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, 2004
Commission File Number 0-15981
HILB ROGAL & HOBBS COMPANY
(Exact name of registrant as specified in its charter)
| Virginia | 54-1194795 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 4951 Lake Brook Drive, Suite 500 Glen Allen, Virginia |
23060 | |
| (Address of principal executive offices) | (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 |
Outstanding at October 29, 2004 | |
| Common Stock, no par value |
35,976,179 |
INDEX
| Page | ||
| Part I. FINANCIAL INFORMATION |
||
| Item 1. Financial Statements |
||
| 3 | ||
| Consolidated Balance Sheet September 30, 2004 and December 31, 2003 |
4 | |
| Statement of Consolidated Shareholders’ Equity for the nine months ended September 30, 2004 and 2003 |
5 | |
| Statement of Consolidated Cash Flows for the nine months ended September 30, 2004 and 2003 |
6 | |
| 7-9 | ||
| Item 2.
Management’s Discussion and Analysis of Financial Condition |
10-14 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
14 | |
| Item 4. Controls and Procedures |
14 | |
| Part II. OTHER INFORMATION |
||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
15 | |
| Item 6. Exhibits |
15 | |
| 16 | ||
2
HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(UNAUDITED)
PART I — FINANCIAL INFORMATION
| Item 1. | FINANCIAL STATEMENTS |
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||
| (in thousands, except per share amounts) | 2004 |
2003 |
2004 |
2003 | ||||||||
| Revenues |
||||||||||||
| Commissions and fees |
$ | 151,622 | $ | 137,133 | $ | 453,692 | $ | 415,500 | ||||
| Investment income |
788 | 775 | 2,099 | 2,253 | ||||||||
| Other |
1,290 | 1,466 | 3,891 | 3,146 | ||||||||
| 153,700 | 139,374 | 459,682 | 420,899 | |||||||||
| Operating expenses |
||||||||||||
| Compensation and employee benefits |
81,474 | 73,856 | 244,344 | 225,515 | ||||||||
| Other operating expenses |
28,313 | 24,051 | 80,290 | 71,482 | ||||||||
| Depreciation |
2,136 | 2,322 | 6,465 | 6,902 | ||||||||
| Amortization of intangibles |
3,444 | 2,353 | 9,125 | 6,708 | ||||||||
| Interest expense |
2,546 | 2,556 | 7,460 | 8,095 | ||||||||
| Integration costs |
176 | 3,174 | 1,803 | 3,174 | ||||||||
| Retirement benefit |
— | — | — | 5,195 | ||||||||
| 118,089 | 108,312 | 349,487 | 327,071 | |||||||||
| INCOME BEFORE INCOME TAXES |
35,611 | 31,062 | 110,195 | 93,828 | ||||||||
| Income taxes |
14,262 | 12,677 | 44,108 | 38,280 | ||||||||
| NET INCOME |
$ | 21,349 | $ | 18,385 | $ | 66,087 | $ | 55,548 | ||||
| Net Income Per Share: |
||||||||||||
| Basic |
$ | 0.60 | $ | 0.52 | $ | 1.85 | $ | 1.62 | ||||
| Assuming Dilution |
$ | 0.58 | $ | 0.50 | $ | 1.81 | $ | 1.53 | ||||
See notes to consolidated financial statements.
3
HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| (in thousands) | September 30, 2004 |
December 31, 2003 |
||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS |
||||||||
| Cash and cash equivalents, including $57,883 and $58,233, respectively, of restricted funds |
$ | 181,357 | $ | 126,464 | ||||
| Receivables: |
||||||||
| Premiums and commissions, less allowance for doubtful accounts of $4,861 and $4,243, respectively |
207,847 | 223,431 | ||||||
| Other |
38,357 | 31,820 | ||||||
| 246,204 | 255,251 | |||||||
| Prepaid expenses and other current assets |
24,499 | 14,603 | ||||||
| TOTAL CURRENT ASSETS |
452,060 | 396,318 | ||||||
| PROPERTY AND EQUIPMENT, NET |
25,179 | 25,487 | ||||||
| GOODWILL |
628,931 | 565,023 | ||||||
| OTHER INTANGIBLE ASSETS |
150,775 | 112,414 | ||||||
| Less accumulated amortization |
72,295 | 63,191 | ||||||
| 707,411 | 614,246 | |||||||
| OTHER ASSETS |
18,280 | 13,176 | ||||||
| $ | 1,202,930 | $ | 1,049,227 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| CURRENT LIABILITIES |
||||||||
| Premiums payable to insurance companies |
$ | 311,961 | $ | 308,533 | ||||
| Accounts payable |
10,340 | 9,089 | ||||||
| Accrued expenses |
32,001 | 37,434 | ||||||
| Premium deposits and credits due customers |
48,079 | 34,290 | ||||||
| Current portion of long-term debt |
10,724 | 9,321 | ||||||
| TOTAL CURRENT LIABILITIES |
413,105 | 398,667 | ||||||
| LONG-TERM DEBT |
233,317 | 174,012 | ||||||
| DEFERRED INCOME TAXES |
28,728 | 19,208 | ||||||
| OTHER LONG-TERM LIABILITIES |
30,127 | 23,073 | ||||||
| SHAREHOLDERS’ EQUITY |
||||||||
| Common Stock, no par value; authorized 100,000 shares; outstanding 35,926 and 35,446 shares, respectively |
236,343 | 228,357 | ||||||
| Retained earnings |
260,418 | 205,184 | ||||||
| Accumulated other comprehensive income (loss): |
||||||||
| Unrealized loss on interest rate swaps, net of deferred tax benefit of $179 and $334 respectively |
(269 | ) | (502 | ) | ||||
| Other |
1,161 | 1,228 | ||||||
| 497,653 | 434,267 | |||||||
| $ | 1,202,930 | $ | 1,049,227 | |||||
See notes to consolidated financial statements.
4
HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(UNAUDITED)
| (in thousands, except per share amounts) | Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
|||||||||
| Balance at January 1, 2004 |
$ | 228,357 | $ | 205,184 | $ | 726 | ||||||
| Issuance of 982 shares of Common Stock |
17,987 | |||||||||||
| Repurchase of 503 shares of Common Stock |
(17,300 | ) | ||||||||||
| Income tax benefit from exercise of stock options |
7,299 | |||||||||||
| Payment of dividends ($0.3025 per share) |
(10,853 | ) | ||||||||||
| Net income |
66,087 | |||||||||||
| Derivative gain, net of tax |
233 | |||||||||||
| Other |
(67 | ) | ||||||||||
| Balance at September 30, 2004 |
$ | 236,343 | $ | 260,418 | $ | 892 | ||||||
| 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 ($0.2750 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 | ||||||
See notes to consolidated financial statements.
5
HILB ROGAL & HOBBS COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, |
||||||||
| (in thousands) | 2004 |
2003 |
||||||
| OPERATING ACTIVITIES |
||||||||
| Net income |
$ | 66,087 | $ | 55,548 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Integration costs |
1,803 | 3,174 | ||||||
| Retirement benefit |
— | 5,195 | ||||||
| Depreciation |
6,465 | 6,902 | ||||||
| Amortization of intangibles |
9,125 | 6,708 | ||||||
| Provision for losses on receivables |
991 | 1,025 | ||||||
| Provision for deferred income taxes |
3,675 | 3,964 | ||||||
| Gain on sale of assets |
(560 | ) | (531 | ) | ||||
| Income tax benefit from exercise of stock options |
7,299 | 3,681 | ||||||
| Changes in operating assets and liabilities net of effects from integration costs, retirement costs and insurance agency acquisitions and dispositions: |
||||||||
| Decrease in receivables |
17,133 | 1,113 | ||||||
| (Increase) decrease in prepaid expenses |
(9,261 | ) | 6,506 | |||||
| (Decrease) increase in premiums payable to insurance companies |
(18,397 | ) | 6,478 | |||||
| Increase in premium deposits and credits due customers |
13,790 | 6,489 | ||||||
| (Decrease) increase in accounts payable |
(388 | ) | 1,190 | |||||
| Decrease in accrued expenses |
(12,043 | ) | (12,070 | ) | ||||
| Other operating activities |
724 | 4,153 | ||||||
| Net Cash Provided by Operating Activities |
86,443 | 99,525 | ||||||
| INVESTING ACTIVITIES |
||||||||
| Purchase of property and equipment |
(6,570 | ) | (8,485 | ) | ||||
| Purchase of insurance agencies, net of cash acquired |
(45,128 | ) | (45,895 | ) | ||||
| Proceeds from sale of assets |
4,872 | 831 | ||||||
| Other investing activities |
(478 | ) | 976 | |||||
| Net Cash Used in Investing Activities |
(47,304 | ) | (52,573 | ) | ||||
| FINANCING ACTIVITIES |
||||||||
| Proceeds from long-term debt |
50,000 | 5,000 | ||||||
| Principal payments on long-term debt |
(5,419 | ) | (29,556 | ) | ||||
| Debt issuance costs |
(300 | )< | ||||||