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Business Combinations
 6 Months Ended
Jun. 30, 2011
Business Combinations  
Business Combinations

NOTE 5· Business Combinations

Acquisitions in 2011

For the six months ended June 30, 2011, Brown & Brown acquired the assets and assumed certain liabilities of 22 insurance intermediaries, the stock of one insurance intermediary and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $114,108,000, including $90,417,000 of cash payments, the issuance of notes payable of $550,000, the assumption of $9,326,000 of liabilities, and $13,815,000 of recorded earn-out payables. All of these acquisitions were acquired primarily to expand Brown & Brown's core businesses and to attract and hire high-quality individuals. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one- to three-year period, within a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations are recorded in the consolidated statement of income when incurred.

The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business's future performance is estimated using financial projections developed by management, and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared with the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

 

All of these acquisitions have been accounted for as business combinations and are as follows:

 

(in thousands)                                                 

Name

    Business
Segment		      2011
Date of
Acquisition		      Cash
Paid		      Note
Payable		      Recorded
Earn-out
Payable		      Recorded
Purchase
Price		      Maximum
Potential
Earn-out
Payable		  

Balcos Insurance, Inc.

      Retail         January 1       $ 8,611       $ —         $ 1,595       $ 10,206       $ 5,766   

Associated Insurance Service, Inc. et al.

      Retail         January 1         12,000         —           1,575         13,575         6,000   

United Benefit Services Insurance Agency LLC et al.

      Retail         February 1         14,559         —           3,199         17,758         9,133   

First Horizon Insurance Group, Inc. et al.

      Retail         April 30         26,465         —           —           26,465         —     

Fitzharris Agency, Inc. et al.

      Retail         May 1         6,159         —           888         7,047         3,832   

Corporate Benefit Consultants, LLC

      Retail         June 1         9,000         —           2,038         11,038         4,520   

Other

      Various         Various         13,623         550         4,520         18,693         10,411   
                                                  

Total

          $ 90,417       $ 550       $ 13,815       $ 104,782       $ 39,662   
                                                  

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:

 

(in thousands)    Balcos     AIS     United     FHI     FA     CBC      Other     Total  

Cash

    $ —        $ —        $ —        $ 5,168      $ —        $ —         $ —        $ 5,168   

Other current assets

      187        252        438        1,334        —          —           432        2,643   

Fixed assets

      20        100        20        134        60        6         48        388   

Goodwill

      6,486        9,055        10,501        17,839        7,311        6,965         11,516        69,673   

Purchased customer accounts

      3,530        4,086        6,787        6,710        3,351        4,046         7,401        35,911   

Non-compete agreements

      42        92        45        10        21        21         81        312   

Other assets

      —          —          4        9        —          —           —          13   
                                                                 

Total assets acquired

      10,265        13,585        17,795        31,204        10,743        11,038         19,478        114,108   

Other current liabilities

      (59 )      (10 )      (37 )      (3,831 )      (3,696 )      —           (785 )      (8,418 ) 

Deferred income taxes

      —          —          —          (908 )      —          —           —          (908 ) 
                                                                 

Total liabilities assumed

      (59 )      (10 )      (37 )      (4,739 )      (3,696 )      —           (785 )      (9,326 ) 
                                                                 

Net assets acquired

    $ 10,206      $ 13,575      $ 17,758      $ 26,465      $ 7,047      $ 11,038       $ 18,693      $ 104,782   
                                                                 

The weighted average useful lives for the above acquired amortizable intangible assets, as of the acquisition date, are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 5.0 years.

Goodwill of $69,673,000 was assigned to the Retail and National Programs Divisions in the amounts of $67,386,000 and $2,287,000, respectively. Of the total goodwill of $69,673,000, $38,019,000 is currently deductible for income tax purposes and $17,839,000 is non-deductible. The remaining $13,815,000 relates to the earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2011 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through June 30, 2011, included in the Condensed Consolidated Statement of Income for the three months ended June 30, 2011, were $8,493,000 and $583,000, respectively. The total revenues and income before income taxes from the acquisitions completed through June 30, 2011, included in the Condensed Consolidated Statement of Income for the six months ended June 30, 2011, were $12,949,000 and $1,555,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company's results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

(UNAUDITED)    For the three  months
ended June 30,		      For the six months
ended June 30,		  
(in thousands, except per share data)    2011      2010      2011      2010  

Total revenues

    $ 249,183       $ 254,929       $ 518,557       $ 519,985   

Income before income taxes

      62,194         71,539         140,929         148,573   

Net income

      37,473         43,320         85,011         89,833   

Net income per share:

            

Basic

    $ 0.26       $ 0.30       $ 0.60       $ 0.63   

Diluted

    $ 0.26       $ 0.30       $ 0.58       $ 0.63   

Weighted average number of shares outstanding:

            

Basic

      138,379         137,685         138,365         137,654   

Diluted

      139,942         139,105         140,950         138,937   

Acquisitions in 2010

For the six months ended June 30, 2010, Brown & Brown acquired the assets and assumed certain liabilities of ten insurance intermediaries and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $43,749,000, including $33,262,000 of cash payments, the issuance of notes payable of $175,000, the assumption of $1,211,000 of liabilities, and $9,101,000 of recorded earn-out payables. All of these acquisitions were acquired primarily to expand Brown & Brown's core businesses and to attract and hire high-quality individuals. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one- to three-year period, within a minimum and maximum price range. The recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the consolidated statement of income when incurred.

The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business's future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared with the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

All of these acquisitions have been accounted for as business combinations and are as follows:

 

(in thousands)                                                 

Name

    Business
Segment		      2010
Date of
Acquisition		      Cash
Paid		      Note
Payable		      Recorded
Earn-out
Payable		      Recorded
Purchase
Price		      Maximum
Potential
Earn-out
Payable		  

DiMartino Associates, Inc.

      Retail         March 1       $ 7,047       $ —         $ 3,402       $ 10,449       $ 5,637   

Stone Insurance Agencies, et al.

      Retail         May 1         15,826         —           124         15,950         3,000   

Other

      Various         Various         10,389         175         5,575         16,139         10,429   
                                                  

Total

          $ 33,262       $ 175       $ 9,101       $ 42,538       $ 19,066   
                                                  

 

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:

 

(in thousands)    DiMartino      Stone     Other     Total  

Cash

    $ —         $ —        $ —        $ —     

Other current assets

      137         516        439        1,092   

Fixed assets

      21         70        98        189   

Goodwill

      6,890         11,128        9,838        27,856   

Purchased customer accounts

      3,380         5,172        5,895        14,447   

Non-compete agreements

      21         74        70        165   

Other assets

      —           —          —          —     
                                 

Total assets acquired

      10,449         16,960        16,340        43,749   

Other current liabilities

      —           (1,011 )      (200 )      (1,211 ) 
                                 

Total liabilities assumed

      —           (1,011 )      (200 )      (1,211 ) 
                                 

Net assets acquired

    $ 10,449       $ 15,949      $ 16,140      $ 42,538   
                                 

The weighted average useful lives, for the above acquired amortizable intangible assets, as of the acquisition date, are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 5.0 years.

Goodwill of $27,856,000, of which $18,806,000 is expected to be deductible for income tax purposes, was assigned to the Retail and Services Divisions in the amounts of $22,458,000 and $5,398,000, respectively.

The results of operations for the acquisitions completed during 2010 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through June 30, 2010 included in the Condensed Consolidated Statement of Income for the three months ended June 30, 2010 were $4,561,000 and $539,000, respectively. The total revenues and income before income taxes from the acquisitions completed through June 30, 2010 included in the Condensed Consolidated Statement of Income for the six months ended June 30, 2010 were $6,348,000 and $911,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company's results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 

(UNAUDITED)    For the three  months
ended June 30,		      For the six months
ended June 30,		  
(in thousands, except per share data)    2010      2009      2010      2009  

Total revenues

    $ 244,250       $ 251,915       $ 500,743       $ 520,953   

Income before income taxes

      68,203         68,741         142,671         149,698   

Net income

      41,300         41,738         86,265         90,811   

Net income per share:

            

Basic

    $ 0.29       $ 0.29       $ 0.61       $ 0.64   

Diluted

    $ 0.29       $ 0.29       $ 0.60       $ 0.64   

Weighted average number of shares outstanding:

            

Basic

      137,685         136,939         137,654         136,937   

Diluted

      139,105         137,304         138,937         137,261   

For acquisitions consummated prior to January 1, 2009, additional consideration paid to sellers as a result of purchase price "earn-out" provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2011 as a result of these adjustments totaled $1,019,000, all of which was allocated to goodwill. Of the $1,019,000 net additional consideration paid, $362,000 was paid in cash and $657,000 was issued as a note payable. The net additional consideration paid by the Company in 2010 as a result of these adjustments totaled $1,745,000, all of which was allocated to goodwill. Of the $1,745,000 net additional consideration paid, $710,000 was paid in cash and $1,035,000 was issued in notes payable.

As of June 30, 2011, the maximum future contingency payments related to all acquisitions totaled $124,335,000, of which $30,360,000 relates to acquisitions consummated prior to January 1, 2009 and $93,975,000 relates to acquisitions consummated subsequent to January 1, 2009.

As of June 30, 2011, the fair value of the estimated earn-out payables for the three and six months was re-evaluated and increased by $1,104,000 and $589,000, respectively, which resulted in a charge to the Condensed Consolidated Statement of Income. As of June 30, 2010, the fair value of the estimated earn-out payables for the three and six months was re-evaluated and reduced by $719,000 and $1,556,000, respectively, which resulted in a credit to the Condensed Consolidated Statement of Income. Additionally, the interest expense accretion, related to the earn-out payables, to the Condensed Consolidated Statement of Income for the three months ended June 30, 2011, and 2010, was $461,000 and $186,000, respectively. The interest expense accretion, related to the earn-out payables, to the Condensed Consolidated Statement of Income for the six months ended June 30, 2011, and 2010, was $877,000 and $327,000, respectively. .As of June 30, 2011, the estimated earn-out payables equaled $41,913,000, of which $8,410,000 was recorded as current liabilities and $33,503,000 was recorded as non-current liabilities.