01—Abstract
Summary
Summary of the 10-K filed February 29, 2012. Cited figures are marked; the original filing is the authoritative source.
Brown & Brown, Inc. (BRO) closed fiscal 2011 with total revenues of $1.014 billiona, up 4.1% year over year, and net income of $164.0 million, up 1.4%.
Diluted EPS was $1.13b versus $1.12 in 2010. Growth came mainly from acquisitions: the company completed 37 acquisitions in 2011 with estimated annualized revenues of $88.7 million. Underlying organic performance remained weak, with core organic commissions and fees down 2.6% (about $23.3 million of net lost revenue), though this was an improvement from the (4.7)% decline in 2010.
Management noted that exposure units appear to be declining more slowly and that premium rates are showing early signs of modest increases in 2012. The most important subsequent event is the January 9, 2012 acquisition of Arrowhead General Insurance Agency, a large managing general agent, for a cash purchase price of about $395.0 millionc. It was financed with new SunTrust and JPMorgan debt, and management estimates Arrowhead's 2011 revenues at roughly $107.5 million.
This substantially increases leverage. Long-term debt was $250.0 milliond at year-end 2011, and new borrowings include a $100 million SunTrust term loan, a $100 million JPMorgan term loan, and up to $50 million of revolver draws. The deal also raises the effective tax rate guidance for 2012 to about 41.0%, and goodwill rose to $1.32 billion, which represents a significant share of total assets of $2.61 billion.
Key risks for investors include revenue dependence on premium rates the company does not control, concentration in a few states (76.1% of commissions and fees from 11 states), and goodwill that would need to be written down if the business deteriorates. Shareholder equity rose to $1.64 billion, and the company paid $46.5 million in dividends during 2011 with a quarterly rate increased to $0.085.
02—Key points
Key Highlights
- Total revenues rose 4.1% to $1.014 billion in 2011, while commissions and fees reached $1.006 billion, up 4.0%.
- Net income increased 1.4% to $164.0 million, and diluted EPS was $1.13 (vs. $1.12 in 2010). Pre-tax income rose 1.7% to $270.5 million.
- Core organic commissions and fees declined 2.6% (net lost revenue of $23.3 million), an improvement from the (4.7)% decline in 2010 but still negative for a fifth consecutive year.
- The company completed 37 acquisitions in 2011 with estimated annualized revenues of $88.7 million, and 38 acquisitions were reported in total activity for the year.
- The $395.0 million cash acquisition of Arrowhead (closed January 9, 2012) is the largest deal in the company's history relative to prior acquisitions and was funded with new bank debt.
- Goodwill of $1.32 billion and amortizable intangibles of $496 million together represent about 70% of total assets of $2.61 billion, creating impairment sensitivity.
- Operating cash flow was $237.5 million, and the company returned $46.5 million to shareholders through dividends, with the quarterly dividend raised to $0.085.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 29, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $1.01B$973.49M | +4.1% |
| Operating Expenses | $743.02M$707.39M | +5.0% |
| Interest Expense | $14.13M$14.47M | −2.3% |
| Net Income | $164.00M$161.75M | +1.4% |
| EPS (Basic) | $0.57$0.57 | +0.9% |
| EPS (Diluted) | $0.56$0.56 | +0.9% |
| Shares Outstanding (Basic) | 277.16M275.85M | +0.5% |
| Shares Outstanding (Diluted) | 280.53M278.64M | +0.7% |
05—Questions
Frequently Asked Questions
Why did revenue grow while the core business shrank?
Total revenues grew 4.1% largely because of acquisitions, which added $78.2 million of core commissions and fees. Organic growth was negative at (2.6)%, reflecting lower property insurance rates and reduced insurable exposure units, mainly in the Retail Division, which lost $23.0 million on an organic basis. The company's acquisition strategy is therefore masking underlying weakness.
How significant is the Arrowhead acquisition for the company's balance sheet?
It is very significant. The $395.0 million cash price was financed with new SunTrust and JPMorgan debt, including a $100 million term loan from SunTrust, a $100 million term loan from JPMorgan and a $50 million bridge. Arrowhead's estimated 2011 revenues of about $107.5 million would add roughly 10% to the company's revenue base. Investors should expect higher interest expense and an increase in the effective tax rate to about 41.0% in 2012.
What are the main concentration risks?
About 76.1% of 2010 commissions and fees came from operations in 11 states, including Florida, California, New York and Texas. The company also derives 5.2% of core commissions from one insurer. Its business is highly dependent on premium rates set by insurers, which the company does not control, and it earns profit-sharing contingent commissions that equaled about 4.4% to 5.7% of prior-year revenues over the last three years.
Could goodwill create a future earnings charge?
Goodwill totaled $1.32 billion at year-end 2011, up from $1.19 billion, and the November 2011 impairment test found fair value substantially exceeded carrying value. However, management warns that a sustained decline in the stock price, a drop in expected cash flows or a worsening business climate could trigger an interim test and a material write-down. The Arrowhead acquisition added about $305 million of goodwill in 2012, increasing this exposure.
What is the outlook for 2012?
Management expects general insurance premium rates to rise modestly and gradually during 2012, and says exposure units are no longer declining as quickly. It does not expect significant growth in exposure units, and it stated that internal growth could turn positive at some point in 2012, though it did not commit to a timeline and cautioned that the trend may not continue in the first half of 2012. Results will also depend on the integration of Arrowhead and on the financing costs of the new debt.
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