01—Abstract
Summary
Summary of the 10-K filed February 28, 2014. Cited figures are marked; the original filing is the authoritative source.
Brown & Brown, Inc. (NYSE: BRO) closed 2013 with a strong year of growth, driven by both organic momentum and acquisitions.
Total revenues rose 13.6% to $1.363 billiona, commissions and fees grew 14.0% to $1.356 billion, and net income increased 18.0% to $217.1 million, or $1.48 per diluted share. The company reported a 6.7% net internal growth rate in core commissions and fees, up from 2.6% in 2012 and a negative 2.4% in 2011, signaling that the post-2008 soft market and economic weakness are giving way to a firmer pricing and exposure environment. Income before taxes rose 17.3% to $357.6 million, and the effective tax rate was 39.3%.
Employee compensation remained the largest expense at 50.1% of revenues, improving slightly from 50.7% in 2012. Growth was also acquisition-heavy. The July 2013 Beecher Carlson acquisition (aggregate price $469.3 millionb) and nine other 2013 deals contributed substantially to top-line growth, and the company has announced the $602.5 million Wright Insurance Group acquisition, expected to close around April 1, 2014.
Financing for Wright is expected to come from a mix of cash and new or existing credit facilities. Total debt stood at $480 millionc at year-end, up from $450 million, and the company had $203 million in cash. Operating cash flow was $389.4 million, which covered $53.5 million in dividends and about $16.4 million in capex, while acquisitions consumed $367.7 million.
Key risks for investors include commission dependence on insurer premium rates, which are cyclical and difficult to forecast; geographic concentration, with about 83% of commissions and fees from 14 states, including Florida, California, and New York; goodwill of $2.0 billiond (about 55% of total assets), which would be exposed to impairment if market conditions deteriorate; and acquisition integration risk as the company's growth strategy depends on continued deal activity. Management also expects premium rates and exposure units to rise modestly in 2014, though Colonial Claims' Superstorm Sandy-related revenue from 2013 will not repeat.
02—Key points
Key Highlights
- Revenue growth: Total revenues increased 13.6% to $1.363 billion, and commissions and fees rose 14.0% to $1.356 billion, with both organic and acquisition contributions.
- Organic momentum: Net internal growth in core commissions and fees reached 6.7% in 2013, up from 2.6% in 2012 and a 2.4% decline in 2011, with positive growth in all four divisions in most quarters.
- Earnings: Net income rose 18.0% to $217.1 million, and diluted EPS increased to $1.48 from $1.26, with income before taxes up 17.3% to $357.6 million.
- Largest acquisition pending: The $602.5 million Wright Insurance Group deal (plus up to $37.5 million contingent consideration) is expected to close around April 1, 2014, adding about $120 million in annualized revenue.
- Balance sheet: Total assets were $3.65 billion, goodwill was $2.0 billion, and long-term debt was $380 million (total debt $480 million); shareholders' equity grew to $2.0 billion.
- Cash generation and capital return: Operating cash flow was $389.4 million, and dividends were raised to $0.37 per share declared for 2013 (quarterly rate of $0.10 in Q4), with a new $25 million share repurchase authorization approved in February 2014 (no shares repurchased as of filing).
- Concentration risk: About 82.9% of commissions and fees came from 14 states, and no single insurer accounted for more than 8.0% of core commissions in 2013.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 28, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $1.36B$1.20B | +13.6% |
| Operating Expenses | $1.01B$895.22M | +12.3% |
| Interest Expense | $16.44M$16.10M | +2.1% |
| Net Income | $217.11M$184.04M | +18.0% |
| EPS (Basic) | $0.75$0.64 | +17.2% |
| EPS (Diluted) | $0.74$0.63 | +17.5% |
| Shares Outstanding (Basic) | 282.07M278.73M | +1.2% |
| Shares Outstanding (Diluted) | 285.25M284.02M | +0.4% |
05—Questions
Frequently Asked Questions
How much did Brown & Brown's revenue and earnings grow in 2013?
Total revenues grew 13.6% to $1.363 billion, and net income grew 18.0% to $217.1 million. Diluted EPS rose to $1.48 from $1.26 in 2012. Part of the growth came from the July 2013 Beecher Carlson acquisition, but organic core commissions and fees growth of 6.7% was a key driver as well.
What is the Wright Insurance Group acquisition, and how will it be financed?
Brown & Brown agreed in January 2014 to acquire The Wright Insurance Group for a total net consideration of $602.5 million, plus up to $37.5 million in contingent payments. Wright has about $120 million in estimated annualized revenue and is expected to close around April 1, 2014, subject to regulatory approvals. Management expects to fund it with a combination of cash and existing or new credit facilities, and liquidity is considered sufficient through at least the end of 2014.
What are the main risks to commission revenue?
Commissions depend on insurance premium rates set by carriers, which are cyclical and hard to predict. Carriers could also reduce commission rates or profit-sharing contingent commissions, which made up about 4% of prior-year revenue. Geographic concentration in 14 states, with about 83% of commissions and fees, exposes the company to regional economic or regulatory shocks. Finally, a disaster in Florida or California could affect operations, since many offices are located in those states.
Is the company's goodwill a concern for investors?
Goodwill totaled $2.0 billion at December 31, 2013, roughly 55% of total assets. Management's November 30, 2013 annual test found fair value exceeded carrying value, and no impairments were recorded for amortizable intangibles in 2011 through 2013. However, a sustained stock price decline, lower cash flow, or a weaker business climate could trigger a future impairment charge, which would reduce earnings and equity.
Are the dividends and share repurchases secure?
Brown & Brown raised its quarterly dividend to $0.10 per share in Q4 2013 and declared $0.37 per share for the year, up from $0.345 in 2012. Dividends paid totaled $53.5 million in 2013. The board approved a $25.0 million share repurchase program in February 2014 over 24 months, but no shares had been repurchased as of the filing date. The company states it intends to continue paying quarterly dividends, subject to capital availability and board determination.
06—Continue