourFlorida -based personal lines businesses and private risk business in 2019. We expect higher loss ratios to continue to reduce contingent revenue for our MainStreet business throughJune 2020 and increase base commissions and fees towards the end of 2020 and into 2021 for those Operating Groups. Policies in force for Specialty'sMSI Partnership grew by 107,147, or 36%, to 401,520 atMarch 31, 2020 from 294,373 atMarch 31, 2019 . Since theMSI Partnership was not completed untilApril 2019 , the 36% policies in force growth was calculated including periods during which MSI was not owned by the Company.
32
--------------------------------------------------------------------------------
Commissions, Employee Compensation and Benefits The following table sets forth our commissions, employee compensation and benefits byOperating Group by amount and as a percentage of our commissions, employee compensation and benefits: For the Three Months Ended March 31, 2020 2019 Variance Percent Change from Prior (in thousands) Amount Percent of Business Amount Percent of Business Amount Year Commissions, employee compensation and benefits by Operating Group Middle Market$ 12,620 37 %$ 8,596 53 %$ 4,024 47 % Specialty 12,801 37 % 2,553 16 % 10,248 n/m MainStreet 3,962 11 % 3,083 19 % 879 29 % Medicare 3,016 9 % 1,688 10 % 1,328 79 % Corporate and Other 2,149 6 % 366 2 % 1,783 n/m$ 34,548 $ 16,286 $ 18,262 __________ n/m not meaningful Commissions, employee compensation and benefits expenses increased across all Operating Groups for the three months endedMarch 31, 2020 as compared to the same period of 2019. These increases were primarily attributable to the Partnership Contribution, which accounted for$2.9 million ,$9.7 million ,$0.7 million and$1.2 million commissions, employee compensation and benefits expenses in the Middle Market, Specialty, MainStreet and Medicare Operating Groups, respectively, during 2020. Commissions, employee compensation and benefits expenses also increased throughout the four Operating Groups as a result of continued investments in Growth Services to support our growth, which costs are allocated among the Operating Groups. Commissions, employee compensation and benefits expenses for Corporate and Other increased as a result of hiring new roles necessary as a public company and due to$1.0 million of additional share-based compensation expense incurred during 2020. Other Operating Expenses The following table sets forth our other operating expenses byOperating Group by amount and as a percentage of our other operating expenses: For the Three Months Ended March 31, 2020 2019 Variance Percent Change from Prior (in thousands) Amount Percent of Business Amount Percent of Business Amount Year Other operating expenses by Operating Group Middle Market$ 2,741 31 %$ 1,792 45 %$ 949 53 % Specialty 1,483 17 % 355 9 % 1,128 318 % MainStreet 997 11 % 926 23 % 71 8 % Medicare 790 9 % 473 12 % 317 67 % Corporate and Other 2,874 32 % 456 11 % 2,418 n/m$ 8,885 $ 4,002 $ 4,883 __________ n/m not meaningful 33
--------------------------------------------------------------------------------
Other operating expenses increased across all Operating Groups for the three months endedMarch 31, 2020 as compared to the same period of 2019. These increases were primarily attributable to the Partnership Contribution, which accounted for$0.7 million ,$1.0 million ,$0.1 million and$0.2 million other operating expenses in the Middle Market, Specialty, MainStreet and Medicare Operating Groups, respectively, during 2020. The remainder of the increases in the four Operating Groups were driven by organic growth. Other operating expenses in Corporate and Other, including professional fees, insurance, colleague education, travel and dues and subscriptions, increased primarily as a result of being a public company. Amortization Expense The following table sets forth our amortization byOperating Group by amount and as a percentage of our amortization: For the Three Months Ended March 31, 2020 2019 Variance Percent Change from (in thousands) Amount Percent of Business Amount Percent of Business Amount Prior Year Amortization by Operating Group Middle Market $ 571 16 %$ 301 34 %$ 270 90 % Specialty 2,366 66 % 267 30 % 2,099 n/m MainStreet 431 12 % 194 22 % 237 122 % Medicare 225 6 % 96 11 % 129 134 % Corporate and Other 3 - % 18 2 % (15 ) (83 )%$ 3,596 $ 876 $ 2,720 __________ n/m not meaningful Amortization expense increased across all Operating Groups for the three months endedMarch 31, 2020 as compared to the same period of 2019. These increases were driven by intangible assets capitalized in connection with Partners acquired since the first quarter of 2019 across all Operating Groups. Change in Fair Value of Contingent Consideration The following table sets forth our change in fair value of contingent consideration byOperating Group by amount and as a percentage of our change in fair value of contingent consideration: For the Three Months Ended March 31, 2020 2019 Variance Percent Change Percent of Percent of from Prior (in thousands) Amount Business Amount Business Amount Year Change in fair value of contingent consideration by Operating Group Middle Market$ (2,166 ) (130 )%$ (2,118 ) 76 %$ (48 ) 2 % Specialty 2,447 147 % (518 ) 19 % 2,965 n/m MainStreet 1,627 98 % 15 (1 )% 1,612 n/m Medicare (247 ) (15 )% (165 ) 6 % (82 ) 50 %$ 1,661 $ (2,786 ) $ 4,447 __________ n/m not meaningful The change in fair value of contingent consideration results from fluctuations in the value of the relevant measurement basis, normally revenue or EBITDA of our Partners. The Specialty and MainStreet Operating Groups recorded losses of$2.1 million and$1.4 million , respectively, during the first quarter of 2020 as a result of higher estimates for the contingent consideration liabilities of the MSI and Foundation Insurance Partnerships related to growth of business.
34
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs for the foreseeable future will include cash to (i) provide capital to facilitate the organic growth of our business and to fund future Partnerships, (ii) pay operating expenses, including cash compensation to our employees and expenses related to being a public company, (iii) make payments under the Tax Receivable Agreement, (iv) pay interest and principal due on borrowings under the JPMorgan Credit Agreement, (v) pay contingent earnout liabilities, and (vi) pay income taxes. We have historically financed our operations and funded our debt service and distributions to our owners through the sale of our insurance products and services. In addition, we financed significant cash needs to fund growth through the acquisition of Partners through debt financing. As ofMarch 31, 2020 , our cash and cash equivalents were$52.1 million . We believe that our cash and cash equivalents, cash flow from operations and available borrowings under the JPMorgan Credit Agreement will be sufficient to fund our working capital and meet our commitments for the foreseeable future. However, we expect that we will require additional funding to continue to execute on our Partnership strategy. Such funding could include the incurrence of additional debt or the issuance of equity. Additional funds may not be available on a timely basis, on favorable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term Partnership strategy. If we are not able to raise funds when needed, we could be forced to delay or reduce the number of Partnerships that we complete. See Part II, Item 1A. "Risk Factors - The ongoing novel coronavirus (COVID-19) pandemic could result in declines in business and increases in claims that could adversely affect our business, financial condition and results of operations." JPMorgan Credit Agreement As ofMarch 31, 2020 , we had an aggregate borrowing capacity of$300.0 million under the revolving credit commitment (the "Revolving Credit Commitment") of the JPMorgan Credit Agreement, which matures onSeptember 23, 2024 and of which no more than$65.0 million is available for working capital purposes and the entirety of which is available to fund acquisitions permitted under the JPMorgan Credit Agreement. OnMarch 12, 2020 , we drew$20.0 million on the Revolving Credit Commitment to utilize for working capital purposes in anticipation of the potential effects of the COVID-19 pandemic. The outstanding balance of the Revolving Credit Commitment was$60.4 million atMarch 31, 2020 . OnApril 28, 2020 , the Company converted$10.0 million of its borrowings previously drawn on the Revolving Credit Commitment for working capital purposes to utilize such proceeds for funding Partnerships closed onMay 1, 2020 . The Revolving Credit Commitment is collateralized by a first priority lien on substantially all the assets of the Company, including a pledge of all equity securities of each of its subsidiaries. The interest rate of the Revolving Credit Commitment is based on, depending on the type of loan, the Eurodollar rate or the Alternative Base Rate, plus, in each case, a margin based on Total Leverage Ratio (as defined in the JPMorgan Credit Agreement), as set forth in the pricing grid below, provided that under no circumstances will the LIBO Rate (as defined in the JPMorgan Credit Agreement) used in the determination of the Eurodollar rate be less than 0.00% or the Alternate Base Rate be less than 1.00%: Applicable Margin for Applicable Margin for Alternate Base Rate Total Net Leverage Ratio Eurodollar Loans Loans < 2.50x 200 bps 100 bps ? 2.50x < 3.00x 225 bps 125 bps ? 3.00x < 3.75x 250 bps 150 bps ? 3.75x 300 bps 200 bps AtMarch 31, 2020 andDecember 31, 2019 , the variable rate in effect for the JPMorgan Credit Agreement was the London Interbank Offered Rate ("LIBOR") due to a pricing option and the applicable interest rate on the Revolving Credit Commitment was 3.00% and 3.81%, respectively. The JPMorgan Credit Agreement contains covenants that, among other things, restrict our ability to make certain restricted payments, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change our business, make certain investments or restrict BRP's ability to make dividends or other distributions toBRP Group .
35
--------------------------------------------------------------------------------
In addition, the JPMorgan Credit Agreement contains financial covenants requiring us to maintain our Total Leverage Ratio (as defined in the JPMorgan Credit Agreement) at or below 5.00 to 1.00 up to but excludingSeptember 21, 2022 (with scheduled annual step downs to 4.75 to 1.00 and 4.50 to 1.00 beginning in 2022 and with step ups of 0.50 to 1.00 and 0.25 to 1.00 for the first and second quarters, respectively, after any Material Acquisition (as defined in the JPMorgan Credit Agreement)), Debt Service Coverage Ratio (as defined in the JPMorgan Credit Agreement) at or above 2.00 to 1.00 up to but excludingSeptember 21, 2022 (with scheduled annual step ups to 2.25 to 1.00 and 2.50 to 1.00 beginning in 2022) and Senior Leverage Ratio (as defined in the JPMorgan Credit Agreement) at or below 4.50 to 1.00 up to but excludingSeptember 21, 2022 (with scheduled annual step downs to 4.25 to 1.00 and 4.00 to 1.00 beginning in 2022 and with step ups of 0.50 to 1.00 and 0.25 to 1.00 for the first and second quarters, respectively, after any Material Acquisition). Contractual Obligations The following table represents our contractual obligations, aggregated by type, atMarch 31, 2020 : Payments Due by Period Less than More than (in thousands) Total 1 year 1-3 years 3-5 years 5 years Operating leases (1)$ 46,416 $ 5,967 $ 12,294 $ 9,956 $ 18,199 Debt obligations payable (2) 68,512 1,811 3,622 63,079 - Maximum future acquisition contingency payments (3) 119,325 23,709 94,678 938 - Total$ 234,253 $ 31,487 $ 110,594 $ 73,973 $ 18,199
__________
(1) The Company leases facilities and equipment under noncancelable operating
leases. Rent expense was
ended
(2) Represents scheduled debt obligations and estimated interest payments.
(3) Includes
liabilities at
Tax Receivable Agreement We expect to obtain an increase in our share of our tax basis of the assets when BRP's LLC Units are redeemed or exchanged for shares ofBRP Group's Class A common stock. This increase in tax basis may have the effect of reducing the future amounts paid to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. We entered into a Tax Receivable Agreement onOctober 28, 2019 (the "Tax Receivable Agreement") that provides for the payment by us to the parties to the Tax Receivable Agreement of 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis inBRP Group's assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. During the three months endedMarch 31, 2020 , no distributions or redemptions were made that triggered an increase inBRP Group's tax basis. SOURCES AND USES OF CASH The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated: For the Three Months Ended March 31, (in thousands) 2020 2019 Variance Net cash provided by operating activities $ 4,971 $ 4,865$ 106 Net cash used in investing activities (39,888 ) (36,188 ) (3,700 ) Net cash provided by financing activities 19,811 34,122 (14,311 ) Net increase (decrease) in cash and cash equivalents and restricted cash (15,106 ) 2,799 (17,905 ) Cash and cash equivalents and restricted cash at beginning of period 71,071 7,995 63,076 Cash and cash equivalents and restricted cash at end of period $ 55,965 $ 10,794$ 45,171 36
--------------------------------------------------------------------------------
Operating Activities The primary sources and uses of cash for operating activities are net income adjusted for non-cash items and changes in assets and liabilities, or operating working capital. Net cash provided by operating activities increased$106,000 for the three months endedMarch 31, 2020 as compared to the same period of 2019 driven by a net increase in net income adjusted for non-cash items, offset in part by a net decrease in cash flows provided by growing receivable balances and losses in revenues from profit-sharing and fees. Investing Activities The primary sources and uses of cash for investing activities relate to cash consideration paid for business combinations and asset acquisitions, as well as capital expenditures. Net cash used in investing activities increased$3.7 million for the three months endedMarch 31, 2020 as compared to the same period of 2019. Cash consideration paid for business combinations and asset acquisitions increased$3.7 million primarily as a result of the four Partnerships we completed during 2020. Financing Activities The primary sources and uses of cash for financing activities relate to the issuance of our Class A common stock, borrowings from and repayment to our credit agreements, payment of debt issuance costs, payment of contingent and guaranteed earnout consideration, distributions and contributions, and other equity transactions. Net cash provided by financing activities decreased$14.3 million for the three months endedMarch 31, 2020 as compared to the same period of 2019. Net cash provided by borrowings from our Credit Agreements to fund acquisitions decreased$28.8 million primarily as a result of borrowings to fund theLykes Insurance, Inc. Partnership during the first quarter of 2019, offset in part by drawing$20.0 million on the Revolving Credit Commitment to utilize for working capital purposes in anticipation of the potential effects of the COVID-19 pandemic during the first quarter of 2020. This decrease in cash was offset in part by cash payments of$12.5 million related to the repurchase of membership interests from members during 2019. CRITICAL ACCOUNTING ESTIMATES In preparing our financial statements in accordance with GAAP, we are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, disclosure of contingent assets and liabilities and accompanying disclosures. We evaluate our estimates and assumptions on an ongoing basis. These estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances; although, actual results may differ from these estimates and assumptions. To the extent that there are differences between our estimates and actual results, our financial condition, results of operations and cash flows will be affected. There have been no material changes in our critical accounting policies during the three months endedMarch 31, 2020 as compared to those disclosed in the Critical Accounting Estimates section under Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K filed with theSEC onMarch 24, 2020 . EMERGING GROWTH COMPANY STATUS We are an emerging growth company, as defined in the Jumpstart Our Business Startups ("JOBS") Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We have also elected to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments, if applicable. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than$1.07 billion in annual revenue, we have more than$700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than$1.0 billion of non-convertible debt securities over a three-year period.
37
--------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS Please refer to Note 1 to our condensed consolidated financial statements included in Part I, Item 1. Financial Statements of this report for a discussion of recent accounting pronouncements that may impact us.
© Edgar Online, source
