How did the company's revenue and profitability trend in 1997?

Total revenues increased about 9% to $129.2 million, and net income rose 17.5% to $19.4 million. Pre-tax income reached $31.6 million, or 24.5% of revenue, up from 22.8% in 1996. Management attributes the improvement to revenue growth and operating efficiency, though the soft property and casualty pricing environment continues to limit renewal commission growth.

What are the main risks to the business?

Key risks include the soft market, which has reduced premium rates since the mid-1980s and limited commissions on renewals; heavy reliance on Florida, where adverse economic or regulatory conditions could materially affect results; dependence on one carrier for about 20% of revenues; and the possibility that licensing authorities could suspend or penalize the company. Competition from larger firms and direct writers is also significant, especially outside Florida.

What is the status of the pending lawsuit?

The Cadillac Uniform & Linen case, filed in Puerto Rico, alleges a subsidiary failed to procure adequate fire coverage and seeks $11.2 million against the company and others. The company and subsidiary are contesting it vigorously and believe they have meritorious defenses. A special master hearing is scheduled for June 1998, and management believes insurance would cover any award. Management does not expect a material adverse effect from this or other routine claims.

How is the company growing, and how is it using its cash?

Growth comes from organic new business, new proprietary programs such as the Agricultural and Railroad Protector Plans, and small acquisitions. In 1997 the company bought three agencies and several customer account books for $3.1 million in cash plus notes, and it spent $2.7 million on fixed assets. It also repurchased $5.9 million of stock, paid $4.6 million in dividends, and reduced debt by $2.6 million. Cash reserves increased by $15.9 million to $47.7 million.

What should investors note about the share count and per-share data?

The reported per-share figures and the $38.00 closing price on March 6, 1998 are pre-split. A three-for-two split took effect February 27, 1998, which increased shares outstanding to about 13.2 million. Investors comparing historical EPS and dividends should adjust for the split. The company's non-affiliate market value was about $332 million as of March 6, 1998.

BRO 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 24, 1998. Cited figures are marked; the original filing is the authoritative source.

This 10-K for fiscal 1997 was filed by Poe & Brown, Inc. (NYSE: PBR), a Florida-based property and casualty insurance agency.

The request named Brown & Brown, Inc. (BRO), but the filing itself is Poe & Brown's, which was formed in a 1993 merger of Poe & Associates and Brown & Brown. The company reported 1997 commissions and fees of $124.4 million^a, up 9% from $114.4 million, and total revenues of $129.2 million. Net income rose 17.5% to $19.4 million, and pre-tax margin improved to 24.5% from 22.8%.

Growth came mainly from new business and acquisitions, while the soft market for premium rates continued to pressure renewal commissions. Organic commission growth was 6%^b, and the company has been expanding through small agency acquisitions. The balance sheet is conservative.

Cash and equivalents rose to $47.7 million, long-term debt fell to $4.1 million^c from $5.3 million, and shareholders' equity grew to $77.1 million. Operating cash flow was $33.0 million, funding $5.9 million of share repurchases, $4.6 million of dividends, and $3.1 million of acquisitions.

Key risks include Florida geographic concentration, a single carrier that accounts for about 20% of revenues, and a $11.2 million^d Puerto Rico lawsuit scheduled for a June 1998 hearing, which management believes is defensible and insured. The per-share figures are pre-split: a three-for-two stock split took effect February 27, 1998.

02—Key points

Key Highlights

Commissions and fees rose 9% to $124.4 million in 1997, with 6% growth excluding acquisitions, driven by new business across all operating divisions.
Net income grew 17.5% to $19.4 million, and EPS was $2.22 on a pre-split basis (about $1.48 adjusted for the February 1998 three-for-two split).
Pre-tax margin expanded to 24.5% from 22.8%, reflecting revenue growth and operating efficiency; employee compensation fell to 50% of revenue from 51%.
Strong cash generation: operating cash flow of $33.0 million, with cash and equivalents up to $47.7 million and long-term debt reduced to $4.1 million.
Concentration risks: about 20% of revenues came from one insurance carrier, and the business is concentrated in Florida, which management has flagged as a material risk.
Pending litigation (Cadillac Uniform & Linen) seeks $11.2 million in damages against a subsidiary and the company; management expects to defend it successfully and says insurance would respond, with a special master hearing in June 1998.
Dividends rose to $0.53 per share for 1997 from $0.49, and the company repurchased $5.9 million of stock during the year.

03—Questions

Frequently Asked Questions

How did the company's revenue and profitability trend in 1997?
Total revenues increased about 9% to $129.2 million, and net income rose 17.5% to $19.4 million. Pre-tax income reached $31.6 million, or 24.5% of revenue, up from 22.8% in 1996. Management attributes the improvement to revenue growth and operating efficiency, though the soft property and casualty pricing environment continues to limit renewal commission growth.
What are the main risks to the business?
Key risks include the soft market, which has reduced premium rates since the mid-1980s and limited commissions on renewals; heavy reliance on Florida, where adverse economic or regulatory conditions could materially affect results; dependence on one carrier for about 20% of revenues; and the possibility that licensing authorities could suspend or penalize the company. Competition from larger firms and direct writers is also significant, especially outside Florida.
What is the status of the pending lawsuit?
The Cadillac Uniform & Linen case, filed in Puerto Rico, alleges a subsidiary failed to procure adequate fire coverage and seeks $11.2 million against the company and others. The company and subsidiary are contesting it vigorously and believe they have meritorious defenses. A special master hearing is scheduled for June 1998, and management believes insurance would cover any award. Management does not expect a material adverse effect from this or other routine claims.
How is the company growing, and how is it using its cash?
Growth comes from organic new business, new proprietary programs such as the Agricultural and Railroad Protector Plans, and small acquisitions. In 1997 the company bought three agencies and several customer account books for $3.1 million in cash plus notes, and it spent $2.7 million on fixed assets. It also repurchased $5.9 million of stock, paid $4.6 million in dividends, and reduced debt by $2.6 million. Cash reserves increased by $15.9 million to $47.7 million.
What should investors note about the share count and per-share data?
The reported per-share figures and the $38.00 closing price on March 6, 1998 are pre-split. A three-for-two split took effect February 27, 1998, which increased shares outstanding to about 13.2 million. Investors comparing historical EPS and dividends should adjust for the split. The company's non-affiliate market value was about $332 million as of March 6, 1998.

04—Continue

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