Goosehead Insurance, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. The company is an independent insurance agency and franchisor operating corporate and franchise distribution channels. It earns commissions, agency and franchise fees, and contingent commissions, and does not bear insurance underwriting risk.
Key financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $60.1 million | $42.7 million |
| Operating income (loss) | $(13.9) million | $7.6 million |
| Consolidated net income (loss) | $(18.7) million | $8.7 million |
| Adjusted EBITDA (non-GAAP) | $14.8 million; 25% margin | $10.7 million; 25% margin |
| Net cash from operating activities | $10.3 million | $13.5 million |
| Cash and cash equivalents at year-end | $18.6 million | $4.9 million |
| Total debt at year-end | $48.4 million | $48.7 million |
| Total written premium | $509.0 million | $342.3 million |
Revenue increased 41%; commissions and agency fees rose 36% to $36.7 million, while franchise revenue rose 49% to $23.0 million. Adjusted EBITDA increased 38%. Corporate Channel Adjusted EBITDA was $7.5 million (22% margin); Franchise Channel Adjusted EBITDA was $8.6 million (33% margin). These segment measures and Adjusted EBITDA are non-GAAP and should not be treated as substitutes for GAAP results.
Policies in force increased 47% to 334,000. The company reported 88% client retention and 94% premium retention. Operating franchises grew 57% to 457, with another 189 contracted but not yet open; corporate sales agents increased 50% to 167. Franchise premiums grew 60%, compared with 33% growth in corporate premiums.
Year-end current assets were $22.8 million and current liabilities $7.8 million. The $13.0 million revolving facility had $10.0 million drawn and approximately $2.6 million available after a letter of credit. Debt is secured by substantially all company assets, including rights to future commissions, bears floating LIBOR-based rates, and includes a $32.5 million term-loan maturity in 2021. The company reported compliance with debt covenants at year-end. Total liabilities were $60.0 million; total equity was negative $25.2 million, including substantial non-controlling interests.
Material changes and unusual items
- GAAP results swung to a loss, largely reflecting $27.1 million in equity-based compensation, including $19.8 million of non-cash compensation associated with pre-IPO equity conversion. The prior year included a $3.5 million gain from a franchisee buyout.
- The company completed its IPO and reorganization in May 2018. At year-end, Goosehead Insurance, Inc. held 38% of Goosehead Financial, LLC’s economic interest and controlled its management; non-controlling holders owned the remaining 62%.
- The August 2018 refinancing replaced prior facilities with a $40 million term loan and $13 million revolver. The filing says the refinancing lowered borrowing costs, while $871,000 of prior loan origination fees were immediately expensed.
- Cash from operations fell despite revenue growth, to $10.3 million from $13.5 million. Financing cash flow included IPO proceeds and substantial member distributions.
- Fourth-quarter 2018 revenue was $14.7 million, operating income $1.4 million and net income $0.6 million. Second-quarter results included a $23.9 million net loss, reflecting the timing of IPO-related compensation expense.
Outlook, commentary and risks
Management identifies continued corporate-agent recruiting, franchise expansion, technology investment, retention and converting new policies to more profitable renewals as priorities. It planned to expand franchise marketing into nine additional states in 2019. No quantified revenue or earnings guidance is provided. Management stated that current liquidity sources should fund working capital and commitments for the foreseeable future.
Key risks include dependence on premium levels and carrier-set commissions, insurance-market cycles, housing activity and home-closing referrals, carrier concentration, and contingent commissions that depend on carrier growth and profitability results. Two carriers each accounted for at least 10% of 2018 revenue (17% and 11%). Other material risks include franchisee performance and retention, rapid-growth execution, cybersecurity and reliance on third-party technology, regulatory and licensing requirements, litigation and errors-and-omissions claims, and natural disasters. The controlled-company and dual-class structure concentrates voting power with pre-IPO holders. The tax receivable agreement requires payment to those holders of 85% of specified realized tax savings.
The company said it had remediated previously reported material weaknesses in financial reporting controls as of year-end. The auditor did not provide an opinion on internal-control effectiveness, and management was not required to include an internal-control assessment in this filing. The company reported no material legal proceedings currently pending.
A subsequent event: in March 2019, Goosehead Financial approved a $15 million extraordinary distribution; the public company declared a $0.41 per-share dividend, payable on or before April 1, 2019. Future dividends remain discretionary and subject to restrictions.
Important facts for investors to verify
- Reconcile the reported $18.7 million consolidated net loss with the $8.9 million loss attributable to Goosehead Insurance, Inc., and distinguish both from management’s non-GAAP Adjusted EBITDA and Adjusted EPS.
- Assess the persistence and cash implications of IPO-related equity compensation, future share-based compensation, and the difference between GAAP earnings and adjusted measures.
- Review debt covenants, floating-rate exposure, the 2021 maturity and balloon payment, and the company’s capacity to service debt while funding growth and distributions.
- Track franchise openings and productivity, renewal conversion, client and premium retention, and whether rapid headcount growth translates into durable margins.
- Monitor carrier concentration, commission terms, contingent-commission variability, and exposure to housing-market and catastrophe-related changes.
- Review the controlled-company governance structure, non-controlling ownership, tax receivable agreement obligations, and dividend capacity and restrictions.