Back to GetFilings.com




SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549


FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended September 30, 2003

Commission file number  0-15981


HILB, ROGAL AND HAMILTON COMPANY

d/b/a HILB ROGAL & HOBBS 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.)


23060


(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 November 1, 2003

35,952,458








HILB, ROGAL AND HAMILTON COMPANY

d/b/a HILB ROGAL & HOBBS COMPANY

INDEX


     Page

Part I.

FINANCIAL INFORMATION


Item 1.

Financial Statements


Statement of Consolidated Income

  for the three months and nine months

  ended September 30, 2003 and 2002

3


Consolidated Balance Sheet

  September 30, 2003 and December 31, 2002

4


Statement of Consolidated Shareholders'

  Equity for the nine months ended

  September 30, 2003 and 2002

5


Statement of Consolidated Cash Flows

  for the nine months ended

  September 30, 2003 and 2002

6


Notes to Consolidated Financial

  Statements

7-13


Item 2.

Management's Discussion and Analysis

  

  of Financial Condition and

              Results of Operations

14-18


Item 3.

Quantitative and Qualitative Disclosures

                           About Market Risk

18


Item 4.             Controls and Procedures

18


Part II.

OTHER INFORMATION


Item 6.             Exhibits and Reports on Form 8-K

19-20


Signatures

21






2

PART I -- FINANCIAL INFORMATION


Item 1.

FINANCIAL STATEMENTS


STATEMENT OF CONSOLIDATED INCOME


HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES


(UNAUDITED)

 

 

Three Months Ended

Nine Months Ended

 

September 30,

September 30,

(in thousands, except per share amounts)

2003

2002

2003

2002

Revenues

    

  Commissions and fees

$137,133

$126,834

$415,500

$320,222

  Investment income

775

633

2,253

1,606

  Other

1,466

1,023

3,146

2,233

 

139,374

128,490

420,899

324,061

Operating expenses

    

  Compensation and employee benefits

73,856

69,795

225,515

175,849

  Other operating expenses

24,051

21,922

71,482

56,478

  Depreciation

2,322

1,998

6,902

5,438

  Amortization of intangibles

2,353

1,920

6,708

3,004

  Interest expense

2,556

3,786

8,095

7,489

  Integration costs

3,174

-

3,174

-

  Retirement benefit

-

-

5,195

-

 

108,312

99,421

327,071

248,258

INCOME BEFORE INCOME TAXES

    

  AND CUMULATIVE EFFECT OF

    

  ACCOUNTING CHANGE

31,062

29,069

93,828

75,803

     

Income taxes

12,677

 11,820

38,280

30,868

     

INCOME BEFORE CUMULATIVE EFFECT

    

  OF ACCOUNTING CHANGE

18,385

17,249

55,548

44,935

     

Cumulative effect of accounting change, net of tax

-

    -

-

3,944

NET INCOME

$ 18,385

$ 17,249

$ 55,548

$  48,879

     
     

Net Income Per Share – Basic:

    

  Income before cumulative effect of
    accounting change

$0.52

$0.59

$1.62

$1.58

  Cumulative effect of accounting change,
    net of tax

-

   -

-

0.13

  Net income

$0.52

$0.59

$1.62

$1.71

     

Net Income Per Share – Assuming Dilution:

    

  Income before cumulative effect of
    accounting change

$0.50

$0.53

$1.53

$1.41

  Cumulative effect of accounting change,
    net of tax

-

   -

-

0.12

  Net income

$0.50

$0.53

$1.53

$1.53

See notes to consolidated financial statements.


3

CONSOLIDATED BALANCE SHEET


HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES


 

       September 30,

                     December 31,

(in thousands)

       2003

                      2002

 

        (UNAUDITED)

 

ASSETS

  

CURRENT ASSETS

  

  Cash and cash equivalents

$137,994 

 $134,692      

  Receivables:

    Premiums and commissions, less allowance for doubtful


 

      accounts of $4,371 and $5,567, respectively

180,487 

175,948      

    Other

32,479 

25,416      

 

212,966 

201,364      

  Prepaid expenses and other current assets

15,105 

21,509      

TOTAL CURRENT ASSETS

366,065 

357,565      

 


 

PROPERTY AND EQUIPMENT, NET

22,647 

20,386      

   

GOODWILL

550,158 

414,237      

OTHER INTANGIBLE ASSETS

96,800 

83,283      

  Less accumulated amortization

62,255 

55,547      

 

584,703 

441,973      

 


 

OTHER ASSETS

13,960 

13,100      

 

$987,375 

$833,024      

   

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

CURRENT LIABILITIES

  

Premiums payable to insurance companies

$271,550 

$235,057      

Accounts payable

13,134 

10,115      

    Accrued expenses

32,032 

39,142      

Premium deposits and credits due customers

40,488 

33,998      

Current portion of long-term debt

8,768 

5,733      

TOTAL CURRENT LIABILITIES

365,972 

324,045      

   

LONG-TERM DEBT

161,635 

177,151      

   

OTHER LONG-TERM LIABILITIES

34,524 

21,180      


SHAREHOLDERS’ EQUITY

  

Common Stock, no par value; authorized 100,000 and 50,000

      shares, respectively; outstanding 35,721 and  33,484 shares,

      respectively



236,074 



168,558      

Retained earnings

189,041 

143,005      

   Accumulated other comprehensive income (loss):

 

 

     Unrealized loss on interest rate swaps, net of deferred tax

  

       benefit of $513 and $977, respectively

(770)

(1,465)     

     Other

899 

550      

 

425,244 

310,648      

 

$987,375 

$833,024      

  



See notes to consolidated financial statements.


4

STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY


HILB ROGAL & HOBBS 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 2,515 shares of Common Stock

71,268     

  

  Repurchase of 278 shares of Common Stock

(8,339)    

  

  Income tax benefit from exercise of stock options

3,681     

  

  Payment of dividends ($.2750 per share)

 

(9,512)    

 

  Net income

 

55,548     

 

  Derivative gain, net of tax

  

695        

  Retirement benefit

906     

 

   

  Other

  

349        

Balance at September 30, 2003

$236,074     

$189,041     

$   129        

    

Balance at January 1, 2002

$ 55,542     

$  88,604     

$(1,344)       

  Issuance of 1,066 shares of Common Stock

34,048     

  

  Payment of dividends ($.2675 per share)

 

(7,708)    

 

  Net income

 

48,879     

 

  Derivative loss, net of tax

  

(178)       

  Other

-     

 

331        

Balance at September 30, 2002

$89,590     

$129,775     

$(1,191)       

    



See notes to consolidated financial statements.


5

STATEMENT OF CONSOLIDATED CASH FLOWS


HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES


(UNAUDITED)

 

Nine Months Ended

September 30,

 

(in thousands)

2003

2002

OPERATING ACTIVITIES

  

  Net income

$ 55,548       

$ 48,879       

  Adjustments to reconcile net income to net cash
    provided by operating activities:

  

      Retirement benefit

5,195       

-       

      Integration costs

3,174       

-       

      Depreciation

6,902       

5,438       

      Amortization of intangible assets

6,708       

3,004       

      Cumulative effect of accounting change, net of tax

-       

(3,944)      

      Net income plus retirement benefit, integration costs,
        depreciation, amortization, and cumulative effect of
        accounting change, net of tax

77,527       

53,377       

      Provision for losses on receivables

1,025       

923       

      Provision for deferred income taxes

3,964       

2,870       

      (Gain) loss on sale of assets

(531)      

115       

      Income tax benefit from exercise of stock options

3,681       

-       

      Changes in operating assets and liabilities
        net of effects from retirement benefit, integration costs
        and insurance agency acquisitions and dispositions:

  

          (Increase) decrease in receivables

1,113       

(14,079)      

          (Increase) decrease in prepaid expenses

6,506       

 (611)      

          Increase in premiums payable to
            insurance companies

6,478       

  14,555       

          Increase in premium deposits and credits due
            customers


6,489       


11,021       

          Increase (decrease) in accounts payable

1,190       

(194)      

          Increase (decrease) in accrued expenses

(12,070)      

10,509       

          Other operating activities

4,153       

(3,592)      

Net Cash Provided by Operating Activities

99,525       

74,894       

   

INVESTING ACTIVITIES

  

  Purchase of held-to-maturity investments

(79)      

(611)      

  Proceeds from maturities of held-to-maturity
    investments

223       

 2,629       

  Purchase of property and equipment

(8,485)      

(4,405)      

  Purchase of insurance agencies, net of cash acquired

(45,895)      

(105,559)      

  Proceeds from sale of assets

831       

1,492       

  Other investing activities

832       

577       

Net Cash Used in Investing Activities

(52,573)      

(105,877)      

   

FINANCING ACTIVITIES

  

  Proceeds from long-term debt

5,000       

160,000       

  Principal payments on long-term debt

(29,556)      

(57,684)      

  Debt issuance costs

(557)      

(2,356)      

  Proceeds from Common Stock, net of tax payments for
    options exercised

(686)      

1,228       

  Repurchase of Common Stock

(8,339)      

-       

  Dividends

(9,512)      

(7,708)      

Net Cash (Used in) Provided by Financing Activities

(43,650)      

93,480       

Increase in Cash and Cash Equivalents

3,302       

62,497       

Cash and cash equivalents at beginning of period

134,692       

51,580       

Cash and Cash Equivalents at End of Period

$137,994       

$114,077       

See notes to consolidated financial statements.


6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES


September 30, 2003


(UNAUDITED)


NOTE A—BASIS OF PRESENTATION


The accompanying unaudited consolidated financial statements of Hilb, Rogal and Hamilton Company d/b/a Hilb Rogal & Hobbs 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 nine-month period ended September 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—COMPANY NAME CHANGE


In September 2003, the company announced that it was changing its name to Hilb Rogal & Hobbs Company and immediately began doing business under the new name.  The company’s board of directors approved an amendment to the company’s articles of incorporation to change the name subject to approval by the company’s shareholders at the May 2004 annual meeting.  The company’s New York Stock Exchange ticker symbol will continue as “HRH.”


NOTE C—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.



7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES


September 30, 2003


(UNAUDITED)


NOTE C—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

  September 30,

  Nine Months Ended

  September 30,

(in thousands, except per share amounts)

  2003

  2002

  2003

  2002

 





Net income - as reported

$18,385   

$17,249   

$55,548   

$48,879   

Deduct:  Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects



(2,109)  



(1,771)  



(5,102)  



(3,158)  


Pro forma net income


$16,276   


$15,478   


$50,446   


$45,721   

     

Net income per share:

    

Basic - as reported

$0.52   

$0.59   

$1.62   

$1.71   

Basic - pro forma

$0.46   

$0.53   

$1.47   

$1.60   

     

Assuming dilution - as reported

$0.50   

$0.53   

$1.53   

$1.53   

Assuming dilution - pro forma

$0.45   

$0.47   

$1.39   

$1.43   


NOTE D—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 E—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 financial statements of the company reflect the combined operations of the company and Hobbs from the closing date of the acquisition.


8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES


September 30, 2003


(UNAUDITED)


NOTE E—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.  In addition, the company paid contingent consideration in August 2003 consisting of $38.4 million in cash and the issuance of 1,751,747 shares of the company’s common stock valued at $56.7 million.  The values of the shares issued were 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 became fixed.


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 contingent payments and existing earn-outs will be recorded when their respective contingencies are resolved and consideration is paid.


9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES


September 30, 2003


(UNAUDITED)


NOTE E—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

September 30,

Nine Months Ended

September 30,

 (in thousands, except per share amounts)

2003

2002

2003

2002

     

Total Revenues

$139,374    

$128,490    

$420,899    

$374,940    

     

Income before cumulative effect of accounting

    

  change and extraordinary item

$  18,385    

$  17,249    

$  55,548    

$  47,795    

     

Net Income

$  18,385    

$  17,249    

$  55,548    

$  51,328    

     

Income per share before cumulative effect of