Brown & Brown, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary and services organization operating through Retail, National Programs, Wholesale Brokerage, and Services segments. The filing covers the fiscal year ended December 31, 2019; quarterly data are also provided for the fourth quarter of 2019. The Company operated 311 locations in 44 states and internationally, with 10,083 employees at year-end.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $2.392 billion | $2.014 billion | 18.8% |
| Commissions and fees | $2.385 billion | $2.010 billion | 18.7% |
| Income before income taxes | $525.9 million | $462.5 million | 13.7% |
| Net income | $398.5 million | $344.3 million | 15.8% |
| Diluted earnings per share | $1.40 | $1.22 | 14.8% |
| Operating cash flow | $678.2 million | $567.5 million | 19.5% |
| EBITDAC | $716.9 million | $615.4 million | 16.5% |
| EBITDAC margin | 30.0% | 30.6% | Down 60 bps |
| Income before tax margin | 22.0% | 23.0% | Down 100 bps |
Net income margin was approximately 16.7% in 2019, compared with approximately 17.1% in 2018. Organic Revenue growth, a non-GAAP measure, was 3.6%, compared with 2.4% in 2018. Core commissions and fees increased 18.4%, including approximately $298.3 million from acquisitions, approximately $70.0 million from net new and renewal business, and a $9.8 million reduction from divested operations.
Segment commissions and fees were $1.366 billion for Retail, $516.9 million for National Programs, $309.4 million for Wholesale Brokerage, and $193.6 million for Services. Organic Revenue growth was 4.7%, 3.0%, 7.4%, and negative 6.3%, respectively.
Fourth-quarter 2019 total revenue was $579.0 million, net income was $76.5 million, and diluted earnings per share were $0.27, compared with fourth-quarter 2018 revenue of $508.7 million, net income of $73.5 million, and diluted earnings per share of $0.26.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $542.2 million at December 31, 2019, up from $439.0 million; cash including restricted cash was $963.0 million.
- Current assets were $2.495 billion and current liabilities were $2.045 billion; the reported current ratio was 1.22.
- Total assets were $7.623 billion and shareholders’ equity was $3.350 billion.
- Total debt was $1.555 billion, net of discount and issuance costs, versus $1.507 billion in 2018. Debt included $848.7 million of senior notes and $660.0 million under credit agreements, plus the current portion.
- The Company issued $350.0 million of 4.500% senior notes due 2029 and used proceeds partly to repay its revolving facility. It had $100.0 million drawn on the revolving facility at year-end.
- The Company had access to up to $700.0 million under its revolving credit facility and stated that cash, investments, operating cash flow, and available borrowing capacity should satisfy normal liquidity needs for at least the next 12 months.
- Capital expenditures were $73.1 million, including technology investments and construction of a new headquarters. Dividends paid were $91.3 million, and share repurchases used $38.7 million of cash.
Material changes versus the prior comparable period
- Growth accelerated through acquisitions, especially the 2018 Hays acquisition and 23 acquisitions completed in 2019. The Company paid approximately $356.3 million for 2019 acquisitions and issued $20.0 million of common stock in connection with those transactions.
- Employee compensation and benefits increased 22.4%, faster than revenue, raising the ratio to 54.7% of revenue from 53.1%. The increase reflected acquired operations, higher staffing, compensation inflation, bonuses, producer commissions, and stock-based compensation.
- Interest expense increased 56.9% to $63.7 million because of acquisition-related debt and higher floating-rate debt costs. Amortization increased 21.7% to $105.3 million due to acquired intangible assets.
- Retail revenue grew 31.1%, but its pretax margin declined to 16.3% from 20.9%, primarily because of Hays-related margin mix, higher compensation, technology spending, amortization, and interest expense.
- Services Organic Revenue declined 6.3%, mainly because of lower Social Security advocacy and property claims activity; Services EBITDAC margin declined to 22.1% from 23.2%.
- Guaranteed supplemental commissions rose to $23.1 million from $10.0 million, including an approximately $9 million non-recurring National Programs commission that is not expected to recur.
- The Company adopted the new lease accounting standard in 2019, recording operating lease assets of $184.3 million and operating lease liabilities of $211.3 million at year-end, without a significant income-statement effect.
Guidance, outlook, commentary, and risks
The filing does not provide formal earnings or revenue guidance. Management stated that if gradual increases in insurable exposure units continued through 2020 and premium-rate changes remained similar to 2019, it expected continued positive quarterly Organic Revenue growth.
Management emphasized long-term growth through net new business, acquisitions, a decentralized sales and service model, and operating leverage. The Company expects to invest approximately $30 million to $40 million in a multi-year technology upgrade program, which may pressure margins and cash flow and could cause implementation disruptions.
- Key risks include retaining qualified employees and maintaining the Company’s culture during continued acquisition-driven expansion.
- Acquisition risks include valuation, integration, retention of acquired personnel, earn-out estimates, failure to achieve expected performance, and goodwill impairment.
- Cybersecurity, data privacy, technology disruption, regulatory changes, and increased compliance costs could adversely affect operations and reputation.
- The Company is concentrated in several U.S. states, including Florida, California, Texas, New York, and Pennsylvania, exposing it to regional economic conditions, natural disasters, and state-level regulation.
- Approximately $715.0 million of borrowings carried floating rates tied to LIBOR. The planned post-2021 LIBOR transition creates uncertainty regarding future interest expense and contract terms.
- Goodwill was $3.746 billion, and the Company reported no goodwill or amortizable intangible asset impairment. However, a sustained stock-price decline, weaker cash flows, or adverse business conditions could trigger future impairment.
- Maximum future acquisition contingency payments were $328.7 million, including $161.5 million of recorded earn-out payables. The earn-out obligation was identified as the critical audit matter because it relies on management projections and other unobservable inputs.
- Ordinary-course litigation and claims were not considered material at filing, but unfavorable developments or inadequate insurance coverage could affect earnings, cash flow, and liquidity.
Deloitte & Touche issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective, although certain 2019 acquisitions were excluded from the internal-control assessment.
Important facts for investors to verify
- Reconcile reported revenue and earnings growth with acquisition contributions versus the 3.6% Organic Revenue growth rate.
- Assess whether Retail margin pressure, higher compensation, technology spending, amortization, and interest costs persist.
- Review debt maturities, floating-rate exposure, covenant compliance, and the transition from LIBOR.
- Evaluate the assumptions supporting the $161.5 million recorded earn-out liability and $328.7 million maximum potential obligation.
- Monitor goodwill of $3.746 billion and the sensitivity of impairment testing to market capitalization and future cash flows.
- Confirm the sustainability of the $23.1 million of guaranteed supplemental commissions, particularly the non-recurring $9 million item.
- Track Services Segment weakness, technology investment execution, cybersecurity exposure, and concentration in catastrophe-prone or highly regulated states.