SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2003
Commission file number 0-15981
HILB, ROGAL AND HAMILTON COMPANY
(Exact name of registrant as specified in its charter)
Virginia (State or other jurisdiction of incorporation or organization) 4951 Lake Brook Drive, Suite 500 Glen Allen, Virginia (Address of principal executive offices) | 54-1194795 (I.R.S. Employer Identification No.)
(Zip Code) |
(804) 747-6500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Common Stock, no par value | Outstanding at July 31, 2003 34,034,342 |
HILB, ROGAL AND HAMILTON COMPANY
INDEX
Page
Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Statement of Consolidated Income
for the three months and six months
ended June 30, 2003 and 2002
3
Consolidated Balance Sheet
June 30, 2003 and December 31, 2002
4
Statement of Consolidated Shareholders'
Equity for the six months ended
June 30, 2003 and 2002
5
Statement of Consolidated Cash Flows
for the six months ended
June 30, 2003 and 2002
6
Notes to Consolidated Financial
Statements
7-12
Item 2.
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
13-17
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk
17
Item 4. Controls and Procedures
17
Part II.
OTHER INFORMATION
Item 4.
Submission of Matters to a Vote of Security
Holders
18
Item 6. Exhibits and Reports on Form 8-K
19-20
Signatures
21
PART I -- FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED INCOME
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
Three Months Ended | Six Months Ended | |||
June 30, | June 30, | |||
(in thousands, except per share amounts) | 2003 | 2002 | 2003 | 2002 |
Revenues | ||||
Commissions and fees | $137,868 | $ 94,739 | $278,367 | $193,387 |
Investment income | 820 | 460 | 1,479 | 974 |
Other | 846 | 518 | 1,679 | 1,210 |
139,534 | 95,717 | 281,525 | 195,571 | |
Operating expenses | ||||
Compensation and employee benefits | 75,846 | 52,795 | 151,659 | 106,054 |
Other operating expenses | 24,275 | 17,717 | 47,431 | 34,555 |
Depreciation | 2,292 | 1,730 | 4,580 | 3,440 |
Amortization of intangibles | 2,203 | 563 | 4,356 | 1,085 |
Interest expense | 2,746 | 1,819 | 5,539 | 3,703 |
Retirement benefit | - | - | 5,195 | - |
107,362 | 74,624 | 218,760 | 148,837 | |
INCOME BEFORE INCOME TAXES | 32,172 | 21,093 | 62,765 | 46,734 |
Income taxes | 13,107 | 8,591 | 25,602 | 19,048 |
INCOME BEFORE CUMULATIVE EFFECT | 19,065 | 12,502 | 37,163 | 27,686 |
Cumulative effect of accounting change, net of tax | - | - | - | 3,944 |
NET INCOME | $ 19,065 | $ 12,502 | $ 37,163 | $ 31,630 |
Net Income Per Share – Basic: | ||||
Income before cumulative effect of | $0.56 | $0.44 | $1.10 | $0.98 |
Cumulative effect of accounting change, | - | - | - | 0.14 |
Net income | $0.56 | $0.44 | $1.10 | $1.12 |
Net Income Per Share – Assuming Dilution: | ||||
Income before cumulative effect of | $0.52 | $0.40 | $1.03 | $0.88 |
Cumulative effect of accounting change, | - | - | - | 0.12 |
Net income | $0.52 | $0.40 | $1.03 | $1.00 |
| ||||
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, | December 31, | |
(in thousands) | 2003 | 2002 |
(UNAUDITED) | ||
ASSETS | ||
CURRENT ASSETS | ||
Cash and cash equivalents | $171,578 | $134,692 |
Receivables: |
|
|
Premiums and commissions, less allowance for doubtful | 200,128 | 175,948 |
Other | 31,587 | 25,416 |
231,715 | 201,364 | |
Prepaid expenses and other current assets | 14,167 | 21,509 |
TOTAL CURRENT ASSETS | 417,460 | 357,565 |
PROPERTY AND EQUIPMENT, NET | 21,234 | 20,386 |
GOODWILL | 445,227 | 414,237 |
OTHER INTANGIBLE ASSETS | 92,666 | 83,283 |
Less accumulated amortization | 59,903 | 55,547 |
477,990 | 441,973 | |
OTHER ASSETS | 12,096 | 13,100 |
$928,780 | $833,024 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
CURRENT LIABILITIES | ||
Premiums payable to insurance companies | $287,529 | $235,057 |
Accounts payable | 12,720 | 10,115 |
Accrued expenses | 25,446 | 39,142 |
Premium deposits and credits due customers | 34,507 | 33,998 |
Current portion of long-term debt | 20,491 | 5,733 |
TOTAL CURRENT LIABILITIES | 380,693 | 324,045 |
LONG-TERM DEBT | 161,123 | 177,151 |
OTHER LONG-TERM LIABILITIES | 29,873 | 21,180 |
SHAREHOLDERS’ EQUITY | ||
Common Stock, no par value; authorized 100,000 and 50,000 shares, respectively; outstanding 34,032 and 33,484 shares, | 183,233 | 168,558 |
Retained earnings | 173,977 | 143,005 |
Accumulated other comprehensive income (loss): |
| |
Unrealized loss on interest rate swaps, net of deferred tax | ||
benefit of $696 and $977, respectively | (1,044) | (1,465) |
Other | 925 | 550 |
357,091 | 310,648 | |
$928,780 | $833,024 | |
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
Accumulated | |||
Other | |||
Common | Retained | Comprehensive | |
(in thousands, except per share amounts) | Stock | Earnings | Income (Loss) |
Balance at January 1, 2003 | $168,558 | $143,005 | $ (915) |
Issuance of 548 shares of Common Stock | 10,108 | ||
Income tax benefit from exercise of stock options | 3,661 | ||
Payment of dividends ($.1825 per share) | (6,191) | ||
Net income | 37,163 | ||
Derivative gain, net of tax | 421 | ||
Retirement benefit | 906 | ||
Other | 375 | ||
Balance at June 30, 2003 | $183,233 | $173,977 | $ (119) |
Balance at January 1, 2002 | $ 55,542 | $ 88,604 | $ (1,344) |
Issuance of 281 shares of Common Stock | 2,542 | ||
Payment of dividends ($.1775 per share) | (5,063) | ||
Net income | 31,630 | ||
Derivative gain, net of tax | 62 | ||
Other | 190 | ||
Balance at June 30, 2002 | $ 58,084 | $115,171 | $ (1,092) |
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
Six Months Ended June 30, | ||
(in thousands) | 2003 | 2002 |
OPERATING ACTIVITIES | ||
Net income | $ 37,163 | $ 31,630 |
Adjustments to reconcile net income to net cash | ||
provided by operating activities: | ||
Retirement benefit | 5,195 | - |
Cumulative effect of accounting change, net of tax | - | (3,944) |
Depreciation | 4,580 | 3,440 |
Amortization of intangible assets | 4,356 | 1,085 |
Net income plus retirement benefit, depreciation, | ||
amortization, and cumulative effect of accounting | ||
change, net of tax | 51,294 | 32,211 |
Provision for losses on receivables | 555 | 584 |
Provision for deferred income taxes | 2,536 | 1,914 |
Loss on sale of assets | 131 | 209 |
Income tax benefit from exercise of stock options | 3,661 | - |
Changes in operating assets and liabilities | ||
net of effects from retirement benefit and insurance | ||
agency acquisitions and dispositions: | ||
Increase in accounts receivable | (24,924) | (1,973) |
(Increase) decrease in prepaid expenses | 7,585 | (274) |
Increase in premiums payable to | ||
insurance companies | 37,651 | 1,377 |
Increase in premium deposits and credits due customers | 509 | 7,174 |
Increase in accounts payable | 297 | 357 |
Decrease in accrued expenses | (15,759) | (2,621) |
Other operating activities | 4,022 | (2,598) |
Net Cash Provided by Operating Activities | 67,558 | 36,360 |
INVESTING ACTIVITIES | ||
Purchase of held-to-maturity investments | (70) | (590) |
Proceeds from maturities of held-to-maturity | ||
investments | 57 | 1,879 |
Purchase of property and equipment | (5,079) | (2,314) |
Purchase of insurance agencies, net of cash acquired | (8,248) | (11,891) |
Proceeds from sale of assets | 135 | 475 |
Other investing activities | 87 | 193 |
Net Cash Used in Investing Activities | (13,118) | (12,248) |
FINANCING ACTIVITIES | ||
Proceeds from long-term debt | 5,000 | - |
Principal payments on long-term debt | (15,403) | (12,851) |
Proceeds from Common Stock, net of tax payments | (960) | 1,361 |
Dividends | (6,191) | (5,063) |
Net Cash Used in Financing Activities | (17,554) | (16,553) |
Increase in Cash and Cash Equivalents | 36,886 | 7,559 |
Cash and cash equivalents at beginning of period | 134,692 | 51,580 |
Cash and Cash Equivalents at End of Period | $171,578 | $59,139 |
|
|
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2003
(UNAUDITED)
NOTE A—BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hilb, Rogal and Hamilton Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the company’s Form 10-K for the year ended December 31, 2002.
Certain amounts for the prior period have been reclassified to conform to current year presentation.
NOTE B—ACCOUNTING FOR STOCK-BASED COMPENSATION
The company has three stock-based compensation plans. The company continues to account for its stock options using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (Statement 123), as amended by Statement of Financial Accounting Standards No. 148, establishes accounting and disclosure requirements using a fair value based method of accounting for stock options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2003
(UNAUDITED)
NOTE B—ACCOUNTING FOR STOCK-BASED COMPENSATION – Continued
The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of Statement 123 to stock-based compensation.
Three Months Ended June 30, |
Six Months Ended June 30, | |||
(in thousands, except per share amounts) | 2003 | 2002 | 2003 | 2002 |
Net income - as reported | $19,065 | $12,502 | $37,163 | $31,630 |
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects | (1,539) | (891) | (2,993) | (1,387) |
Pro forma net income | $17,526 | $11,611 | $34,170 | $30,243 |
Net income per share: | ||||
Basic - as reported | $0.56 | $0.44 | $1.10 | $1.12 |
Basic - pro forma | $0.52 | $0.41 | $1.01 | $1.07 |
Assuming dilution - as reported | $0.52 | $0.40 | $1.03 | $1.00 |
Assuming dilution - pro forma | $0.48 | $0.37 | $0.95 | $0.95 |
NOTE C—INCOME TAXES
Deferred taxes result from temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The company’s effective rate varies from the statutory rate primarily due to state income taxes.
NOTE D—ACQUISITIONS
On July 1, 2002, the company acquired all of the issued and outstanding membership interest units of Hobbs Group, LLC (Hobbs) other than those owned by Hobbs IRA Corp. (HIRAC), and all of the issued and outstanding capital stock of HIRAC, pursuant to a purchase agreement dated May 10, 2002, by and among the company, Hobbs, the members of Hobbs (other than HIRAC) and the shareholders of HIRAC. The company’s financial statements include the results of Hobbs operations since the closing date of the acquisition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2003
(UNAUDITED)
NOTE D—ACQUISITIONS – Continued
Hobbs is an insurance broker serving top-tier clients and provides property and casualty insurance brokerage, risk management and executive and employee benefits services. This acquisition allows the company to expand its capabilities in the top-tier market. In addition, Hobbs will provide the company with additional market presence and expertise in the employee benefits services area and an increased presence in executive benefits. Hobbs will also bring increased depth to the geographic reach of the company’s existing national platform.
The amount the company paid in connection with the acquisition consisted of approximately $116.5 million in cash, which included acquisition costs of $2.3 million and the company’s assumption and retirement of certain debt of Hobbs, and the issuance to the members of Hobbs (other than HIRAC) and the shareholders of HIRAC of an aggregate of 719,729 shares of the company’s common stock valued at $31.6 million. The value of the 719,729 shares issued was determined based on the average market price of the company’s stock over the period including two days before and after the date at which the number of shares to be issued in accordance with the purchase agreement became fixed.
In addition, the company will pay contingent consideration in August 2003 consisting of approximately $38.4 million in cash and the issuance of 1,751,747 shares of the company’s common stock.
The company has further agreed to assume and satisfy certain existing contingent earn-out and deferred compensation obligations of Hobbs from Hobbs’ prior acquisitions estimated to approximate a net present value of $30 million as of the date of acquisition. The assumed existing earn-outs will be recorded when their respective contingencies are resolved and consideration is paid.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2003
(UNAUDITED)
NOTE D—ACQUISITIONS – Continued
The following unaudited pro forma results of operations of the company give effect to the acquisition of Hobbs as though the transaction had occurred on January 1, 2002:
Three Months Ended June 30, | Six Months Ended June 30, | |||
(in thousands, except per share amounts) | 2003 | 2002 | 2003 | 2002 |
Total Revenues | $139,534 | $121,864 | $281,525 | $246,450 |
Income before cumulative effect of accounting | ||||
change and extraordinary item | $ 19,065 | $ 13,537 | $ 37,163 | $ 30,546 |
Net Income | $ 19,065 | $ 13,126 | $ 37,163 | $ 34,079 |
Income per share before cumulative effect of | ||||
accounting change and extraordinary item: | ||||
Basic | $0.56 | $0.47 | $1.10 | $1.06 |
Assuming Dilution | $0.52 | $0.42 | $1.03 | $0.94 |
Net Income Per Share: | ||||
Basic | $0.56 | $0.45 | $1.10 | $1.18 |
Assuming Dilution | $0.52 | $0.41 | $1.03 | $1.05 |
The pro forma net income results for the six months ended June 30, 2002 include a cumulative effect of accounting change of $3.9 million ($0.12 per share) related to the company’s change in revenue recognition policy (see Note H) and for the three months and six months ended June 30, 2002 include an extraordinary loss of $0.5 million ($0.01 per share) related to Hobbs’ debt extinguishment.
During the first six months of 2003, the company also acquired certain assets and liabilities of six insurance agencies and other accounts for approximately $27.0 million ($8.0 million in cash, $8.0 million in guaranteed future payments and 294,761 shares of common stock). The purchase price may be increased based on agency profitability per the contracts. These acquisitions are not material to the consolidated financial statements individually or in aggregate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2003
(UNAUDITED)
NOTE E—SALE OF ASSETS AND OTHER GAINS
During the six months ended June 30, 2003 and 2002, the company sold certain insurance accounts and other assets resulting in losses of $131 thousand and $209 thousand, respectively. Revenues, expenses and assets related to these dispositions were not material to the consolidated financial statements.
NOTE F—NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share.
Three Months Ended June 30, | Six Months Ended June 30, | |||
(in thousands, except per share amounts) | 2003 | 2002 | 2003 | 2002 |
Numerator for basic net income | ||||
per share – net income | $19,065 | $12,502 | $37,163 | $31,630 |
Effect of dilutive securities: | ||||
5.25% Convertible Subordinated Debentures | - | 273 | - | 545 |
Numerator for dilutive net income per share – net income | ||||
available after assumed conversions | $19,065 | $12,775 | $37,163 | $32,175 |
Denominator | ||||
Weighted average shares | 33,753 | 28,229 | 33,628 | 28,189 |
Effect of guaranteed future shares to be issued in connection | ||||
with agency acquisitions | 158 | 26 | 168 | 32 |
Denominator for basic net income per share | 33,911 | 28,255 | 33,796 | 28,221 |
Effect of dilutive securities: | ||||
Employee stock options | 738 | 1,060 | 781 | 1,045 |
Employee non-vested stock | 105 | 166 | 114 | 159 |
Contingent stock – acquisitions | 1,801 | 38 | 1,333 | 30 |
5.25% Convertible Subordinated Debentures | - | 2,813 | - | 2,813 |
Dilutive potential common shares | 2,644 | 4,077 | 2,228 | 4,047 |
Denominator for diluted net income per share - | ||||
adjusted weighted average shares and | ||||
assumed conversions | 36,555 | 32,332 | 36,024 | 32,268 |
Net Income Per Share: | ||||
Basic | $0.56 | $0.44 | $1.10 | $1.12 |
Assuming Dilution | $0.52 | $0.40 | $1.03 | $1.00 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
Jun