Hub International Revenue Increases Sharply in Third Quarter

 

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 Location:  Chicago
 Date:    2004-10-28  
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Hub International Limited (NYSE:HBG)(TSX:HBG):

  • Revenue increases 47% for quarter, 23% year to date
  • Talbot stock based compensation leads to reduced net earnings, as previously announced
  • Net earnings decline 83% for third quarter; 13% year to date
  • Adjusted net earnings (see tables) rise 44% for quarter, 26% year to date
  • Organic growth rate averages 2% in third quarter, 7% year to date

Hub International Limited(NYSE:HBG)(TSX:HBG) today reported a decline in net earnings for the third quarter and the first nine months of 2004, as expected, due to the impact of non-cash stock based compensation related to the July 1, 2004 acquisition of Talbot Financial Corporation ("Talbot").

Net earnings declined 83% to $1.1 million in the third quarter from $6.8 million in the same period a year earlier, while earnings per diluted share declined 82% to $0.04 per share from $0.22 a year earlier. As shown in the table below, the earnings figure included the impact of $6.9 million in non-cash stock based compensation to executives of Talbot. (See discussion of this item later in release.) Excluding the impact of the Talbot earnout and other adjustments noted in the table below, net earnings would have increased 44% to $7.6 million and diluted earnings per share would have increased 35% to $0.23 in the third quarter 2004, as compared to the third quarter 2003.

(in thousands of U.S. dollars, except per share amounts)

                                                         Net   Diluted

                                                       Earnings  EPS

                                                      ----------------

Three months ended September 30, 2004 reported net

 earnings                                               $1,146  $0.04

Impact of foreign exchange                                (404) (0.01)

Non-cash stock based compensation - Talbot               6,889   0.20

                                                      ----------------

Adjusted September 30, 2004 results                     $7,631  $0.23

                                                      ----------------

 

Three months ended September 30, 2003 reported net

 earnings                                               $6,820  $0.22

Impact of foreign exchange                                (518) (0.02)

Proceeds from life insurance                            (1,000) (0.03)

                                                      ----------------

Adjusted September 30, 2003 results                     $5,302  $0.17

                                                      ----------------

Revenue increased 47% to $94.9 million in the quarter ended September 30, 2004 from $64.7 million a year earlier, including the benefit of acquired brokerages and organic growth. Net acquisitions and divestitures completed since September 30, 2003 added approximately $110 million to Hub's annualized revenue base. Hub posted third quarter organic growth, the equivalent of same-store sales, of 2%, including a decline of 3% in the United States and an increase of 9% (4% excluding foreign exchange effects) in Canada. Net of foreign exchange effects, overall organic growth was 0%.

"Although we were pleased with the performance of our largest acquisitions this year--Talbot and Bush, Cotton & Scott--third quarter results suffered from a softening rate environment," said Martin P. Hughes, chairman and chief executive officer. "In a declining rate environment, both new business and renewal business carry lower premiums, while increased capacity results in more competition for the clients' business.

"In spite of these challenges, for the quarter nearly half of our hubs generated organic growth rates well above our long-term target average of 5%. We are working aggressively to address the specific shortfalls in underperforming brokerages."

On a consolidated basis, commission income increased 49% to $90.3 million from $60.8 million in the same period of 2003. Third quarter contingent commissions and volume overrides declined 1% to $1.9 million while other income grew 37% to $2.8 million from $2.0 million.

In the United States, third quarter revenue increased 75% to $66.5 million from $38.0 million a year earlier, largely due to the acquisitions of Talbot and Bush, Cotton & Scott. Commissions increased 79% to $62.7 million from $35.0 million, while contingent commissions and volume overrides grew 2% to $1.6 million. Other income grew 63% to $2.2 million from $1.4 million.

In Canada, revenue grew 6% to $28.4 million from $26.7 million in the third quarter of 2003. Commissions rose 7% to $27.6 million from $25.7 million, while contingent commissions and volume overrides fell 14% to $0.3 million and other income fell 17% to $0.5 million from $0.6 million. A stronger Canadian dollar added approximately 5 percentage points to the revenue growth rate in Canada in the third quarter 2004.

Cash compensation increased 56% in the third quarter to $57.6 million, or 61% of revenue, from $36.9 million, or 57% of revenue, a year earlier. The increase in compensation expense as a percentage of revenue reflected both negative organic growth in the United States and a relatively higher cash compensation ratio at Talbot. Non-cash stock based compensation increased to $8.3 million from $1.4 million, primarily as a result of the earnout to Talbot management. Selling, occupancy and administration expense increased 41% to $19.6 million from $14.0 million, but decreased to 21% of revenue from 22% a year earlier, aided by expense control.

Pre-tax income in the third quarter declined 59.2% to $4.1 million from $10.0 million, largely due to the impact of non-cash stock based compensation earned by Talbot management. Because this expense is not deductible for tax purposes, Hub's effective tax rate increased to 72% from 32% in the same quarter of 2003.

NINE-MONTH RESULTS REFLECT STRONG GROWTH

For the first nine months of 2004, Hub posted a 23% increase in revenue to $256.5 million from $207.7 million in the prior year, largely due to the impact of acquired brokerages and a 7% organic growth rate. Commissions grew 24% to $228.9 million from $184.8 million, while contingent commissions and volume overrides grew 16% to $19.9 million from $17.2 million. Other income grew 33% to $7.7 million from $5.8 million. The benefits of a stronger Canadian dollar added approximately 3 percentage points to the revenue growth rate for the first nine months of 2004.

U.S. revenue grew 30% to $166.0 million in the first nine months of 2004 from $127.9 million, including the impact of acquisitions and a 2% organic growth rate. Commissions increased 32% to $146.6 million from $111.3 million. Contingent commissions and volume overrides rose 7% to $13.4 million from $12.6 million, while other income increased 47% to $5.9 million from $4.0 million.

Canadian revenue rose 13% to $90.5 million in the first nine months of 2004 from $79.8 million, due largely to a 15% organic growth rate. Commissions rose 12% to $82.3 million from $73.4 million, while contingent commissions and volume overrides increased 42% to $6.5 million from $4.6 million. Other income declined 2% to $1.7 million from $1.8 million. A stronger Canadian dollar added approximately 8 percentage points to the revenue growth rate for Canadian operations.

Cash compensation increased 23% to $140.3 million in the first nine months of 2004 from $113.7 million a year earlier, remaining constant as a percentage of revenue at 55%. Non-cash stock based compensation expense increased to $11.7 million from $3.6 million, due to both the Talbot earnout and the issuance of restricted share units in the first quarter 2004 as part of a restructuring of the management bonus plan. Selling, occupancy and administration expense increased 25% to $51.3 million from $40.9 million, remaining constant at 20% of revenue.

Pre-tax earnings declined 6% to $37.6 million in the first nine months of 2004 from $39.9 million, including the impact of the Talbot earnout. Hub's effective tax rate increased to 40% from 35%, due largely to the non-cash stock based compensation related to Talbot, which is not deductible for tax purposes.

Net earnings decreased 13% to $22.4 million in the first nine months of 2004 from $25.8 million in the same period of 2003, reflecting the impact of the Talbot earnout and the first quarter 2004 write-down of intangibles related to a corporate branding effort, offset somewhat by foreign exchange benefits. Net earnings declined 16% per diluted share to $0.68 from $0.81. Excluding the impact of the Talbot earnout and other adjustments noted in the table below, net earnings would have increased 26% to $29.7 million and diluted earnings per share would have increased 20% to $0.89 for the first nine months of 2004, as compared to the first nine months of 2003.

(in thousands of U.S. dollars, except per share amounts)

 

                                                        Net    Diluted

                                                       Earnings  EPS

                                                      ----------------

Nine months ended September 30, 2004 reported net

 earnings                                              $22,360  $0.68

Impact of foreign exchange                              (1,235) (0.04)

Impact of write-off of trademarks                        1,656   0.05

Impact of non-cash stock based compensation - Talbot     6,889   0.20

                                                      ----------------

Adjusted September 30, 2004 results                    $29,670  $0.89

                                                      ----------------

 

Nine months ended September 30, 2003 reported net

 earnings                                              $25,833  $0.81

Impact of foreign exchange                              (1,229) (0.04)

Life insurance proceeds                                 (1,000) (0.03)

                                                      ----------------

Adjusted September 30, 2003 results                    $23,604  $0.74

                                                      ----------------

FULL-YEAR GUIDANCE CONFIRMED TOWARD LOWER END OF RANGE

After reviewing third quarter results, rate trends and other factors, the company maintained its earnings guidance at $0.80 - $0.84 per diluted share for 2004, with a bias toward the lower end of the range.

"Rates have declined more rapidly than anticipated earlier in the year, which is leading to a slower rate of organic growth and a more challenging earnings outlook. In addition, we are absorbing higher than anticipated costs related to compliance with Sarbanes-Oxley and the ongoing inquiry into contingent commissions by the New York Attorney General's office," Hughes said. "As we noted at the start of this year, 2004 is a period of internal investment and repositioning to strengthen our platform for our next phase of growth. While we are no less confident of our ability to implement our growth strategies over the long term, the near term outlook is challenging from an earnings perspective. Given all the circumstances, we do not plan to offer an earnings forecast for 2005."

HUB ADDRESSES CONCERNS REGARDING COMPENSATION PRACTICES

As reported earlier, Hub's New York based brokerage has been subpoenaed by the New York Attorney General's office for information on compensation practices, including contingent commissions, and is fully cooperating. Further, as a result of the ongoing debate regarding, and inquiries into, compensation practices in the insurance brokerage industry, Hub has initiated the following to ensure continued high levels of service and ethical standards:

  • Creation of an internal task force
  • Engagement of outside counsel to conduct a review
  • Expanded communications with clients
  • Establishment of a toll-free hotline for customer inquiries (1-866-857-4073)

"We want to make it easy for clients to obtain answers to any questions about our practices" Hughes said. "In addition to the hotline, we are developing expanded information content for our website and increasing direct outreach to clients and other stakeholders."

Understanding the Talbot Compensation Charge

Hub discloses the impact of non-cash stock based compensation related to Talbot in order to give investors increased insight into Hub's results of operations and the effective cost of the Talbot acquisition.

Both the $90 million cash paid to Safeco Corporation and the future issuance of restricted and non-restricted Hub shares to approximately 70 Talbot executives are components of the total consideration paid to acquire Talbot. This total consideration is within Hub's target range of paying 5-7 times EBITDA (earnings before interest, taxes, depreciation and amortization, a non-GAAP measure) for acquired brokerages.

The executives of Talbot were not shareholders prior to the sale, and therefore non-cash stock based compensation they receive under terms of the purchase agreement is recorded as compensation expense. This compensation expense, which is not deductible for tax purposes, will be charged to earnings through the first quarter 2007 and will affect earnings comparisons through 2007, making it difficult for investors to analyze the company's results in comparison to prior years and industry peers.

In the third quarter 2004, Hub recorded $6.9 million of non-cash stock based compensation based on a total estimated earnout liability of approximately $48 million. The amount of non-cash stock based compensation may vary from quarter to quarter based on the profitability of Talbot. Based on the current expected earnout of $48 million, the estimated charge to earnings will be:

2004 $13.8 million
2005 $21.8 million
2006 $10.9 million
2007 $ 1.5 million

Conference Call and Webcast Scheduled

Hub International will discuss financial results and guidance on a conference call scheduled for 9:30 a.m. (CT), 10:30 a.m. (ET) today, October 28, 2004. This call is being webcast by Thompson/CCBN and can be accessed at Hub International's web site at www.hubinternational.com. The webcast is also being distributed through the Thomson StreetEvents Network to both institutional and individual investors. Individual investors can listen to the call at www.fulldisclosure.com, Thomson/CCBN's individual investor portal, powered by StreetEvents. Institutional investors can access the call via Thomson's password-protected event management site, StreetEvents (www.streetevents.com).

Headquartered in Chicago, IL, Hub International is a leading North American insurance brokerage that provides a broad array of property and casualty, life and health, employee benefits, investment and risk management products and services through offices located in the United States and Canada.

This press release may contain forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements relate, among other things, to our plans and objectives for future operations and are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, risks associated with implementing our business strategies, identifying and consummating acquisitions, integrating acquired brokerages, attaining greater market share, developing and implementing effective information technology systems, recruiting and retaining qualified employees, fluctuations in the premiums charged by insurance companies with corresponding fluctuations in our premium-based revenue, any loss of services of key executives, industry consolidation, increased competition in the industry, fluctuations in the demand for insurance products, exchange rates, resolution of regulatory issues, including those related to compensation arrangements with insurance companies, the actual costs of resolution of contingent liabilities and the passage of new legislation subjecting our business to regulation in jurisdictions where we operate. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Additional information regarding these risks and other factors that could cause Hub International's actual results to differ materially from our expectations is contained in the company's filings with the Securities and Exchange Commission and the Canadian securities commissions. Except as otherwise required by federal securities laws, Hub International undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

HUB INTERNATIONAL LIMITED

Consolidated Organic Growth

For the three months and nine months ended September 30, 2004

(in thousands of U.S. dollars, except percentages)

 

                                                      Net

                  Revenue                         Adjustments

             ------------------            Total      For      Organic

               Third quarter      Total   Growth (Acquisitions) Growth

              2004       2003   Change ($)  (%)   And Disposals   (%)

             ---------------------------------------------------------

Total

-------------

Commission

 Income       $90,269  $60,772   $29,497     49%      $(27,534)     3%

Contingent

 Commissions

 and Volume

 Overrides      1,865    1,884       (19)    -1%          (465)   -26%

Other Income    2,768    2,015       753     37%          (803)    -2%

             ---------------------------------------------------------

Total         $94,902  $64,671   $30,231     47%      $(28,802)     2%

             ---------------------------------------------------------

 

USA

-------------

Commission

 Income       $62,658  $35,031   $27,627     79%      $(28,305)    -2%

Contingent

 Commissions

 and Volume

 Overrides      1,605    1,580        25      2%          (466)   -28%

Other Income    2,229    1,369       860     63%          (834)     2%

             ---------------------------------------------------------

Total         $66,492  $37,980   $28,512     75%      $(29,605)    -3%

             ---------------------------------------------------------

 

Canada

-------------

Commission

 Income       $27,611  $25,741    $1,870      7%          $771     10%

Contingent

 Commissions

 and Volume

 Overrides        260      304       (44)   -14%             1    -14%

Other Income      539      646      (107)   -17%            31    -12%

             ---------------------------------------------------------

Total         $28,410  $26,691    $1,719      6%          $803      9%

             ---------------------------------------------------------

 

 

 

                                                      Net

                  Revenue                         Adjustments

             ------------------            Total      For      Organic

             First nine months    Total   Growth (Acquisitions) Growth

              2004       2003   Change ($)  (%)   And Disposals   (%)

             ---------------------------------------------------------

Total

-------------

Commission

 Income      $228,858 $184,755   $44,103     24%      $(32,238)     6%

Contingent

 Commissions

 and Volume

 Overrides     19,940   17,150     2,790     16%          (530)    13%

Other Income    7,684    5,798     1,886     33%        (1,484)     7%

             ---------------------------------------------------------

Total        $256,482 $207,703   $48,779     23%      $(34,252)     7%

             ---------------------------------------------------------

 

USA

-------------

Commission

 Income      $146,593 $111,324   $35,269     32%      $(33,396)     2%

Contingent

 Commissions

 and Volume

 Overrides     13,437   12,575       862      7%          (531)     3%

Other Income    5,948    4,032     1,916     47%        (1,529)    10%

             ---------------------------------------------------------

Total        $165,978 $127,931   $38,047     30%      $(35,456)     2%

             ---------------------------------------------------------

 

Canada

-------------

Commission

 Income       $82,265  $73,431    $8,834     12%        $1,158     14%

Contingent

 Commissions

 and Volume

 Overrides      6,503    4,575     1,928     42%             1     42%

Other Income    1,736    1,766       (30)    -2%            45      1%

             ---------------------------------------------------------

Total         $90,504  $79,772   $10,732     13%        $1,204     15%

             ---------------------------------------------------------

 

 

HUB INTERNATIONAL LIMITED

Consolidated Statements of Earnings

For the three months and nine months ended September 30, 2004 and 2003

(in thousands of U.S. dollars, except per share amounts)

 

                          Third quarter          First nine months

                     ------------------------ ------------------------

                         2004        2003         2004        2003

                     ------------------------ ------------------------

                     (Unaudited)  (Unaudited) (Unaudited) (Unaudited)

Revenue

  Commission income      $90,269     $60,772     $228,858    $184,755

  Contingent

   commissions and

   volume overrides        1,865       1,884       19,940      17,150

  Other                    2,768       2,015        7,684       5,798

                     ------------------------ ------------------------

                          94,902      64,671      256,482     207,703

                     ------------------------ ------------------------

 

Expenses

  Compensation            57,593      36,855      140,344     113,744

  Selling, occupancy

   and administration     19,647      13,974       51,286      40,888

  Depreciation             1,962       1,551        5,279       4,462

  Interest expense         2,330       1,269        5,692       4,152

  Intangible asset

   amortization            1,904         840        3,621       2,397

  Gain on disposal of

   subsidiaries, property,

   equipment and other

   assets                   (981)       (290)      (1,540)       (281)

  Non-cash stock

   based compensation      8,346       1,355       11,661       3,575

  Loss on write-off

   of trademarks               -           -        2,587           -

  Loss/(gain) on put

   option liability            -          73            -        (167)

  Proceeds from life

   insurance                   -      (1,000)           -      (1,000)

                     ------------------------ ------------------------

                          90,801      54,627      218,930     167,770

                     ------------------------ ------------------------

 

Net earnings before

 income taxes              4,101      10,044       37,552      39,933

                     ------------------------ ------------------------

 

Provision for income

 tax expense (benefit)

  Current                  5,032       6,074       16,762      15,339

  Future                  (2,077)     (2,850)      (1,570)     (1,239)

                     ------------------------ ------------------------

                           2,955       3,224       15,192      14,100

                     ------------------------ ------------------------

Net earnings               1,146       6,820       22,360      25,833

Interest on

 subordinated

 convertible debentures        -         471        1,425       1,414

Dividends in lieu of

 restricted share units       23          36           88          76

                     ------------------------ ------------------------

Diluted net earnings      $1,169      $7,327      $23,873     $27,323

                     ------------------------ ------------------------

                     ------------------------ ------------------------

 

Earnings per share

  Basic                    $0.04       $0.23        $0.74       $0.88

  Diluted                  $0.04       $0.22        $0.68       $0.81

 

Weighted average

 shares outstanding

  - Basic  (000's)        30,292      29,327       30,192      29,326

Weighted average

 shares outstanding

  -  Diluted (000's)      32,666      33,830       35,006      33,927

 

 

HUB INTERNATIONAL LIMITED

Consolidated Balance Sheets

As of September 30, 2004 and December 31, 2003

(in thousands of U.S. dollars)

                                                    2004       2003

                                                 ---------- ----------

                                                 (Unaudited)

Assets

Current assets:

Cash and cash equivalents                          $78,108    $82,052

Trust cash                                          65,671     54,534

Accounts and other receivables                     140,585    163,728

Income taxes receivable                              6,668      6,768

Future income taxes                                  5,389      2,865

Prepaid expenses                                     8,371      4,449

                                                 ---------- ----------

Total current assets                               304,792    314,396

 

Goodwill                                           368,881    305,862

Other intangible assets                             90,635     42,903

Property and equipment                              27,442     24,181

Future income taxes                                  7,578      6,458

Other assets                                        10,945      6,803

                                                 ---------- ----------

Total assets                                      $810,273   $700,603

                                                 ---------- ----------

                                                 ---------- ----------

 

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable and accrued liabilities          $226,521   $226,168

Income taxes payable                                 4,370      3,804

Future income taxes                                    322        114

Current portion long-term debt and capital leases    6,602      3,362

                                                 ---------- ----------

Total current liabilities                          237,815    233,448

 

Long-term debt and capital leases                  148,272     75,437

Subordinated convertible debentures                 35,000     35,000

Future income taxes                                 16,597     13,928

                                                 ---------- ----------

Total liabilities                                  437,684    357,813

                                                 ---------- ----------

 

Commitments and contingencies

 

Shareholders' equity

Share capital                                      259,445    254,845

Issuable shares                                         51        721

Contributed surplus                                 11,053      4,806

Cumulative translation account                      21,894     20,062

Retained earnings                                   80,146     62,356

                                                 ---------- ----------

Total shareholders' equity                         372,589    342,790

                                                 ---------- ----------

Total liabilities and shareholders' equity        $810,273   $700,603

                                                 ---------- ----------

                                                 ---------- ----------

 

HUB INTERNATIONAL LIMITED

Consolidated Statements of Cash Flows

For the three months and nine months ended September 30, 2004 and 2003

(in thousands of U.S. dollars)

 

                          Third quarter          First nine months

                     ------------------------ ------------------------

                         2004        2003         2004        2003

                     ------------------------ ------------------------

                     (Unaudited)  (Unaudited) (Unaudited) (Unaudited)

Operating activities

Net earnings              $1,146      $6,820      $22,360     $25,833

Items not affecting

 working capital:

  Amortization and

   depreciation            3,866       2,391        8,900       6,859

  Gain on disposal of

    subsidiaries,

    property, equipment

    and other assets        (981)       (290)      (1,540)       (281)

  Non-cash stock

   based compensation      8,346       1,355       11,661       3,575

  Loss on write-off

   of trademarks               -           -        2,587           -

  Loss/(gain) on put

   option liability            -          73            -        (167)

  Future income taxes     (2,077)     (2,850)      (1,570)     (1,239)

Non-cash working

 capital items

  Trust cash               1,850         106        1,867       9,673

  Accounts and other

   receivables            54,259      50,028       40,669      38,626

  Prepaid expenses          (203)        283       (3,837)       (185)

  Accounts payable and

   accrued liabilities   (50,118)    (44,340)     (49,628)    (38,463)

  Other assets               128         129          384      (2,191)

  Income taxes              (837)      4,165         (981)      1,318

                     ------------------------ ------------------------

  Net cash flows

   from operating

   activities             15,379      17,870       30,872      43,358

                     ------------------------ ------------------------

 

Investing activities

  Property and

   equipment -

   purchases              (2,086)     (1,547)      (4,993)     (4,589)

  Property and

   equipment -

   proceeds on sale           60          17          142          44

  Purchase of

   subsidiaries, net

   of cash received      (78,495)        452      (90,385)    (11,935)

  Sale of subsidiaries     1,895         613        6,062       1,064

  Other assets                34         176          388        (539)

                     ------------------------ ------------------------

  Net cash flows

   used for

   investing activities  (78,592)       (289)     (88,786)    (15,955)

                     ------------------------ ------------------------

 

Financing activities

  Long-term debt -

   advances                    -         250       65,000      65,250

  Long-term debt and

   capital leases -

   repayments             (3,449)       (688)      (8,169)    (52,184)

  Share capital -

   issued for cash,

   net of issue costs          -         (28)         480         (59)

  Proceeds from sale

   of executive plan

   shares                      -         222            -         222

  Dividends paid          (1,527)     (1,514)      (4,570)     (4,552)

                     ------------------------ ------------------------

  Net cash flows

   from (used for)

   financing activities   (4,976)     (1,758)      52,741       8,677

                     ------------------------ ------------------------

 

Effect of exchange

 rate changes on cash

 and cash equivalents      1,770         160        1,229       2,339

                     ------------------------ ------------------------

Change in cash and

 cash equivalents        (66,419)     15,983       (3,944)     38,419

Cash and cash

 equivalents -

 Beginning of period     144,527      63,078       82,052      40,642

                     ------------------------ ------------------------

Cash and cash

 equivalents -

 End of period           $78,108     $79,061      $78,108     $79,061

                     ------------------------ ------------------------

                     ------------------------ ------------------------

 

 In the following box below, please add a contact information.
CONTACT:
Hub International Limited, Chicago
Dennis J. Pauls, 312-279-4880
Media Contact
email: dennis.pauls@hubinternational.com
or
Rosenbaum Advisors
Michael Rosenbaum, 847-749-1010
Investor Contact
email: michael@rosenbaumadvisors.com
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 SOURCE :   Hub International Limited