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BROWN & BROWN, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Company Overview
The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes to those Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition, please see "Information Regarding Non-GAAP Measures" below, regarding important information on non-GAAP financial measures contained in our discussion and analysis. We are a diversified insurance agency, wholesale brokerage, insurance programs and services organization headquartered inDaytona Beach, Florida . As an insurance intermediary, our principal sources of revenue are commissions paid by insurance companies and, to a lesser extent, fees paid directly by customers. Commission revenues generally represent a percentage of the premium paid by an insured and are 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 or payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which we control. We also operate a capitalized captive insurance facility (the "Captive") for the purpose of having additional capacity to sell property insurance for earthquake and wind exposed properties. The Captive buys reinsurance, limiting, but not eliminating the Company's exposure to underwriting losses and revenues are recognized as net retained earned premiums over the associated policy periods. We have increased revenues every year from 1993 to 2021, with the exception of 2009, when our revenues declined 1.0%. Our revenues grew from$95.6 million in 1993 to$3.1 billion in 2021, reflecting a compound annual growth rate of 13.2%. In the same 28-year period, we increased net income from$8.1 million to$587.1 million in 2021, a compound annual growth rate of 16.5%. The volume of business from new and existing customers, fluctuations in insurable exposure units, changes in premium rate levels, changes in general economic and competitive conditions, a health pandemic, and the occurrence of catastrophic weather events all affect our revenues. For example, level rates of inflation or a general decline in economic activity could limit increases in the values of insurable exposure units. Conversely, increasing costs of litigation settlements and awards could cause some customers to seek higher levels of insurance coverage. Historically, we have grown our revenues as a result of our focus on net new business and acquisitions. We foster a strong, decentralized sales and service culture which enables responsiveness to changing business conditions and drives accountability for results. The term "Organic Revenue," a non-GAAP measure, is our core commissions and fees less: (i) the core commissions and fees earned for the first 12 months by newly-acquired operations; (ii) divested business (core commissions and fees generated from offices, books of business or niches sold or terminated during the comparable period); and (iii) the period over period impact of foreign currency translation, which is calculated by applying current year foreign exchange rates to the same period in the prior year. The term "core commissions and fees" excludes profit-sharing contingent commissions and guaranteed supplemental commissions, and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. "Organic Revenue" is reported in this manner in order to express the current year's core commissions and fees on a comparable basis with the prior year's core commissions and fees. The resulting net change reflects the aggregate changes attributable to: (i) net new and lost accounts; (ii) net changes in our customers' exposure units; (iii) net changes in insurance premium rates or the commission rate paid to us by our carrier partners; and (iv) the net change in fees paid to us by our customers. Organic Revenue is reported in "Results of Operations" and in "Results of Operations - Segment Information" of this Annual Report on Form 10-K. In connection with the Captive, we will recognize revenue starting in 2022 on a net retained earned premiums basis in a manner consistent with core commissions and fees. Beginning in 2022 we will no longer exclude guaranteed supplemental commissions from core commissions and fees and therefore they will be a component of Organic Revenue. We anticipate presenting certain prior periods accordingly so that the calculation of Organic Revenue compares both periods on the same basis. Guaranteed supplemental commissions are a small and increasingly more stable source of revenue that are highly correlated to core commissions, so excluding them provides no meaningful incremental value in evaluating our revenue performance. We also earn "profit-sharing contingent commissions," which are commissions based primarily on underwriting results, but which may also reflect considerations for volume, growth and/or retention. These commissions, which are included in our commissions and fees in the Consolidated Statement of Income, are accrued throughout the year based on actual premiums written and are primarily received in the first and second quarters of each subsequent year, based upon the aforementioned considerations for the prior year(s). Over the last three years, profit-sharing contingent commissions have averaged approximately 3.0% of commissions and fees revenue. Certain insurance companies offer guaranteed fixed-base agreements, referred to as "Guaranteed Supplemental Commissions" ("GSCs") in lieu of profit-sharing contingent commissions. GSCs are accrued throughout the year based on actual premiums written. Over the last three years, GSCs have averaged less than 1.0% of commissions and fees revenue. Combined, our profit-sharing contingent commissions and GSCs for the year endedDecember 31, 2021 increased by$14.1 million over 2020. This increase was the result of recent acquisitions and qualifying for certain profit-sharing contingent commissions and GSCs in 2021 that we did not qualify for in the prior year. Fee revenues primarily relate to services other than securing coverage for our customers, as well as fees negotiated in lieu of commissions, and are recognized as performance obligations are satisfied. Fee revenues are generated by: (i) our Services segment, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers' compensation and all-lines liability arenas, as well as Medicare Set-aside services,Social Security disability and Medicare 27 -------------------------------------------------------------------------------- benefits advocacy services, and claims adjusting services; (ii) our National Programs and Wholesale Brokerage segments, which earn fees primarily for the issuance of insurance policies on behalf of insurance companies; and (iii) our Retail segment in our large-account customer base, where we primarily earn fees for securing insurance for our customers, and in our automobile dealer services ("F&I") businesses where we primarily earn fees for assisting our customers with creating and selling warranty and service risk management programs. Fee revenues as a percentage of our total commissions and fees, represented 27.4% in 2021 and 26.1% in 2020.
For the years ended
rate was 16.9% and 9.3%, respectively, and our consolidated Organic Revenue
growth rate was 10.4% and 3.8%, respectively.
Investment income consists primarily of interest earnings on operating cash, and where permitted, 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. Other income primarily reflects legal settlements and other miscellaneous revenues. Income before income taxes for the year endedDecember 31, 2021 increased by$138.7 million over 2020, as a result of net new business, acquisitions we completed since 2020, and management of our expense base, partially offset by an increase in the change in estimated acquisition earn-out payables.
Information Regarding Non-GAAP Measures
In the discussion and analysis of our results of operations, in addition to
reporting financial results in accordance with generally accepted accounting
principles ("GAAP"), we provide references to the following non-GAAP financial
measures as defined in Regulation G of SEC rules: Organic Revenue, Organic
Revenue growth, EBITDAC and EBITDAC Margin. EBITDAC is defined as income before
interest, income taxes, depreciation, amortization, and the change in estimated
acquisition earn-out payables ("EBITDAC"). EBITDAC Margin is defined as EBITDAC
divided by total revenues. We view these non-GAAP financial measures as
important indicators when assessing and evaluating our performance on a
consolidated basis and for each of our segments because they allow us to
determine a more comparable, but non-GAAP, measurement of revenue growth and
operating performance that is associated with the revenue sources that were a
part of our business in both the current and prior year. We believe that Organic
Revenue provides a meaningful representation of our operating performance and
view Organic Revenue growth as an important indicator when assessing and
evaluating the performance of our four segments. Organic Revenue can be
expressed as a dollar amount or a percentage rate when describing Organic
Revenue growth. We use Organic Revenue growth in determining incentive cash
compensation and as a performance measure in our equity incentive grants for our
executive officers and other key
employees. We use EBITDAC Margin for incentive cash compensation determinations
for our executive officers. We view EBITDAC and EBITDAC Margin as important
indicators of operating performance, because they allow us to determine more
comparable, but non-GAAP, measurements of our operating margins in a meaningful
and consistent manner by removing the significant non-cash items of
depreciation, amortization, and the change in estimated acquisition earn-out
payables, as well as interest expense and taxes, which are reflective of
investment and financing activities, not operating performance.
These measures are not in accordance with, or an alternative to the GAAP
information provided in this Annual Report on Form 10-K. We present such
non-GAAP supplemental financial information because we believe such information
is of interest to the investment community and because we believe they provide
additional meaningful methods of evaluating certain aspects of our operating
performance from period to period on a basis that may not be otherwise apparent
on a GAAP basis. We believe these non-GAAP financial measures improve the
comparability of results between periods by eliminating the impact of certain
items that have a high degree of variability. Our industry peers may provide
similar supplemental non-GAAP information with respect to one or more of these
measures, although they may not use the same or comparable terminology and may
not make identical adjustments. This supplemental financial information should
be considered in addition to, not in lieu of, our Consolidated Financial
Statements.
Tabular reconciliations of this supplemental non-GAAP financial information to
our most comparable GAAP information are contained in this Annual Report on Form
10-K under "Results of Operation - Segment Information."
Acquisitions
Part of our business strategy is to attract high-quality insurance
intermediaries and service organizations to join our operations. From 1993
through the fourth quarter of 2021, we acquired 580 insurance intermediary
operations.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with 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 upon a
combination of historical experience and assumptions that we believe to be
reasonable under the circumstances. These estimates form the basis for our
judgments about the recognition of revenues, expenses, carrying values of our
assets and liabilities, of which values are not readily apparent from other
sources. Actual results may differ from these estimates.
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We believe that of our significant accounting and reporting policies, the more
critical policies include our accounting for revenue recognition, business
combinations and purchase price allocations, intangible asset impairments,
non-cash stock-based compensation and reserves for litigation. In particular,
the accounting for these areas requires significant use of judgment 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.
Revenue Recognition
The majority of our revenue is commissions derived from our performance as agents and brokers, acting on behalf of insurance carriers to sell products to customers that are seeking to transfer risk, and conversely, acting on behalf of those customers in negotiating with insurance carriers seeking to acquire risk in exchange for premiums. In the majority of these arrangements, our performance obligation is complete upon the effective date of the bound policy, as such, that is when the associated revenue is recognized. In some arrangements, where we are compensated through commissions, we also perform other services for our customer beyond binding of coverage. In those arrangements we apportion the commission between binding of coverage and other services based on their relative fair value and recognize the associated revenue as those performance obligations are satisfied. Where the Company's performance obligations have been completed, but the final amount of compensation is unknown due to variable factors, we estimate the amount of such compensation. We refine those estimates upon our receipt of additional information or final settlement, whichever occurs first. To a lesser extent, the Company earns revenues in the form of fees. Like commissions, fees paid to us in lieu of commission, are recognized upon the effective date of the bound policy. When we are paid a fee for service, however, the associated revenue is recognized over a period of time that coincides with when the customer simultaneously receives and consumes the benefit of our work, which characterizes most of our claims processing arrangements and various services performed in our property and casualty, and employee benefits practices. Other fees are typically recognized upon the completion of the delivery of the agreed-upon services to the customer. To a much lesser extent, the Company will earn revenues starting in 2022 in the form of net retained earned premiums in connection with the Captive, in which the majority of underwriting risk is reinsured and a small portion is retained by the Company. These premiums are reported net of the ceded premiums for reinsurance and recognized evenly over the associated policy periods.
Management determines a policy cancellation reserve based upon historical
cancellation experience adjusted in accordance with known circumstances.
Please see Note 2 "Revenues" in the "Notes to Consolidated Financial Statements"
for additional information regarding the nature and timing of our revenues.
Business Combinations and Purchase Price Allocations
We have acquired significant intangible assets through acquisitions of
businesses. These assets generally consist of purchased customer accounts,
non-compete agreements, and the excess of purchase prices over the fair value of
identifiable net assets acquired (goodwill). The determination of estimated
useful lives and the allocation of purchase price to intangible assets requires
significant judgment and affects the amount of future amortization and possible
impairment charges.
In connection with acquisitions, we record the estimated value of the net
tangible assets purchased and the value of the identifiable intangible assets
purchased, which typically consist of purchased customer accounts and
non-compete agreements. Purchased customer accounts include the right to
represent insureds or claimants supported by the physical records and files
obtained from acquired businesses that contain information about insurance
policies, customers and other matters essential to policy renewals of delivery
of services. Their value primarily represents the present value of the
underlying cash flows expected to be received over the estimated future duration
of the acquired customer relationships. The valuation of purchased customer
accounts involves significant estimates and assumptions concerning matters such
as cancellation frequency, expenses and discount rates. Any change in these
assumptions could affect the carrying value of purchased customer accounts.
Non-compete agreements are valued based upon their duration and any unique
features of the particular agreements. Purchased customer accounts and
non-compete agreements are amortized on a straight-line basis over the related
estimated lives and contract periods, which typically range from 3 to 15 years.
The excess of the purchase price of an acquisition over the fair value of the
identifiable tangible and intangible assets is assigned to goodwill and is not
amortized.
The recorded purchase prices for all acquisitions include an estimation of the
fair value of liabilities associated with any potential earn-out provisions,
where an earn-out is part of the negotiated transaction. Subsequent changes in
the fair value of earn-out obligations are recorded in the Consolidated
Statement of Income as a result of updated expectations for the performance of
the associated business.
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The fair value of earn-out obligations is based upon the present value of the
expected future payments to be made to the sellers of the acquired businesses in
accordance with the provisions contained in the respective purchase agreements.
In determining fair value, the acquired business's future performance is
estimated using financial projections developed by management for the acquired
business, and this estimate reflects market participant assumptions regarding
revenue growth and/or profitability. The expected future payments are estimated
based on the earn-out formula and performance targets specified in each purchase
agreement compared to the associated financial projections. These estimates are
then discounted to a present value using a risk-adjusted rate that takes into
consideration the likelihood that the forecast earn-out payments will be made.
Intangible Assets Impairment
Goodwill is subject to at least an annual assessment for impairment, measured by a fair-value-based test. Amortizable intangible assets are amortized over their useful lives and are subject to an impairment review based upon an estimate of the undiscounted future cash flows resulting from the use of the assets. To determine if there is potential impairment of goodwill, we compare the fair value of each reporting unit with its carrying value. The Company may elect to first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the Company does not perform a qualitative assessment, or if it is determined that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the Company will calculate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based upon multiples of EBITDAC, or on a discounted cash flow basis. Management assesses the recoverability of our goodwill and our amortizable intangibles and other long-lived assets annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Any of the following factors, if present, may trigger an impairment review: (i) a significant underperformance relative to historical or projected future operating results, (ii) a significant negative industry or economic trend, and (iii) a significant decline in our market capitalization. If the recoverability of these assets is unlikely because of the existence of one or more of the above-referenced factors, an impairment analysis is performed. Management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or related assumptions change in the future, we may be required to revise the assessment and, if appropriate, record an impairment charge. We completed our most recent evaluation of impairment for goodwill as ofNovember 30, 2021 and determined that the fair value of goodwill exceeded the carrying value of such assets. Additionally, there have been no impairments recorded for amortizable intangible assets for the years endedDecember 31, 2021 and 2020.
Non-Cash Stock-Based Compensation
We grant non-vested stock awards to our employees, with the related compensation
expense recognized in the financial statements over the associated service
period based upon the grant-date fair value of those awards. During the
performance measurement period, we review the probable outcome of the
performance conditions associated with our performance awards and align the
expense accruals with the expected performance outcome.
During the first quarter of 2021, the performance conditions for approximately 1.2 million shares of the Company's common stock granted under the Company's 2010 SIP and approximately 22,000 shares of the Company's common stock granted under the Company's 2019 SIP were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2018 and 2020. These grants had a performance measurement period that concluded onDecember 31, 2020 . The vesting condition for these grants requires continuous employment for a period of up to five years from the 2018 grant date and four years from the 2020 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share. During the first quarter of 2022, the performance conditions for approximately 1.3 million shares of the Company's common stock granted under the Company's 2010 SIP and approximately 22,000 shares of the Company's common stock granted under the Company's 2019 SIP were determined by the Compensation Committee to have been satisfied relative to performance-based grants issued in 2019 and 2021. These grants had a performance measurement period that concluded onDecember 31, 2021 . The vesting condition for these grants requires continuous employment for a period of up to five years from the 2019 grant date and four years from the 2021 grant date in order for the awarded shares to become fully vested and nonforfeitable. As a result of the awarding of these shares, the grantees will be eligible to receive payments of dividends and exercise voting privileges after the awarding date, and the awarded shares will be included as issued and outstanding common stock shares and included in the calculation of basic and diluted net income per share.
Litigation and Claims
We are subject to numerous litigation claims that arise in the ordinary course
of business. If it is probable that a liability has been incurred at the date of
the financial statements and the amount of the loss is estimable, an accrual for
the costs to resolve these claims is recorded in accrued expenses in the
accompanying Consolidated Financial Statements. Professional fees related to
these claims are included in other operating expenses in the accompanying
Consolidated Statement of Income as incurred. Management, with the assistance of
in-house and outside counsel, determines whether it is probable that a liability
has been incurred and estimates the amount of loss based upon analysis of
individual issues. New developments or changes in settlement strategy in dealing
with these matters may significantly affect the required reserves and affect our
net income.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED
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. For a comparison of our results of operations and liquidity and capital resources for the years endedDecember 31, 2020 and 2019, please see Part II, Item 7 of our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 23, 2021 .
Financial information relating to our Consolidated Financial Results is as
follows:
(in thousands, except percentages) 2021 % Change
2020
REVENUES
Core commissions and fees$ 2,946,291 17.0 %$ 2,518,980 Profit-sharing contingent commissions 82,226 15.9 % 70,934 Guaranteed supplemental commissions 19,005 17.4 % 16,194 Investment income 1,099 (60.9 )% 2,811 Other income, net 2,777 (37.7 )% 4,456 Total revenues 3,051,398 16.8 % 2,613,375 EXPENSES Employee compensation and benefits 1,636,911 14.0 % 1,436,377 Other operating expenses 402,941 10.1 % 365,973 (Gain)/loss on disposal (9,605 ) NMF (2,388 ) Amortization 119,593 10.2 % 108,523 Depreciation 33,309 26.8 % 26,276 Interest 64,981 10.2 % 58,973 Change in estimated acquisition earn-out payables 40,445 NMF (4,458 ) Total expenses 2,288,575 15.0 % 1,989,276 Income before income taxes 762,823 22.2 % 624,099 Income taxes 175,719 22.4 % 143,616 NET INCOME$ 587,104 22.2 %$ 480,483 Income Before Income Taxes Margin (1) 25.0 % 23.9 % EBITDAC (2)$ 1,021,151 25.5 %$ 813,413 EBITDAC Margin (2) 33.5 % 31.1 % Organic Revenue growth rate (2) 10.4 % 3.8 %
Employee compensation and benefits relative
to total revenues 53.6 % 55.0 % Other operating expenses relative to total revenues 13.2 % 14.0 % Capital expenditures$ 45,045 (36.3 )%$ 70,700 Total assets at December 31$ 9,795,443 9.2 %$ 8,966,492 (1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues (2) A non-GAAP financial measure NMF = Not a meaningful figure Commissions and Fees Commissions and fees, including profit-sharing contingent commissions and GSCs for 2021, increased$441.4 million to$3,047.5 million , or 16.9% over 2020. Core commissions and fees in 2021 increased$427.3 million , composed of (i)$261.3 million of net new and renewal business, which reflects an Organic Revenue growth rate of 10.4%; (ii)$170.1 million from acquisitions that had no comparable revenues in the same period of 2020; (iii) a positive impact from foreign currency translation of$1.2 million ; and (iv) an offsetting decrease of$5.3 million related to commissions and fees revenue from business divested in the preceding 12 months. Profit-sharing contingent commissions and GSCs for 2021 increased by$14.1 million , or 16.2%, compared to the same period in 2020. This increase was the result of recent acquisitions and qualifying for certain profit-sharing contingent commissions and GSCs in 2021 that we did not qualify for in the prior year. Investment Income Investment income decreased to$1.1 million in 2021, compared with$2.8 million in 2020. The decrease was primarily due to lower interest rates as compared to the prior year. 31 --------------------------------------------------------------------------------
Other Income, Net
Other income for 2021 was
Other income consists primarily of legal settlements and other miscellaneous
income.
Employee Compensation and Benefits
Employee compensation and benefits expense as a percentage of total revenues was 53.6% for the year endedDecember 31, 2021 as compared to 55.0% for the year endedDecember 31, 2020 , and increased 14.0%, or$200.5 million . This increase included$70.7 million of compensation costs related to stand-alone acquisitions that had no comparable costs in the same period of 2020. Therefore, employee compensation and benefits expense attributable to those offices that existed in the same time periods of 2021 and 2020 increased by$129.8 million or 9.2%. This underlying employee compensation and benefits expense increase was primarily related to: (i) an increase in staff salaries attributable to salary inflation; (ii) an increase in accrued performance bonuses; and (iii) an increase in producer compensation associated with revenue growth.
Other Operating Expenses
Other operating expenses represented 13.2% of total revenues for 2021 as compared to 14.0% for the year endedDecember 31, 2020 . Other operating expenses for 2021 increased$37.0 million , or 10.1%, from the same period of 2020 growing slower than revenues. The net increase included: (i)$40.2 million of other operating expenses related to stand-alone acquisitions that had no comparable costs in the same period of 2020; (ii) increased data processing costs as we invest in our business to drive future growth; (iii) slightly higher variable operating expenses, including travel and entertainment and meeting-related expenses; partially offset by (iv) non-recurring legal costs and the write-off recorded in 2020 of certain receivables in one of our programs where it was determined the collectability was in doubt and which did not recur in 2021.
Gain or Loss on Disposal
The Company recognized net gains on disposals of$9.6 million in 2021 and$2.4 million in 2020. The change in the net gain on disposal was due to activity associated with sales of businesses or portions of businesses. Although we are not in the business of selling customer accounts, we periodically sell an office or a book of business (one or more customer accounts) that we believe does not produce reasonable margins or demonstrate a potential for growth, or because doing so is in the Company's best interest.
Amortization
Amortization expense for 2021 increased
10.2% over 2020. This increase reflects the amortization of new intangibles from
businesses acquired within the past 12 months, partially offset by certain
intangible assets becoming fully amortized.
Depreciation
Depreciation expense for 2021 increased$7.0 million to$33.3 million , or 26.8% over 2020. Changes in depreciation expense reflect the addition of fixed assets resulting from business initiatives, net additions of fixed assets resulting from businesses acquired in the past 12 months, partially offset by fixed assets which became fully depreciated.
Interest Expense
Interest expense for 2021 increased$6.0 million to$65.0 million , or 10.2%, from 2020. The increase is due to higher average debt balances from increased borrowings associated with the issuance of bonds inSeptember 2020 , partially offset by the decrease in interest rates associated with our floating rate debt balances.
Change in Estimated Acquisition Earn-Out Payables
Accounting Standards Codification ("ASC") Topic 805-Business Combinations is the
authoritative guidance requiring an acquirer to recognize 100% of the fair value
of acquired assets, including goodwill and assumed liabilities (with only
limited exceptions) upon initially obtaining control of an acquired entity.
Additionally, the fair value of contingent consideration arrangements (such as
earn-out purchase price arrangements) at the acquisition date must be included
in the purchase price consideration. The recorded purchase price for
acquisitions includes an estimation of the fair value of liabilities associated
with any potential earn-out provisions. Subsequent changes in these earn-out
obligations are required to be recorded in the Consolidated Statement of Income
when incurred or reasonably estimated. Estimations of potential earn-out
obligations are typically based upon future earnings of the acquired operations
or entities, usually for periods ranging from one to three years.
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The net charge or credit to the Consolidated Statement of Income for the period
is the combination of the net change in the estimated acquisition earn-out
payables balance, and the interest expense imputed on the outstanding balance of
the estimated acquisition earn-out payables.
As of December 31, 2021 , the fair values of the estimated acquisition earn-out
payables were reevaluated and measured at fair value on a recurring basis using
unobservable inputs (Level 3) as defined in ASC 820-Fair Value Measurement. The
resulting net changes, as well as the interest expense accretion on the
estimated acquisition earn-out payables, for the years ended December 31, 2021
and 2020 were as follows:
(in thousands) 2021 2020
Change in fair value of estimated acquisition
earn-out payables $ 34,209 $ (11,814 )
Interest expense accretion 6,236
7,356
Net change in earnings from estimated acquisition
earn-out payables$ 40,445 $ (4,458 ) For the years endedDecember 31, 2021 and 2020, the fair value of estimated earn-out payables was reevaluated and increased by$34.2 million for 2021 and decreased by$11.8 million for 2020, which are charges and credits respectively, net of interest expense accretion, to the Consolidated Statement of Income for 2021 and 2020. As ofDecember 31, 2021 , the estimated acquisition earn-out payables equaled$291.0 million , of which$78.4 million was recorded as accounts payable and$212.6 million was recorded as other non-current liabilities. As ofDecember 31, 2020 , the estimated acquisition earn-out payables equaled$258.9 million , of which$79.2 million was recorded as accounts payable and$179.7 million was recorded as other non-current liabilities.
Income Taxes
The effective tax rate on income from operations was 23.0% in 2021 and 2020.
RESULTS OF OPERATIONS - SEGMENT INFORMATION
As discussed in Note 16 "Segment Information" of the Notes to Consolidated Financial Statements, we operate four reportable segments: Retail, National Programs, Wholesale Brokerage and Services. On a segmented basis, changes in amortization, depreciation and interest expenses generally result from activity associated with acquisitions. Likewise, other revenues in each segment reflects net gains primarily from legal settlements and miscellaneous income. As such, in evaluating the operational efficiency of a segment, management focuses on the Organic Revenue growth rate and EBITDAC margin. The reconciliation of total commissions and fees included in the Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, including by segment, and the growth rates for Organic Revenue for the year endedDecember 31, 2021 are as follows: 2021 Retail(1) National Programs Wholesale Brokerage Services Total (in thousands, except percentages) 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
Commissions and fees
Total change
$ 294,829 $ 91,266 $ 50,474 $ 4,845 $ 441,414 Total growth % 20.1 % 15.0 % 14.3 % 2.8 % 16.9 % Profit-sharing contingent commissions (38,895 ) (35,785 ) (35,259 ) (27,278 ) (8,072 ) (7,871 ) - - (82,226 ) (70,934 ) GSCs (16,452 ) (15,128 ) (1,619 ) 238 (934 ) (1,304 ) - - (19,005 ) (16,194 ) Core commissions and fees$ 1,709,575 $ 1,419,180 $ 664,230 $
582,802
Acquisitions
(138,968 ) - (8,151 ) - (22,998 ) - - - (170,117 ) - Dispositions - (4,403 ) - (478 ) - - - (364 ) - (5,245 ) Foreign currency translation - - - 1,161 - - - - - 1,161 Organic Revenue(2)$ 1,570,607 $ 1,414,777 $ 656,079 $ 583,485 $ 370,631 $ 342,986 $ 178,857 $ 173,648 $ 2,776,174 $ 2,514,896 Organic Revenue growth(2)$ 155,830 $ 72,594 $ 27,645 $ 5,209 $ 261,278 Organic Revenue growth rate(2) 11.0 % 12.4 % 8.1 % 3.0 % 10.4 % (1) The Retail segment includes commissions and fees reported in the "Other" column of the Segment Information table in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items. (2) A non-GAAP financial measure. 33
-------------------------------------------------------------------------------- The reconciliation of total commissions and fees included in the Consolidated Statements of Income to Organic Revenue, a non-GAAP financial measure, including by segment, and the growth rates for Organic Revenue for the year endedDecember 31, 2020 , by segment, are as follows: 2020 Retail(1) National Programs Wholesale Brokerage Services Total (in thousands, except percentages) 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Commissions and fees
Total change
$ 105,338 $ 92,927 $ 42,735 $ (19,629 ) $ 221,371 Total growth % 7.7 % 18.0 % 13.8 % (10.1 )% 9.3 % Profit-sharing contingent commissions (35,785 ) (34,150 ) (27,278 ) (17,517 ) (7,871 ) (7,499 ) - - (70,934 ) (59,166 ) GSCs (15,128 ) (11,056 ) 238 (10,566 ) (1,304 ) (1,443 ) - - (16,194 ) (23,065 ) Core commissions and fees$ 1,419,180 $ 1,319,549 $ 582,802 $
488,832
Acquisitions
(79,580 ) - (34,173 ) - (25,861 ) - (1,484 ) - (141,098 ) - Dispositions - (11,772 ) - (377 ) - - - - - (12,149 ) Foreign currency translation - - - - - - - - - - Organic Revenue(2)$ 1,339,600 $ 1,307,777 $ 548,629 $ 488,455 $ 317,125 $ 300,484 $ 172,528 $ 193,641 $ 2,377,882 $ 2,290,357 Organic Revenue growth(2)$ 31,823 $ 60,174 $ 16,641 $ (21,113 ) $ 87,525 Organic Revenue growth rate(2) 2.4 % 12.3 % 5.5 % (10.9 )% 3.8 % (1) The Retail segment includes commissions and fees reported in the "Other" column of the Segment Information table in Note 16 of the Notes to the Consolidated Financial Statements, which includes corporate and consolidation items. (2) A non-GAAP financial measure. The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year endedDecember 31, 2021 , is as follows: National Wholesale (in thousands) Retail Programs Brokerage Services Other Total Income before income taxes$ 334,377 $ 242,334 $ 94,845 $ 28,257 $ 63,010 $ 762,823 Income Before Income Taxes Margin(2) 18.9 % 34.5 % 23.5 % 15.8 % NMF 25.0 % Amortization 77,810 27,357 9,150 5,276 - 119,593 Depreciation 11,194 9,839 2,646 1,484 8,146 33,309 Interest 91,425 11,381 15,990 2,899 (56,714 ) 64,981 Change in estimated acquisition earn-out payables 40,778 (7,652 ) 7,319 - - 40,445 EBITDAC(2)$ 555,584 $ 283,259 $ 129,950 $ 37,916 $ 14,442 $ 1,021,151 EBITDAC Margin(2) 31.4 % 40.4 % 32.2 % 21.2 % NMF 33.5 % (1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues (2) A non-GAAP financial measure NMF = Not a meaningful figure 34
-------------------------------------------------------------------------------- The reconciliation of income before incomes taxes, included in the Consolidated Statement of Income, to EBITDAC, a non-GAAP measure, and Income Before Income Taxes Margin to EBITDAC Margin, a non-GAAP measure, for the year endedDecember 31, 2020 , is as follows: National Wholesale (in thousands) Retail Programs Brokerage Services Other Total Income before income taxes$ 262,245 $ 182,892 $ 93,593 $ 27,994 $ 57,375 $ 624,099 Income Before Income Taxes Margin(2) 17.8 % 30.0 % 26.5 % 16.1 % NMF 23.9 % Amortization 67,315 27,166 8,481 5,561 - 108,523 Depreciation 9,071 8,658 1,948 1,424 5,175 26,276 Interest 85,968 20,597 10,281 4,142 (62,015 ) 58,973 Change in estimated acquisition earn-out payables 8,689 (10,484 ) 422 (3,085 ) - (4,458 ) EBITDAC(2)$ 433,288 $ 228,829 $ 114,725 $ 36,036 $ 535 $ 813,413 EBITDAC Margin(2) 29.4 % 37.5 % 32.5 % 20.7 % NMF 31.1 % (1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues (2) A non-GAAP financial measure NMF = Not a meaningful figure 35
--------------------------------------------------------------------------------
Retail Segment
The Retail segment provides a broad range of insurance products and services to
commercial, public and quasi-public, professional and individual insured
customers, and non-insurance risk-mitigating products through our automobile
dealer services ("F&I") businesses. Approximately 76.4% of the Retail segment's
commissions and fees revenue is commission based.
Financial information relating to our Retail segment for the 12 months ended
(in thousands, except percentages) 2021 % Change
2020
REVENUES
Core commissions and fees$ 1,711,320 20.5 %$ 1,420,439 Profit-sharing contingent commissions 38,895 8.7 % 35,785 Guaranteed supplemental commissions 16,452 8.8 % 15,128 Investment income 278 70.6 % 163 Other income, net 993 (20.6 )% 1,251 Total revenues 1,767,938 20.0 % 1,472,766 EXPENSES Employee compensation and benefits 949,351 15.7 % 820,368 Other operating expenses 268,126 21.1 % 221,496 (Gain)/loss on disposal (5,123 ) 114.7 % (2,386 ) Amortization 77,810 15.6 % 67,315 Depreciation 11,194 23.4 % 9,071 Interest 91,425 6.3 % 85,968 Change in estimated acquisition earn-out payables 40,778 NMF 8,689 Total expenses 1,433,561 18.4 % 1,210,521 Income before income taxes$ 334,377 27.5 %$ 262,245 Income Before Income Taxes Margin (1) 18.9 % 17.8 % EBITDAC (2) 555,584 28.2 % 433,288 EBITDAC Margin (2) 31.4 % 29.4 % Organic Revenue growth rate (2) 11.0 % 2.4 % Employee compensation and benefits relative to total revenues 53.7 % 55.7 % Other operating expenses relative to total revenues 15.2 % 15.0 % Capital expenditures$ 8,093 (38.6 )%$ 13,175 Total assets at December 31 (3)$ 5,040,706 (28.9 )%$ 7,093,627 (1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues (2) A non-GAAP financial measure (3) As ofDecember 31, 2021 , the Company settled the historical accumulation of the cash outlays paid by Corporate reducing the total assets at the segment level with no effect on the consolidated company
NMF = Not a meaningful figure
The Retail segment's total revenues in 2021 increased 20.0%, or$295.2 million , over the same period in 2020, to$1,767.9 million . The$290.9 million increase in core commissions and fees was driven by the following: (i)$156.3 million related to net new and renewal business; (ii) approximately$139.0 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2020; offset by (iii) a decrease of$4.4 million related to commissions and fees from businesses or books of business divested in 2020 and 2021. Profit-sharing contingent commissions and GSCs in 2021 increased 8.7%, or$4.4 million , over 2020, to$55.3 million primarily from acquisitions completed in 2020 and 2021. The Retail segment's growth rate for total commissions and fees was 20.1% and the Organic Revenue growth rate was 11.0% for 2021. The Organic Revenue growth rate was driven by net new business written during the preceding 12 months and growth on renewals of existing customers. Renewal business was impacted by rate increases in most lines of business and some modest expansion of exposure units. Income before income taxes for 2021 increased 27.5%, or$72.1 million , over the same period in 2020, to$334.4 million . The primary factors driving this increase were: (i) the net increase in revenue as described above, offset by (ii) a 15.7%, or$129.0 million , increase in employee compensation and benefits, due primarily to the year-on-year impact of salary inflation and additional employees to support revenue growth and acquisitions, (iii) operating expenses which increased by$46.6 million , or 21.1%, due to increased professional services to support our customers and acquisitions; (iv) an increase in the change in estimated acquisition earn-out payables of$32.1 million , to$40.8 million ; and (v) a combined increase in amortization, depreciation and intercompany interest expense of$18.1 million resulting from our acquisition activity over the past 12 months. EBITDAC for 2021 increased 28.2%, or$122.3 million , from the same period in 2020, to$555.6 million . EBITDAC Margin for 2021 increased to 31.4% from 29.4% in the same period in 2020. EBITDAC Margin was impacted by (i) the leveraging of our expense base, (ii) higher profit-sharing contingent commissions and GSCs; partially offset by, (iii) increased non-stock cash compensation costs. 36 --------------------------------------------------------------------------------
National Programs Segment
The National Programs segment manages over 40 programs supported by approximately 100 well-capitalized carrier partners. In most cases, the insurance carriers that support the programs have delegated underwriting and, in many instances, claims-handling authority to our programs operations. These programs are generally distributed through a nationwide network of independent agents and Brown & Brown retail agents, and offer targeted products and services designed for specific industries, trade groups, professions, public entities and market niches. The National Programs segment operations can be grouped into five broad categories: Professional programs, Personal Lines programs, Commercial programs, Public Entity-Related programs and Specialty programs. Approximately 75.2% of the National Programs segment's commissions and fees revenue is commission based.
Financial information relating to our National Programs segment for the 12
months ended
(in thousands, except percentages) 2021 % Change
2020
REVENUES
Core commissions and fees$ 664,230 14.0 %$ 582,802 Profit-sharing contingent commissions 35,259 29.3 % 27,278 Guaranteed supplemental commissions 1,619 NMF (238 ) Investment income 550 (27.2 )% 756 Other income, net 192 NMF 42 Total revenues 701,850 14.9 % 610,640 EXPENSES Employee compensation and benefits 294,713 13.3 % 260,141 Other operating expenses 128,368 5.5 % 121,670 (Gain)/loss on disposal (4,490 ) NMF - Amortization 27,357 0.7 % 27,166 Depreciation 9,839 13.6 % 8,658 Interest 11,381 (44.7 )% 20,597 Change in estimated acquisition earn-out payables (7,652 ) (27.0 )% (10,484 ) Total expenses 459,516 7.4 % 427,748 Income before income taxes$ 242,334 32.5 %$ 182,892 Income Before Income Taxes Margin (1) 34.5 % 30.0 % EBITDAC (2) 283,259 23.8 % 228,829 EBITDAC Margin (2) 40.4 % 37.5 % Organic Revenue growth rate (2) 12.4 % 12.3 % Employee compensation and benefits relative to total revenues 42.0 % 42.6 % Other operating expenses relative to total revenues 18.3 % 19.9 % Capital expenditures$ 13,467 86.8 %$ 7,208 Total assets at December 31 (3)$ 2,943,006 (16.2 )%$ 3,510,983 (1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues (2) A non-GAAP financial measure (3) As ofDecember 31, 2021 , the Company settled the historical accumulation of the cash outlays paid by Corporate reducing the total assets at the segment level with no effect on the consolidated company
NMF = Not a meaningful figure
The National Programs segment's total revenue for 2021 increased 14.9%, or$91.2 million , as compared to the same period in 2020, to$701.9 million . The$81.4 million increase in core commissions and fees revenue was driven by: (i)$72.6 million related to net new and renewal business; (ii) approximately$8.2 million related to the core commissions and fees revenue from acquisitions that had no comparable revenues in 2020; (iii) a positive impact from foreign currency translation of$1.2 million ; offset by (iv) a decrease of$0.5 million related to commissions and fees revenue from business divested in the preceding 12 months. The National Programs segment's growth rate for total commissions and fees was 15.0% and the Organic Revenue growth rate was 12.4% for 2021. The total commissions and fees growth was due to strong Organic Revenue growth across many of our programs along with new acquisitions. The Organic Revenue growth was driven by new business, good retention, exposure unit expansion and rate increases across many programs. Income before income taxes for 2021 increased 32.5%, or$59.4 million , from the same period in 2020, to$242.3 million . The increase was the result of: (i) strong total revenue growth; (ii) lower intercompany interest expense; (iii) a gain on sale of one of our businesses; partially offset by; (iv) an increase in estimated acquisition earn-out payables.
EBITDAC for 2021 increased 23.8%, or
2020, to
Organic Revenue growth and scaling of a number of our programs; (ii) higher
contingent commissions, and (iii) a gain on the sale of one of our businesses.
37 --------------------------------------------------------------------------------
Wholesale Brokerage Segment
The Wholesale Brokerage segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, including Brown & Brown retail agents. Approximately 83.3% of the Wholesale Brokerage segment's commissions and fees revenue is commission based.
Financial information relating to our Wholesale Brokerage segment for the 12
months ended
(in thousands, except percentages) 2021 % Change
2020
REVENUES
Core commissions and fees$ 393,629 14.8 %$ 342,986 Profit-sharing contingent commissions 8,072 2.6 % 7,871 Guaranteed supplemental commissions 934 (28.4 )% 1,304 Investment income 155 (15.8 )% 184 Other income, net 627 38.7 % 452 Total revenues 403,417 14.3 % 352,797 EXPENSES Employee compensation and benefits 212,781 15.4 % 184,429 Other operating expenses 60,686 13.1 % 53,643 (Gain)/loss on disposal - - - Amortization 9,150 7.9 % 8,481 Depreciation 2,646 35.8 % 1,948 Interest 15,990 55.5 % 10,281 Change in estimated acquisition earn-out payables 7,319 NMF 422 Total expenses 308,572 19.0 % 259,204 Income before income taxes$ 94,845 1.3 %$ 93,593 Income Before Income Taxes Margin (1) 23.5 % 26.5 % EBITDAC (2) 129,950 13.3 % 114,725 EBITDAC Margin (2) 32.2 % 32.5 % Organic Revenue growth rate (2) 8.1 % 5.5 % Employee compensation and benefits relative to total revenues 52.7 % 52.3 % Other operating expenses relative to total revenues 15.0 % 15.2 % Capital expenditures$ 1,612 (51.5 )%$ 3,324 Total assets at December 31 (3)$ 1,154,373 (35.6 )%$ 1,791,717 (1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues (2) A non-GAAP financial measure (3) As ofDecember 31, 2021 , the Company settled the historical accumulation of the cash outlays paid by Corporate reducing the total assets at the segment level with no effect on the consolidated company NMF = Not a meaningful figure The Wholesale Brokerage segment's total revenues for 2021 increased 14.3%, or$50.6 million , over 2020, to$403.4 million . The$50.6 million increase in core commissions and fees was driven by the following: (i)$27.6 million related to net new and renewal business and; (ii)$23.0 million related to the core commissions and fees from acquisitions that had no comparable revenues in 2020. Profit-sharing contingent commissions and GSCs for 2021 decreased$0.2 million compared to 2020, to$9.0 million . The Wholesale Brokerage segment's growth rate for total commissions and fees was 14.3%, and the Organic Revenue growth rate was 8.1% for 2021. The Organic Revenue growth rate was driven by net new business, as well as increased rates seen across most lines of business, which was partially offset by shrinking capacity in the catastrophe exposed personal lines market. Income before income taxes for 2021 increased 1.3%, or$1.3 million , over 2020, to$94.8 million , primarily due to the following: (i) the net increase in total revenues as described above, which was offset by; (ii) an increase in amortization expense; (iii) an increase in intercompany interest expense; (iv) an increase in employee compensation and benefits of$28.3 million , related to additional employees from acquisitions completed in the past 12 months and net additions to support increased transaction volumes, compensation increases for existing employees, and additional non-cash stock-based compensation expense; and (v) a net$7.0 million increase in other operating expenses, primarily acquisition related. EBITDAC for 2021 increased 13.3%, or$15.2 million , from the same period in 2020, to$129.9 million . EBITDAC Margin for 2021 decreased to 32.2% from 32.5% in the same period in 2020. The decrease in EBITDAC Margin was primarily driven by; (i) increased employee compensation based on the composition of revenue growth and non-cash stock-based compensation costs, in addition to; (ii) a variable expense normalization which was partially offset by; (iii) revenue growth as described above. 38 --------------------------------------------------------------------------------
Services Segment
The Services segment provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers' compensation and all-lines liability arenas. The Services segment also provides Medicare Set-aside account services,Social Security disability and Medicare benefits advocacy services, and claims adjusting services.
Unlike the other segments, nearly all of the Services segment's revenue is
generated from fees which are not significantly affected by fluctuations in
general insurance premiums.
Financial information relating to our Services segment for the 12 months ended
(in thousands, except percentages) 2021 % Change
2020
REVENUES
Core commissions and fees$ 178,857 2.8 %$ 174,012 Profit-sharing contingent commissions - -
-
Guaranteed supplemental commissions - - - Investment income 3 - - Other income, net - - - Total revenues 178,860 2.8 % 174,012 EXPENSES Employee compensation and benefits 89,723 1.1 % 88,787 Other operating expenses 51,212 4.1 % 49,191 (Gain)/loss on disposal 9 - (2 ) Amortization 5,276 (5.1 )% 5,561 Depreciation 1,484 4.2 % 1,424 Interest 2,899 (30.0 )% 4,142 Change in estimated acquisition earn-out payables - (100.0 )% (3,085 ) Total expenses 150,603 3.1 % 146,018 Income before income taxes$ 28,257 0.9 %$ 27,994 Income Before Income Taxes Margin (1) 15.8 % 16.1 % EBITDAC (2) 37,916 5.2 % 36,036 EBITDAC Margin (2) 21.2 % 20.7 % Organic Revenue growth rate (2) 3.0 % (10.9 )% Employee compensation and benefits relative to total revenues 50.2 % 51.0 % Other operating expenses relative to total revenues 28.6 % 28.3 % Capital expenditures$ 1,609 13.0 %$ 1,424 Total assets at December 31 (3)$ 299,185 (37.7 )%$ 480,440 (1) "Income Before Income Taxes Margin" is defined as income before income taxes divided by total revenues (2) A non-GAAP financial measure (3) As ofDecember 31, 2021 , the Company settled the historical accumulation of the cash outlays paid by Corporate reducing the total assets at the segment level with no effect on the consolidated company
NMF = Not a meaningful figure
The Services segment's total revenues for 2021 increased 2.8%, or$4.8 million , from 2020, to$178.9 million . The$4.8 million increase in core commissions and fees, was driven by; (i) specialized claims handling in our advisory business; (ii) expansion of existing programs; (iii) partially offset by continued pressure in our advocacy space (iii) and reduction in workers' compensation severity claims. Total commissions and fees increased 2.8%, and Organic Revenue increased 3.0% in 2021, both as compared to 2020. Income before income taxes for 2021 increased 0.9%, or$0.3 million , from 2020, to$28.3 million due to a combination of: (i) lower intercompany interest; (ii) drivers of EBITDAC described below and; (iii) partially offset by the earn-out liability credit recorded in prior year. EBITDAC for 2021 increased 5.2%, or$1.9 million , from the same period in 2020, to$37.9 million . EBITDAC Margin for 2021 increased to 21.2% from 20.7% in the same period in 2020. The increase in EBITDAC and EBITDAC Margin were driven primarily by leveraging our expense base with higher Organic Revenue growth and lower variable expenses in response to COVID-19.
Other
As discussed in Note 16 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
intercompany interest expense charges to reporting segments.
39
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company seeks to maintain a conservative balance sheet and liquidity profile. Our capital requirements to operate as an insurance intermediary are low and we have been able to grow and invest in our business principally through cash that has been generated from operations. We have the ability to utilize our revolving credit facility, which as ofDecember 31, 2021 provided access to up to$800.0 million in available cash. We believe that we have access to additional funds, if needed, through the capital markets or private placements to obtain further debt financing under the current market conditions. The Company believes that its existing cash, cash equivalents, short-term investment portfolio and funds generated from operations, together with the funds available under the revolving credit facility, will be sufficient to satisfy our normal liquidity needs, including principal payments on our long-term debt, for at least the next 12 months. The revolving credit facility contains an expansion for up to an additional$500.0 million of borrowing capacity, subject to the approval of participating lenders. In addition, under the term loan credit agreement, the unsecured term loan in the initial amount of$300.0 million may be increased by up to$150.0 million , subject to the approval of participating lenders. Including the expansion options under all existing credit agreements, the Company has access to up to$1.5 billion of incremental borrowing capacity as ofDecember 31, 2021 . Our cash and cash equivalents of$887.0 million atDecember 31, 2021 , of which$245.6 million was held in a fiduciary capacity, reflected an increase of$69.6 million from the$817.4 million balance atDecember 31, 2020 . During 2021,$942.5 million of cash was generated from operating activities, representing an increase of 30.6%. During this period,$366.8 million of cash was used for new acquisitions,$89.1 million was used for acquisition earn-out payments,$45.0 million was used to purchase additional fixed assets,$107.2 million was used for payment of dividends,$82.6 million was used for share repurchases and$73.1 million was used to pay outstanding principal balances owed on long-term debt.
We hold approximately
currently have no plans to repatriate in the near future.
Our cash and cash equivalents of$817.4 million atDecember 31, 2020 , of which$211.9 million was held in a fiduciary capacity, reflected an increase of$275.2 million from the$542.2 million balance atDecember 31, 2019 . During 2020,$721.6 million of cash was generated from operating activities, representing an increase of 6.4%. During this period,$694.8 million of cash was used for new acquisitions,$29.5 million was used for acquisition earn-out payments,$70.7 million was used to purchase additional fixed assets,$100.6 million was used for payment of dividends,$55.1 million was used for share repurchases and$55.0 million was used to pay outstanding principal balances owed on long-term debt.
Our ratio of current assets to current liabilities (the "current ratio") was
1.25 and 1.26 for
Contractual Cash Obligations
As of
Payments Due by Period
Less Than After 5
(in thousands) Total 1 Year 1-3 Years 4-5 Years Years
Long-term debt $ 2,036,875 $ 42,500 $ 750,625 $ 193,750 $ 1,050,000
Other liabilities(1) 178,299 38,816 18,621 11,237 109,625
Operating leases(2) 260,801 49,529 87,355 58,928 64,989
Interest obligations 349,233 61,157 111,940 71,391 104,745
Unrecognized tax benefits 917 - 917 - -
Maximum future acquisition
contingency payments(3) 484,815 116,033 368,782 - -
Total contractual cash
obligations(4) $ 3,310,940 $ 308,035 $ 1,338,240 $ 335,306 $ 1,329,359
(1)
Includes the current portion of other long-term liabilities, and approximately
$15.6 million of remaining deferred employer-only payroll tax payments related
to the CARES Act which are expected to be paid in December 2022 . The Company
paid the first installment of $15.6 million in December 2021 .
(2)
Includes $18.8 million of future lease commitments expected to commence in 2022.
(3)
Includes $291.0 million of current and non-current estimated earn-out payables.
$25.0 million of this balance is not subject to any further contingency as a
result of the Amendment dated as of July 27, 2020 by and among the Company, The
Hays Group, Inc. , and certain of its affiliates, to the Asset Purchase
Agreement, dated as of October 22, 2018 .
(4)
Does not include approximately $28.9 million of current liability for a dividend
of $0.1025 per share approved by the board of directors on
January 20, 2022 .
Debt
Total debt at December 31, 2021 was $2,022.9 million net of unamortized discount
and debt issuance costs, which was an decrease of $73.0 million compared to
December 31, 2020 . The decrease includes: (i) the repayment of the principal
balance of $73.1 million for scheduled principal amortization balances related
to our various existing floating rate debt term notes; (ii) an additional $2.7
million including debt issuance costs related to the Company's refinanced credit
facility, the Second Amended and Restated Credit Agreement (as defined below),
on
40
--------------------------------------------------------------------------------
related to our various unsecured Senior Notes, and debt issuance cost
amortization of
OnOctober 27, 2021 , the Company entered into an amended and restated credit agreement (the "Second Amended and Restated Credit Agreement") with the lenders named therein,JPMorgan Chase Bank, N.A . as administrative agent,Bank of America, N.A .,Truist Bank andBMO Harris Bank N.A . as co-syndication agents, andU.S. Bank National Association ,Fifth Third Bank , National Association,Wells Fargo Bank, National Association ,PNC Bank, National Association ,Morgan Stanley Senior Funding, Inc. andCitizens Bank, N.A. as co-documentation agents. The Second Amended and Restated Credit Agreement amended and restated the credit agreement datedApril 17, 2014 , among certain of such parties, as amended by that certain amended and restated credit agreement datedJune 28, 2017 (the "Original Credit Agreement"). The Second Amended and Restated Credit Agreement, among other certain terms, extended the maturity of the revolving credit facility of$800.0 million and unsecured term loans associated with the agreement of$250.0 million toOctober 27, 2026 . At the time of the renewal, the Company added an additional$2.7 million in debt issuance costs related to the transaction. The Company carried forward$0.6 million of existing debt issuance costs related to the previous credit facility agreements while expensing$0.1 million in debt issuance costs due to certain lenders exiting the renewed facility agreement. During the 12 months endedDecember 31, 2021 , the Company has repaid$30.0 million of principal related to the amended and restated credit agreement term loan through quarterly scheduled amortized principal payments each equaling$10.0 million onMarch 31, 2021 ,June 30, 2021 ,September 30, 2021 and onOctober 27, 2021 in conjunction with the closing of the Second Amended and Restated Credit Agreement, the Company repaid an additional$10.0 million of outstanding principal related to the term loan under the amended and restated credit agreement. OnDecember 31, 2021 , the Company repaid$3.1 million under the Second Amended and Restated Credit Agreement as part of a scheduled amortized principal payment/ The Second Amended and Restated Credit Agreement term loan had an outstanding balance of$246.9 million as ofDecember 31, 2021 . The Company's next scheduled amortized principal payment is dueMarch 31, 2022 and is equal to$3.1 million . During the 12 months endedDecember 31, 2021 , the Company has repaid$30.0 million of principal related to the term loan credit agreement through quarterly scheduled amortized principal payments each equaling$7.5 million onMarch 31, 2021 ,June 30, 2021 ,September 30, 2021 andDecember 31, 2021 . The term loan credit agreement had an outstanding balance of$240.0 million as ofDecember 31, 2021 . The Company's next scheduled amortized principal payment is dueMarch 31, 2021 and is equal to$7.5 million . Total debt atDecember 31, 2020 was$2,095.9 million net of unamortized discount and debt issuance costs, which was an increase of$540.6 million compared toDecember 31, 2019 . The increase includes: (i) incremental borrowings of$700.0 million related to the Company's 2.375% Senior Notes due 2031 issued onSeptember 24, 2020 ; (ii) net of the amortization of discounted debt related to our various unsecured Senior Notes, and debt issuance cost amortization of$2.3 million ; offset by (iii) the repayment of the principal balance of$55.0 million for scheduled principal amortization balances related to our various existing floating rate debt term notes; (iv) the net repayment of$100.0 million under the revolving credit facility; and (v) an additional$6.7 million including debt issuance costs and the portion of discount applied to the proceeds issued under the incremental borrowings related to the Company's 2.375% Senior Notes due 2031 issued onSeptember 24, 2020 . OnSeptember 24, 2020 , the Company completed the issuance of$700.0 million aggregate principal amount of the Company's 2.375% Senior Notes due 2031. The Senior Notes were given investment grade ratings of BBB- stable outlook and Baa3 positive outlook. The notes are subject to certain covenant restrictions, which are customary for credit rated obligations. At the time of funding, the proceeds were offered at a discount of the original note amount, which also excluded an underwriting fee discount. The net proceeds received from the issuance were used to repay a portion of the outstanding balance of$200.0 million on the revolving credit facility, to pay a portion of the purchase price in connection with the acquisitions ofLP Insurance Services, LLP andCKP Insurance, LLC and for other general corporate purposes. As ofDecember 31, 2020 , there was an outstanding debt balance of$700.0 million exclusive of the associated discount balance. During the 12 months endedDecember 31, 2020 , the Company has repaid$40.0 million of principal related to the amended and restated credit agreement term loan through quarterly scheduled amortized principal payments each equaling$10.0 million onMarch 31, 2020 ,June 30, 2020 ,September 30, 2020 andDecember 31, 2020 . The amended and restated credit agreement term loan had an outstanding balance of$290.0 million as ofDecember 31, 2020 . The Company's next scheduled amortized principal payment is dueMarch 31, 2021 and is equal to$10.0 million . During the 12 months endedDecember 31, 2020 , the Company has repaid$15.0 million of principal related to the term loan credit agreement through quarterly scheduled amortized principal payments each equaling$3.8 million onMarch 31, 2020 ,June 30, 2020 ,September 30, 2020 andDecember 31, 2020 . The term loan credit agreement had an outstanding balance of$270.0 million as ofDecember 31, 2020 . The Company's next scheduled amortized principal payment is dueMarch 31, 2021 and is equal to$7.5 million . OnApril 30, 2020 , the Company borrowed$250.0 million under the revolving credit facility. The proceeds were used in conjunction with the payment of the purchase price for the previously announced acquisition ofLP Insurance Services LLC and for additional liquidity to further strengthen the Company's financial position and balance sheet in the event cash receipts from customers or carrier partners are delayed due to the COVID-19 pandemic. OnJune 30, 2020 , the Company repaid$150.0 million on the revolving credit facility. OnSeptember 24, 2020 , the Company repaid the total outstanding borrowings under the revolving credit facility of$200.0 million using the proceeds received from the borrowings under the Company's 2.375% Senior Notes due 2031. 41
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