01—Abstract
Summary
Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.
Brown & Brown, Inc. (BRO) reported a strong 2003.
Total revenues rose 20.9% to $551.0 milliona, and net income grew 32.7% to $110.3 million, with diluted EPS of $1.60 versus $1.22 in 2002. Commissions and fees, the core revenue line, increased 20.6%, but organic (core) growth was a more modest 5.9%, as acquisitions drove much of the gain. Management attributes the slowdown in top-line growth to moderating premium rate increases during 2003, which it expects to continue through 2004.
The company's stated objective of growing EPS at least 15% annually was met again, and pre-tax margins held up well at roughly 32%. The balance sheet expanded meaningfully. Total assets reached $865.9 million and shareholders' equity rose to $498.0 millionb, largely from retained earnings.
Long-term debt fell to $41.1 millionc, down from $57.6 million, and the company generated $142.7 million of operating cash flow. The company completed 23 agency acquisitions in 2003 for about $86 million, and it entered 2004 with 11 more acquisitions totaling roughly $92.9 million. Goodwill and amortizable intangibles together now exceed $470 million, which is a significant share of total assets and a key area for investors to monitor.
Risk factors include a concentration of business in Florida, New York, California, Arizona, and Washington; reliance on two insurance carriers that together generated about 10.8% of revenues; a Physicians' Protector Plan contract that expired in March 2003 with no replacement yet secured; and contingent commissions, which averaged about 6.8% of prior-year commission and fee revenues. The Gresham litigation, which had sought more than $10 milliond in damages, was resolved in the company's favor, with the appellate affirmance in January 2004 and the time for further appeal having expired.
02—Key points
Key Highlights
- Total revenues grew 20.9% to $551.0 million; commissions and fees rose 20.6% to $545.3 million, though core commissions and fees grew only 5.9% excluding acquisitions.
- Net income rose 32.7% to $110.3 million, and diluted EPS increased 31.1% to $1.60, marking the company's 11th consecutive year of at least 15% EPS growth.
- Retail Division produced 72.6% of commission and fee revenue ($396.2 million); National Programs grew fastest, up 51.7% to $87.6 million.
- Premium rate increases that began in 2000 moderated during 2003, and management expects this moderation to continue through 2004, which may pressure organic growth.
- Operating cash flow was $142.7 million, and long-term debt was reduced by $28.0 million to $41.1 million total, while shareholders' equity increased to $498.0 million.
- Acquisition activity remained active: 23 agencies were acquired in 2003 for $86.2 million, and 11 more were acquired from January through March 5, 2004 for about $92.9 million.
- The Gresham & Associates lawsuit, which sought over $10 million in damages, was resolved in the company's favor after the January 2004 appellate affirmance, and the time for further appeal has expired.
03—Questions
Frequently Asked Questions
How much of Brown & Brown's 2003 revenue growth came from acquisitions versus the existing business?
Total commissions and fees grew 20.6%, but core commissions and fees, which exclude acquired and divested operations, grew only 5.9%. Acquisitions therefore accounted for most of the headline growth. Management attributes the core slowdown partly to moderating premium rate increases, compared with 12.1% core growth in 2002.
Is the company's debt load a concern?
Not at present. Long-term debt declined to $41.1 million from $57.6 million, and total debt including the current portion was about $59.8 million against $498.0 million of shareholders' equity. Management says it is in compliance with all credit covenants and believes existing cash and operating cash flow will cover liquidity needs through at least the end of 2004. The company also has an undrawn $75 million revolving facility and roughly $90 million remaining on its shelf registration.
What are the main concentration risks in the business?
Business is concentrated geographically in Florida (32 locations), New York, California, Arizona, and Washington, so adverse economic or regulatory developments in those states could materially affect results. Carrier concentration is also notable: two insurance companies supplied about 5.7% and 5.1% of total revenues. Management believes other carriers could replace them, though with some additional expense and possible market-share loss.
Does the company's goodwill and intangible asset base pose an impairment risk?
Goodwill ($237.8 million) and amortizable intangibles ($232.9 million) together make up roughly 54% of total assets. Management completed its annual goodwill impairment test as of November 30, 2003 and found no impairment, and no intangible impairments were recorded in 2001 through 2003. However, the company's valuations depend on assumptions about cancellation rates, discount rates, and future cash flows, so a significant slowdown in renewals or a sustained decline in the stock price could trigger a future charge.
Are there any significant changes in the company's auditors or stock-based compensation that investors should know about?
Brown & Brown replaced Arthur Andersen with Deloitte & Touche in June 2002, and the company reported no disagreements with Andersen. Stock-based compensation expense fell to $2.3 million in 2003 from $3.8 million in 2002, because the stock never sustained the 20% price-increase threshold required for further expensing of performance grants. Option and performance-stock grants could add expense in future periods if the share price rises significantly.
04—Continue