NOTE 4· Business Combinations

Acquisitions in 2014

During the three months ended March 31, 2014, Brown & Brown acquired the assets and assumed certain liabilities of one insurance intermediary. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain acquisitions completed within the last twelve months as permitted by ASC Topic 805 — Business Combinations (“ASC 805”). The aggregate purchase price of the acquisition and the miscellaneous adjustments totaled $1,324,000, including $1,013,000 of cash payments, the assumption of $31,000 of liabilities and $280,000 of recorded earn-out payables. This acquisition was acquired primarily to expand Brown & Brown’s core business 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 price for all acquisitions consummated after January 1, 2009 included 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 to 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.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the three months ended March 31, 2014, several adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $21,000 relating to the assumption of certain liabilities.

The following table summarizes the aggregate purchase price allocations made as of the date of acquisition for the current-year acquisition and adjustments made during the measurement period for prior-year acquisitions:

(in thousands)

Name

Business
Segment

Date of
Acquisition

Cash
Paid

Recorded
Earn-out
Payable

Net Assets
Acquired

Acquisition

Retail

Various

1,013

280

1,293

The following table summarizes the adjustments made to the estimated fair values along with the aggregate assets and liabilities acquired as of the date of each acquisition:


(in thousands)
Other current assets	$	384
Fixed assets		4
Goodwill		318
Purchased customer accounts		607
Non-compete agreements		11

Total assets acquired		1,324
Other current liabilities		(31	)

Net assets acquired	$	1,293

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

Goodwill of $318,000, was allocated to the Retail Division. Of the total goodwill of $318,000, $38,000 is currently deductible for income tax purposes and $280,000 is non-deductible as it relates to the earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisition completed during 2014 have been combined with those of the Company since the acquisition date. The total revenues and income before income taxes from the acquisition completed through March 31, 2014, included in the Condensed Consolidated Statement of Income for the three months ended March 31, 2014, were $6,000 and $1,000, respectively. If the acquisition 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 acquisition actually been made at the beginning of the respective periods.


(UNAUDITED)	For the three months ended March 31,
(in thousands, except per share data)	2014		2013
Total revenues	$	363,739	$	335,253
Income before income taxes	$	86,883	$	99,566
Net income	$	52,443	$	60,176

Net income per share:
Basic	$	0.36	$	0.42
Diluted	$	0.36	$	0.41

Weighted average number of shares outstanding:
Basic		141,610		140,796
Diluted		143,309		142,947

Acquisitions in 2013

During the three months ended March 31, 2013, Brown & Brown did not acquire any insurance intermediaries, however there were miscellaneous adjustments to the purchase price allocation of certain prior acquisitions acquired within the then-preceding twelve months as permitted by ASC 805. 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 price for all acquisitions consummated after January 1, 2009 included 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.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the three months ended March 31, 2013, several adjustments were made within the permitted measurement period that resulted in reduction of the aggregate purchase price of the affected acquisitions by $1,071,000, including $61,000 of cash payments, a reduction of $454,000 in other payables, the assumption of $43,000 of liabilities and the reduction of $721,000 in recorded earn-out payables.

The following table summarizes the adjustments made to the aggregate purchase price allocations as of the date of each acquisition:


(in thousands)
Name	Business Segment	2012 Date of Acquisition		Cash Paid		Other Payable			Recorded Earn-out Payable			Net Assets Acquired
Arrowhead General Insurance Agency Superholding Corporation	National Programs; Services		January 9	$	—	$	(454	)	$	—		$	(454	)
Insurcorp & GGM Investments LLC	Retail		May 1		—		—			(834	)		(834	)
Richard W. Endlar Insurance Agency, Inc.	Retail		May 1		—		—			220			220
Texas Security General Insurance Agency, Inc.	Wholesale/ Brokerage		Sept 1		—		—			(107	)		(107	)
Other	Various		Various		61		—			—			61

Total				$	61	$	(454	)	$	(721	)	$	(1,114	)

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


(in thousands)	Arrowhead			Insurcorp			Endlar		Texas Security			Other			Total
Other current assets	$	—		$	—		$	—	$	25		$	1,419		$	1,444
Goodwill		(454	)		(566	)		216		(843	)		(1,214	)		(2,861	)
Purchased customer accounts		—			(268	)		4		708			(98	)		346

Total assets acquired		(454	)		(834	)		220		(110	)		107			(1,071	)
Other current liabilities		—			—			—		3			(46	)		(43	)

Net assets acquired	$	(454	)	$	(834	)	$	220	$	(107	)	$	61		$	(1,114	)

ASC 805 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 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 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 March 31, 2014 and 2013, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3). The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three months ended March 31, 2014 and 2013, were as follows:


	For the three months ended March 31,
(in thousands)	2014			2013
Balance as of the beginning of the period	$	43,058		$	52,987
Additions to estimated acquisition earn-out payables		280			(721	)
Payments for estimated acquisition earn-out payables		(615	)		(4,319	)

Subtotal		42,723			47,947

Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables		5,603			997
Interest expense accretion		480			525

Net change in earnings from estimated acquisition earn-out payables		6,083			1,522

Balance as of March 31	$	48,806		$	49,469

Of the $48,806,000 estimated acquisition earn-out payables as of March 31, 2014, $18,171,000 was recorded as accounts payable and $30,635,000 was recorded as other non-current liabilities.

As of March 31, 2014, the maximum future contingency payments related to all acquisitions totaled $125,006,000, all of which relates to acquisitions consummated subsequent to January 1, 2009.