Brown & Brown, Inc. 2011 Form 10-K Summary
Business context and reporting period
Brown & Brown is a diversified insurance agency, wholesale brokerage, insurance programs and services organization. It earns primarily commission revenue from insurance carriers and fee revenue from customers. The filing covers the fiscal year ended December 31, 2011; fourth-quarter information is presented as unaudited quarterly data.
- Operations included 230 locations in 36 states and one London office.
- Reportable segments were Retail, National Programs, Wholesale Brokerage and Services.
- The company completed 38 acquisitions in 2011 and had 5,557 full-time equivalent employees at year-end.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $1,013.5 million | $973.5 million | 4.1% |
| Commissions and fees | $1,006.0 million | $966.9 million | 4.0% |
| Core commissions and fees | $962.8 million | $912.2 million | 5.5% |
| Profit-sharing contingent commissions | $43.2 million | $54.7 million | (21.1%) |
| Income before income taxes | $270.5 million | $266.1 million | 1.7% |
| Net income | $164.0 million | $161.8 million | 1.4% |
| Diluted EPS | $1.13 | $1.12 | 0.9% |
| Cash flow from operations | $237.5 million | $296.1 million | (19.8%) |
- Approximate pretax margin was 26.7%; net margin was 16.2%.
- Employee compensation and benefits were $508.7 million, or 50.2% of revenue, compared with 50.1% in 2010.
- Non-cash stock-based compensation increased 63.5% to $11.2 million.
- Effective tax rate was 39.4%, compared with 39.2% in 2010. Management expected approximately 41.0% for 2012, assuming other variables remained constant.
- Year-end cash and cash equivalents were $286.3 million, up from $273.0 million. The current ratio was 1.47.
- Total debt was $251.3 million, including $250.0 million of unsecured senior notes; long-term debt was $250.0 million. The company reported compliance with all debt covenants.
- Total assets were $2.607 billion and shareholders’ equity was $1.644 billion at year-end. Goodwill was $1.323 billion, with no impairment recorded.
- Capital expenditures were $13.6 million, acquisitions used $166.1 million of cash, and dividends paid were $46.5 million.
Fourth-quarter results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Total revenue | $244.1 million | $229.9 million |
| Income before income taxes | $59.7 million | $52.0 million |
| Net income | $36.5 million | $32.1 million |
| Diluted EPS | $0.25 | $0.22 |
Fourth-quarter revenue increased approximately 6.2% and net income increased approximately 13.5% year over year. Quarterly results are affected by the timing of policy renewals, acquisitions and profit-sharing contingent commissions.
Material changes versus the prior comparable period
- Core organic commissions and fees declined 2.6%, representing approximately $23.3 million of net lost revenue, but this was an improvement from declines of 4.7% in 2010 and 5.1% in 2009.
- Acquired operations contributed approximately $78.2 million of core commission and fee revenue and substantially offset organic declines.
- Retail revenue increased 5.6% and pretax income increased 7.6%, while Retail core organic revenue declined 4.2%.
- National Programs revenue declined 4.2% and pretax income declined 9.8%, primarily because of lower contingent commissions and lost Proctor business.
- Wholesale Brokerage core organic revenue grew 1.3%, and pretax income increased 16.5% due largely to expense reductions and lower acquisition-related interest.
- Services revenue increased 42.0%, principally from acquisitions, but pretax income was essentially flat because of acquisition-related interest and earn-out charges.
- Operating cash flow fell $58.5 million, primarily reflecting working-capital changes and lower tax benefits compared with 2010.
- Dividends declared increased to $0.325 per share from $0.3125. The company authorized a $100 million repurchase plan but made no plan repurchases during the fourth quarter.
Guidance, outlook, commentary and unusual items
- Management expected general insurance premium rates to increase modestly and gradually in 2012, while not expecting significant growth in exposure units.
- Management believed the slowing decline in exposure units could support positive internal commission and fee growth at some point in 2012, but cautioned that negative internal growth might persist in the first half of the year.
- Guaranteed Supplemental Commissions accrued in 2011 were $12.1 million, most of which was expected to be collected in the first quarter of 2012.
- On January 9, 2012, the company completed the Arrowhead acquisition. The filing reported aggregate purchase consideration of $580.8 million, including $397.5 million of cash, and preliminary goodwill of $305.0 million. The transaction was financed with new term and revolving facilities and a bridge facility; the bridge facility was subsequently refinanced with a JPMorgan term loan.
- Pro forma 2011 results including Arrowhead were estimated at $1.122 billion of revenue, $287.7 million of pretax income and $174.1 million of net income. These amounts are unaudited and not indicative of future results.
- Maximum future acquisition contingency payments were $132.5 million at December 31, 2011, and estimated acquisition earn-out payables were $47.7 million.
- Total contractual cash obligations were $567.6 million, including $109.4 million of operating leases and $132.5 million of maximum future acquisition contingency payments.
- Material risks include soft insurance pricing, weak exposure units, contingent commission volatility, acquisition integration, goodwill impairment, regulatory changes, litigation and errors-and-omissions claims, insurer or bank credit risk, data-security disruptions, employee retention and geographic concentration.
- The company reported an unqualified audit opinion and an unqualified opinion on internal control over financial reporting. Controls excluded certain 2011 acquisitions representing 1.8% of revenue and 2.7% of net income.
Most important facts for investors to verify
- Whether Arrowhead integration, financing costs and expected synergies support the stated pro forma earnings potential.
- Whether core organic revenue turns positive as insurance rates stabilize and exposure-unit declines slow.
- The sustainability and predictability of contingent commissions, which declined materially in 2011.
- Debt repayment capacity and covenant compliance after the Arrowhead financing.
- Goodwill and acquired intangible asset carrying values, particularly following the Arrowhead transaction.
- Potential exposure from litigation, regulatory investigations, contingent commissions, acquisition earn-outs and errors-and-omissions claims.
- The effect of the expected 2012 effective tax rate of approximately 41.0% on earnings and cash flow.