01—Abstract
Summary
Summary of the 10-K filed March 1, 2011. Cited figures are marked; the original filing is the authoritative source.
Brown & Brown, Inc. (NYSE: BRO) reported FY2010 total revenues of $973.5 milliona, up 0.6% from $967.9 million in 2009, and net income of $161.8 million (diluted EPS $1.12, up from $1.08).
Growth was modest and driven by acquisitions and higher profit-sharing contingent commissions, while core commissions and fees fell 4.7% on an internal basis, the fourth consecutive year of negative internal growth. Management attributes the weakness to a prolonged soft market in premium rates and declining insurable exposure units, with the Florida property market and the Wholesale Brokerage Division under particular pressure. Income before taxes rose 4.5% to $266.1 millionb, helped by cost efficiencies in rent and legal expense and a $1.7 million earn-out credit.
Balance sheet and cash generation remained strong. Operating cash flow was $296.1 million, cash rose to $273.0 millionc, and goodwill reached $1.19 billion after 33 acquisitions costing $158.6 million in cash. Long-term debt was roughly flat at $250.1 million, and the company agreed in January 2011 to issue $100 million of 4.5% Series E notes, with funding in September 2011 to coincide with the maturity of the $100 million Series A notes.
Management expects premium rates to stay soft in 2011 while exposure units decline more slowly, which it views as a gradual stabilization. Investors should weigh the company's disciplined acquisition strategy and cash generation against persistent organic revenue declines and concentration risk.
Key risks include goodwill impairment exposure if the stock price or cash flows weaken, dependence on profit-sharing commissions from a few insurers, geographic concentration in nine states that produced 73.4% of commissions and fees, and a significant ownership stake held by the Brown family (about 16.9%). In addition, former executives who left in 2010 and early 2011 are forming a competing firm backed by up to $250 milliond of private equity.
02—Key points
Key Highlights
- Total revenues rose 0.6% to $973.5 million, and net income increased 5.6% to $161.8 million, with diluted EPS of $1.12 versus $1.08 in 2009.
- Core commissions and fees declined 4.7% on an internal basis, the fourth consecutive year of negative organic growth, reflecting soft premium rates and lower insurable exposure units.
- Acquisition activity rebounded, with 33 deals in 2010 for an aggregate purchase price of $186.8 million, including $158.6 million in cash, versus 11 deals in 2009.
- Operating cash flow was $296.1 million, and year-end cash and equivalents reached $273.0 million, a $75.9 million increase.
- Goodwill grew to $1.19 billion, and management reported no impairment in its November 30, 2010 test, though it flagged impairment risk if market capitalization or cash flows decline.
- Profit-sharing contingent commissions rose 14.9% to $54.7 million, while the National Programs Division's core revenue fell 7.1%, driven by the loss of two large Proctor Financial customers.
- Brown & Brown plans to issue $100 million of 4.5% Series E senior notes due 2018, with funding scheduled for September 2011 to refinance the 5.57% Series A notes maturing that month.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 1, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $973.49M$967.88M | +0.6% |
| Operating Expenses | $707.39M$713.12M | −0.8% |
| Interest Expense | $14.47M$14.60M | −0.9% |
| Net Income | $161.75M$153.29M | +5.5% |
| EPS (Basic) | $0.57$0.54 | +5.6% |
| EPS (Diluted) | $0.56$0.54 | +3.7% |
| Shares Outstanding (Basic) | 275.85M274.35M | +0.5% |
| Shares Outstanding (Diluted) | 278.64M275.01M | +1.3% |
05—Questions
Frequently Asked Questions
Is Brown & Brown's revenue growing organically?
No. Core commissions and fees declined 4.7% internally in 2010, following declines of 5.1% in 2009 and 5.5% in 2008. Reported growth came from acquisitions and higher profit-sharing contingent commissions, not from same-store growth. Management expects premium rates to remain soft in 2011, though the rate of exposure-unit decline appears to be slowing.
How much of the company's revenue depends on a few states and insurers?
Nine states (California, Florida, Indiana, Michigan, New Jersey, New York, Pennsylvania, Texas and Washington) generated 73.4% of commissions and fees in 2010. One insurer accounted for about 5.0% of total commissions and fees. Profit-sharing contingent commissions, which are not guaranteed, represented 5.6% of prior-year revenue on average over the last three years.
Is the company's debt load a concern?
Not at present. Long-term debt was $250.1 million at year-end 2010, roughly flat year over year, and the $100 million Series A maturity in September 2011 is being addressed through a planned $100 million Series E placement at 4.5%. The company's $50 million revolving facility was undrawn, and it reports compliance with all debt covenants. Management believes operating cash flow is sufficient to meet liquidity needs through at least the end of 2011.
What is the risk from former executives who have left the company?
Two former senior executives, Jim Henderson and Thomas Riley, announced a partnership with a private equity firm on March 1, 2011, to build a competing middle-market brokerage backed by up to $250 million of equity. They are prohibited from soliciting Brown & Brown's employees and customers but are not barred from competing. Management identifies this as a risk to customer retention and to new business generation.
How is the company valued and returning capital to shareholders?
The stock closed 2010 at $23.94, giving a price-to-earnings multiple of about 21.4 times. The dividend was raised to $0.08 per quarter in Q4 2010, for annual dividends declared of $0.3125 per share. The company repurchased no shares under a public program in 2010, and only shares withheld for employee tax obligations were acquired. Total shareholder return over 2005 to 2010 was 83.42 versus 100 at the start, trailing the NYSE index and the peer group.
06—Continue