Hub International Limited reported strong growth in revenue and net earnings for the first quarter ended March 31, 2007.
First quarter 2007 revenue of $171.8 million represented a $37.7 million, or 28%, increase over first quarter 2006 revenue of $134.1 million. First quarter 2007 net earnings of $24.7 million represented an $8.3 million, or 50%, increase over first quarter 2006 net earnings of $16.5 million. First quarter 2007 diluted earnings per share of $0.60 represented a $0.14, or 30%, increase over first quarter 2006 diluted earnings per share of $0.46.
Quarterly total revenue organic revenue growth was 7.2%. Organic revenue growth calculations for the first quarter of 2007 exclude guaranteed supplemental commission revenue recorded during the first quarter of 2007 that historically would not have been recorded until 2008. Quarterly total organic revenue growth was 8.3% including guaranteed supplemental commission revenue, or 8.7% excluding the impact of foreign exchange. Organic revenue growth is a non-GAAP measurement that describes internal revenue growth from current operations owned at least one year.
Normalized first quarter 2007 net earnings of $26.0 million represented a $5.3 million, or 25%, increase over normalized first quarter 2006 net earnings of $20.7 million. Normalized diluted earnings per share were $0.63 and $0.58, respectively, for the first quarter 2007 and 2006.
First Quarter 2007 Performance Review
Quarterly total revenue growth of 28% included organic revenue growth of 7.2%, despite most hubs operating in declining rate environments. Commission income growth of 26% included organic commission income growth of 5.3%. Contingent commission and volume override revenue increased 32% including organic contingent commission and volume override revenue growth of 11.5%. Excluding the impact of foreign exchange, organic commission income growth was 5.7%.
For U.S.-based hubs, quarterly revenue of $130.8 million represented a $35.0 million, or 37%, increase from first quarter 2006 revenue of $95.8 million. Organic commission income growth was 5.8% and organic revenue growth was 8.5%. Including the effect of guaranteed supplemental commission revenue earned during the first quarter of 2007, organic revenue growth was 10.0%.
For Canadian-based hubs, quarterly revenue of $40.5 million represented a $2.6 million, or 7%, increase from first quarter 2006 revenue of $37.8 million. Organic commission income growth was 3.9% and organic revenue growth was 4.1%. Excluding the impact of foreign exchange, organic commission income and organic revenue growth was 5.3% and 5.5%, respectively. Canadian-based hubs are not presently affected by guaranteed supplemental commission arrangements.
Quarterly employee cash compensation of $85.4 million represented a $17.0 million, or 25%, increase from first quarter 2006 employee cash compensation of $68.4 million. As a percentage of quarterly revenue, 2007 quarterly employee cash compensation improved 130 basis points to 49.7% from 51.0% for the same period in 2006.
Quarterly selling, occupancy and administration expense of $27.6 million represented a $5.2 million, or 23%, increase from first quarter 2006 selling, occupancy and administration expense of $22.4 million. First quarter 2007 selling, occupancy and administration expense included approximately $2.6 million of transaction costs related to the arrangement agreement pursuant to which the company would be acquired by funds advised by Apax Partners and Morgan Stanley Principal Investments. As a percentage of quarterly revenue, 2007 quarterly selling, occupancy and administration expense improved 60 basis points to 16.1% from 16.7% for the same period in 2006.
On a combined basis, quarterly employee cash compensation and selling, occupancy and administration expense improved 200 basis points to 65.8% of revenue from 67.8% of revenue for the same period in 2006.
Quarterly intangible asset amortization expense of $8.5 million represented a $5.2 million, or 160%, increase over first quarter 2006 intangible asset amortization expense of $3.3 million. This increase is primarily attributable to the impact of acquisitions and a refinement in our amortization methodology for customer relationship and non-competition covenants intangible assets accounted for as a change in accounting estimate.
First Quarter Highlights
The company continued its penetration into the southeastern U.S. market by acquiring Hibernia Insurance Agency, an $18 million revenue brokerage located just outside of New Orleans. The company’s acquisition of Hibernia provides it with a strategic platform to expand its operations in the gulf coast region.
The company expanded its presence in the transportation insurance market by acquiring Vermont-based Coburn Insurance Agency, a $9 million revenue brokerage, as well as a smaller insurance brokerage that specializes in the transportation insurance market in the eastern U.S. The combined strength of these operations, together with the Salt Lake City-based Kaufman transportation insurance brokerage that was acquired during 2006 (collectively operating as Hub International Transportation Insurance Services) will provide increased accessibility to insurance markets and will position Hub well for transportation risks across the U.S.
Quarterly earnings before interest, taxes, depreciation and amortization (EBITDA, a non-GAAP measurement) margin of 34.2% improved 200 basis points from 32.2% for the same period in 2006.
Subsequent to March 31, 2007, on April 2, 2007 the Company made the final Talbot earnout payment of $21.8 million in cash. As of April 2, 2007, the Talbot earnout is complete. Compensation expense of $2.0 million, which is not deductible for tax purposes, was charged to earnings through the first quarter of 2007 for the Talbot earnout and will affect year-over-year earnings comparisons through 2008.
Cash and cash equivalents as of March 31, 2007 were $102.5 million, an increase of $3.3 million from December 31, 2006.
Quarterly capital expenditures of $1.9 million represented 1.1% of total revenue, a decrease from the 2.2% experienced during the first quarter of 2006. Management expects full-year 2007 capital expenditures to be approximately 2% of total revenue.
Effective tax rate, excluding the effects of the Talbot earnout expense, was approximately 38% for the first quarter of 2007.
Debt-to-capitalization ratio increased slightly to 19% as of March 31, 2007 from 18% as of December 31, 2006. The Company has $22.0 million outstanding and $63.4 million remaining available under its revolving credit facilities as of March 31, 2007.
Conference Call and Webcast
Hub will discuss its financial results and outlook on a conference call scheduled for Tuesday, May 1, 2007 at 10:30 a.m. (EDT), 9:30 a.m. (CDT). The call is being webcast by Thompson/CCBN and can be accessed at Hub’s web site at www.hubinternational.com.
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