01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
Brown & Brown, Inc. (NYSE: BRO) closed 2012 as a clear inflection year.
Total revenues rose 18.4% to $1.20 billiona and net income rose 12.2% to $184.0 million, or $1.26 diluted EPS (vs. $1.13 in 2011). Growth was driven largely by acquisitions, including the $395 million cash purchase of Arrowhead General Insurance Agency in January 2012, but management also reported positive internal (organic) core commissions and fees growth of 2.6% for the first time since 2006, after five years of negative organic growth. That reversal reflects modestly rising premium rates and stabilizing insurable exposure units.
Income before taxes grew 12.7%, though management noted that same-office profit growth was weaker once acquisition effects, earn-out adjustments, and a one-time $6.8 millionb producer bonus were excluded. Balance sheet leverage increased meaningfully. Goodwill rose to $1.71 billion, total assets to $3.13 billion, and long-term debt to $450 million (from $250 million), largely to fund Arrowhead.
Shareholders' equity grew to $1.81 billionc. Operating cash flow was $220.3 million, below the $237.5 million in 2011, while $425.1 million went to acquisitions. The company paid $49.5 million in dividends (quarterly dividend raised to $0.09) and bought back no stock under its $100 million authorization.
Management states liquidity is sufficient through at least the end of 2013, and Deloitte issued unqualified opinions on both the financial statements and internal controls. Key risks for investors include the cyclical nature of premium rates, dependence on acquisitions for growth, goodwill impairment exposure given the large intangible base, geographic concentration (about 78.5%d of commissions and fees from 11 states, with Florida and California prominent), and the ongoing regulatory scrutiny of profit-sharing contingent commissions. Profit-sharing contingent commissions are also less predictable and represented about 4.3% to 5.7% of prior-year revenue over the last three years.
02—Key points
Key Highlights
- Total revenues increased 18.4% to $1.20 billion (2011: $1.01 billion), with commissions and fees up 18.2%, largely from acquisitions.
- Positive internal organic growth of 2.6% in core commissions and fees, the first positive result since 2006, reversing five years of declines.
- Net income rose 12.2% to $184.0 million; diluted EPS was $1.26 versus $1.13 in 2011.
- Completed 20 acquisitions in 2012 with estimated annualized revenues of $149.6 million, including Arrowhead ($395 million cash purchase, January 2012).
- Long-term debt more than doubled to $450 million, and goodwill increased to $1.71 billion, raising balance sheet and impairment sensitivity.
- Operating cash flow declined to $220.3 million from $237.5 million, while dividends increased to $0.345 per share for the year (quarterly rate raised to $0.09).
- Concentration risk: 78.5% of commissions and fees came from 11 states, and 2012 included a one-time $6.8 million Retail producer bonus that pressured margins.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $1.20B$1.01B | +18.4% |
| Operating Expenses | $895.22M$743.02M | +20.5% |
| Interest Expense | $16.10M$14.13M | +13.9% |
| Net Income | $184.04M$164.00M | +12.2% |
| EPS (Basic) | $0.64$0.57 | +11.3% |
| EPS (Diluted) | $0.63$0.56 | +11.5% |
| Shares Outstanding (Basic) | 278.73M277.16M | +0.6% |
| Shares Outstanding (Diluted) | 284.02M280.53M | +1.2% |
05—Questions
Frequently Asked Questions
Did Brown & Brown's organic growth actually turn positive in 2012?
Yes. Core organic commissions and fees grew 2.6% in 2012 (a net $24.9 million), compared with declines of 2.4% in 2011 and 4.5% in 2010. Growth was positive in every division except the Retail Division's first quarter and the National Programs Division's third quarter. Management attributes the improvement to rising premium rates and recovering insurable exposure units.
How much of the revenue growth came from acquisitions versus the underlying business?
Most of it came from acquisitions. Core commissions and fees rose $185.6 million, of which about $171.4 million came from acquisitions with no prior-year comparable revenue. The organic contribution was roughly $24.9 million. Acquisition-driven growth also increases amortization, interest, and compensation costs, so margin expansion from acquisitions may take time to show.
Is the higher debt load a concern?
Debt rose to $450 million at year-end 2012 from $250 million, mainly to finance Arrowhead. Management said it was in compliance with all covenants, that liquidity is sufficient through at least the end of 2013, and that its debt-to-total-capitalization ratio remains relatively low. Key facilities mature in 2016 and 2018, and the company has $125 million of new shelf capacity from its October 2012 agreement.
What are the biggest risks to earnings going forward?
The main risks are: (1) soft or declining premium rates and exposure units, which drive commission revenue; (2) reduced profit-sharing contingent commissions, which carriers can change or stop paying; (3) goodwill impairment, since goodwill is about 55% of total assets; (4) regulatory investigations into contingent commission practices; and (5) geographic concentration in states such as Florida and California, where Citizens Property Insurance Corporation and other state entities compete with private carriers.
06—Continue