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Business Combinations
9 Months Ended
Sep. 30, 2011
Business Combinations [Abstract] 
Business Combinations

NOTE 5· Business Combinations

Acquisitions in 2011

For the nine months ended September 30, 2011, Brown & Brown acquired the assets and assumed certain liabilities of 29 insurance intermediaries, all of the stock of one insurance intermediary and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $126,462,000, including $100,449,000 of cash payments, the issuance of notes payable of $1,194,000, the assumption of $9,356,000 of liabilities, and $15,463,000 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		      Net Assets
Acquired		      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         24,835         —           —           24,835         —     

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         25,285         1,194         6,168         32,647         12,865   
        

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total

          $ 100,449       $ 1,194       $ 15,463       $ 117,106       $ 42,116   
        

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

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

    $ —        $ —        $ —        $ 5,170      $ —        $ —         $ —        $ 5,170   

Other current assets

      187        252        438        1,415        77        —           879        3,248   

Fixed assets

      20        100        20        134        60        6         65        405   

Goodwill

      6,486        9,055        10,501        14,701        7,244        6,965         18,624        73,576   

Purchased customer accounts

      3,530        4,086        6,787        8,094        3,351        4,046         13,746        43,640   

Non-compete agreements

      42        92        45        10        21        21         177        408   

Other assets

      —          —          4        9        —          —           2        15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

Total assets acquired

      10,265        13,585        17,795        29,533        10,753        11,038         33,493        126,462   

Other current liabilities

      (59 )      (10 )      (37 )      (3,790 )      (3,706 )      —           (846 )      (8,448 ) 

Deferred income taxes, net

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

Total liabilities assumed

      (59 )      (10 )      (37 )      (4,698 )      (3,706 )      —           (846 )      (9,356 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

Net assets acquired

    $ 10,206      $ 13,575      $ 17,758      $ 24,835      $ 7,047      $ 11,038       $ 32,647      $ 117,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

 

 

  

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 $73,576,000 was assigned to the Retail and National Programs Divisions in the amounts of $71,287,000 and $2,289,000, respectively. Of the total goodwill of $73,576,000, $43,412,000 is currently deductible for income tax purposes and $14,701,000 is non-deductible. The remaining $15,463,000 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 September 30, 2011, included in the Condensed Consolidated Statement of Income for the three months ended September 30, 2011, were $1,471,000 and $894,000, respectively. The total revenues and income before income taxes from the acquisitions completed through September 30, 2011, included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2011, were $3,026,000 and $1,832,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company's estimated 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 September 30,		      For the nine months
ended September 30,		  
(in thousands, except per share data)    2011      2010      2011      2010  

Total revenues

    $ 261,015       $ 260,735       $ 782,561       $ 783,433   

Income before income taxes

      72,933         77,284         215,159         227,040   

Net income

      44,319         47,501         130,119         137,420   

Net income per share:

            

Basic

    $ 0.31       $ 0.33       $ 0.91       $ 0.97   

Diluted

    $ 0.31       $ 0.33       $ 0.90       $ 0.96   

Weighted average number of shares outstanding:

            

Basic

      138,690         138,093         138,475         137,802   

Diluted

      140,443         139,507         140,120         139,128   

Acquisitions in 2010

For the nine months ended September 30, 2010, Brown & Brown acquired the assets and assumed certain liabilities of 18 insurance intermediaries and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $142,321,000, including $119,663,000 of cash payments, the issuance of notes payable of $275,000, the assumption of $1,426,000 of liabilities, and $20,957,000 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 and 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		      Net Assets
Acquired		      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   

Crowe Paradis Holding Company, et al.

      Services         September 1         75,000         —           8,665         83,665         15,000   

Other

      Various         Various         21,790         275         8,766         30,831         18,338   
        

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total

          $ 119,663       $ 275       $ 20,957       $ 140,895       $ 41,975   
        

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

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     Crowe      Other     Total  

Cash

    $ —         $ —        $ 1,000       $ —        $ 1,000   

Other current assets

      137         517        —           941        1,595   

Fixed assets

      21         70        500         142        733   

Goodwill

      6,890         11,128        53,692         18,383        90,093   

Purchased customer accounts

      3,380         5,172        28,440         11,590        48,582   

Noncompete agreements

      21         74        33         190        318   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

Total assets acquired

      10,449         16,961        83,665         31,246        142,321   

Other current liabilities

      —           (1,011 )      —           (415 )      (1,426 ) 
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

Total liabilities assumed

      —           (1,011 )      —           (415 )      (1,426 ) 
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

Net assets acquired

    $ 10,449       $ 15,950      $ 83,665       $ 30,831      $ 140,895   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and noncompete agreements, 5.0 years.

Goodwill of $90,093,000 was assigned to the Retail and Services Divisions in the amounts of $31,004,000 and $59,089,000, respectively. Of the total goodwill of $90,093,000, $69,136,000 is currently deductible for income tax purposes. The remaining $20,957,000 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 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 September 30, 2010 included in the Condensed Consolidated Statement of Income for the three months ended September 30, 2010 were $8,050,000 and $756,000, respectively. The total revenues and income before income taxes from the acquisitions completed through September 30, 2010 included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2010 were $14,398,000 and $1,667,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company's estimated 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 September 30,		      For the nine months
ended September 30,		  
(in thousands, except per share data)    2010      2009      2010      2009  

Total revenues

    $ 251,913       $ 255,097       $ 769,369       $ 789,415   

Income before income taxes

      74,060         70,627         221,088         223,763   

Net income

      44,915         42,864         133,817         135,760   

Net income per share:

            

Basic

    $ 0.32       $ 0.30       $ 0.94       $ 0.96   

Diluted

    $ 0.31       $ 0.30       $ 0.93       $ 0.96   

Weighted average number of shares outstanding:

            

Basic

      138,093         137,279         137,802         137,052   

Diluted

      139,507         137,671         139,128         137,403   

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 $4,446,000, all of which was allocated to goodwill. Of the $4,446,000 net additional consideration paid, $3,781,000 was paid in cash and $665,000 was issued as a note payable. The net additional consideration paid by the Company in 2010 as a result of these adjustments totaled $2,709,000, all of which was allocated to goodwill. Of the $2,709,000 net additional consideration paid, $710,000 was paid in cash and $1,999,000 was issued in notes payable.

As of September 30, 2011, the maximum future contingency payments related to all acquisitions totaled $104,386,000, of which $12,098,000 relates to acquisitions consummated prior to January 1, 2009, and $92,288,000 relates to acquisitions consummated subsequent to January 1, 2009.

Accounting Standards Codification ("ASC") Topic 805 - Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities (with only limited exceptions) upon initially obtaining control of an acquired entity. Additionally, the fair value of contingent consideration arrangements (such as earn-out purchase arrangements) at the acquisition date must be included in the purchase price consideration. As a result, the recorded purchase price 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 these earn-out obligations will be recorded in the consolidated statement of income when incurred. Potential earn-out obligations are typically based upon future earnings of the acquired entities, usually between one and three years.

As of September 30, 2011, the fair values of the estimated acquisition earn-out payables were re-evaluated. The resulting net changes, as well as, the interest expense accretion on the estimated acquisition earn-out payables, for the three and nine month periods ended September 30, 2011 and 2010, were as follows (in thousands):

 

     For the three months
ended September 30,		     For the nine months
ended September 30,		  
     2011     2010     2011     2010  

Change in fair value on estimated acquisition earn-out payables

    $ (1,286 )    $ (60 )    $ (697 )    $ (1,616 ) 

Interest expense accretion

      476        253        1,353        580   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total change in estimated acquisition earn-out payables

    $ (810 )    $ 193      $ 656      $ (1,036 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

As of September 30, 2011, the estimated acquisition earn-out payables equaled $40,461,000, of which $7,365,000 was recorded as accounts payable and $33,096,000 was recorded as other non-current liability.