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Business Combinations | 6 Months Ended
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Jun. 30, 2020
Business Combinations [Abstract] |
Business Combinations | NOTE 5 Business Combinations During the six months ended June 30, 2020, Brown & Brown acquired the assets and assumed certain liabilities of seven insurance intermediaries and three books of business (customer accounts) for a total of ten acquisitions. Additionally, adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions includes 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 Condensed Consolidated Statements 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 six months ended June 30, 2020, adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $3.5 million relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the six months ended June 30, 2020 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments primarily impacted goodwill, with no effect on earnings or cash in the current period. Cash paid for acquisitions was $291.4 million during the six months ended June 30, 2020. The Company completed ten acquisitions (including book of business purchases) during the six months ended June 30, 2020. The Company completed fourteen acquisitions (including book of business purchases) during the six months ended June 30, 2019. The following table summarizes the purchase price allocations made as of the date of each acquisition for current year acquisitions and adjustments made during the measurement period for prior year acquisitions. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. These adjustments are made in the period in which the amounts are determined, and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.
(in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Name |  | Business segment |  | Effective date of acquisition |  | Cash paid |  |  | Common Stock Issued |  |  | Other payable |  |  | Recorded earn-out payable |  |  | Net assets acquired |  |  | Maximum potential earn- out payable |
Special Risk Insurance Managers Ltd. (Special Risk) |  | National Programs |  | January 1, 2020 |  | $ | 70,156 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,173 |  |  | $ | 78,329 |  |  | $ | 14,650 |
Texas All Risk General Agency, Inc. et al (Texas Risk) |  | Wholesale Brokerage |  | January 1, 2020 |  |  | 10,511 |  |  |  | — |  |  |  | 159 |  |  |  | 310 |  |  |  | 10,980 |  |  |  | 1,150 |
The Colonial Group, Inc. et al (Colonial) |  | Wholesale Brokerage |  | March 1, 2020 |  |  | 29,037 |  |  |  | — |  |  |  | 527 |  |  |  | 5,639 |  |  |  | 35,203 |  |  |  | 10,150 |
RLA Insurance Intermediaries, LLC (RLA) |  | Wholesale Brokerage |  | March 1, 2020 |  |  | 42,496 |  |  |  | — |  |  |  | 786 |  |  |  | 9,970 |  |  |  | 53,252 |  |  |  | 22,500 |
Dealer Financial Services of N.C., LLC d/b/a The Sterling Group (Sterling) |  | Retail |  | April 1, 2020 |  |  | 19,341 |  |  |  | — |  |  |  | 300 |  |  |  | 2,840 |  |  |  | 22,481 |  |  |  | 5,400 |
LP Insurance Services, LLC (LP) |  | National Programs |  | May 1, 2020 |  |  | 115,948 |  |  |  | 10,000 |  |  |  | 318 |  |  |  | 42,993 |  |  |  | 169,259 |  |  |  | 75,850 |
Other |  | Various |  | Various |  |  | 3,935 |  |  |  | — |  |  |  | 75 |  |  |  | 4,829 |  |  |  | 8,839 |  |  |  | 3,940 |
Total |  |  |  |  |  | $ | 291,424 |  |  | $ | 10,000 |  |  | $ | 2,165 |  |  | $ | 74,754 |  |  | $ | 378,343 |  |  | $ | 133,640 |
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition and adjustments made during the measurement period of the prior year acquisitions.
(in thousands) |  | Special Risk |  |  | Texas Risk |  |  | Colonial |  |  | RLA |  |  | Sterling |  |  | LP |  |  | Other |  |  | Total |
Cash |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other current assets |  |  | 1,764 |  |  |  | 446 |  |  |  | 1,344 |  |  |  | — |  |  |  | 118 |  |  |  | 3,528 |  |  |  | 833 |  |  |  | 8,033 |
Fixed assets |  |  | 346 |  |  |  | 27 |  |  |  | 59 |  |  |  | 54 |  |  |  | 16 |  |  |  | 1,877 |  |  |  | — |  |  |  | 2,379 |
Goodwill |  |  | 60,049 |  |  |  | 8,940 |  |  |  | 25,719 |  |  |  | 51,285 |  |  |  | 15,163 |  |  |  | 115,200 |  |  |  | 848 |  |  |  | 277,204 |
Purchased customer accounts |  |  | 15,483 |  |  |  | 3,222 |  |  |  | 9,393 |  |  |  | 12,875 |  |  |  | 7,196 |  |  |  | 48,633 |  |  |  | 4,158 |  |  |  | 100,960 |
Non-compete agreements |  |  | 136 |  |  |  | 25 |  |  |  | 43 |  |  |  | 481 |  |  |  | 21 |  |  |  | 31 |  |  |  | 31 |  |  |  | 768 |
Other assets |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,088 |  |  |  | 3,088 |
Total assets acquired |  |  | 77,778 |  |  |  | 12,660 |  |  |  | 36,558 |  |  |  | 64,695 |  |  |  | 22,514 |  |  |  | 169,269 |  |  |  | 8,958 |  |  |  | 392,432 |
Other current liabilities |  |  | 551 |  |  |  | (1,680 | ) |  |  | (1,355 | ) |  |  | (11,443 | ) |  |  | (33 | ) |  |  | (10 | ) |  |  | (119 | ) |  |  | (14,089 | )
Other liabilities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total liabilities assumed |  |  | 551 |  |  |  | (1,680 | ) |  |  | (1,355 | ) |  |  | (11,443 | ) |  |  | (33 | ) |  |  | (10 | ) |  |  | (119 | ) |  |  | (14,089 | )
Net assets acquired |  | $ | 78,329 |  |  | $ | 10,980 |  |  | $ | 35,203 |  |  | $ | 53,252 |  |  | $ | 22,481 |  |  | $ | 169,259 |  |  | $ | 8,839 |  |  | $ | 378,343 |
The other column represents current year acquisitions with total net assets acquired of less than $10.0 million and adjustments from prior year acquisitions that were made within the permitted measurement period. The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years. Goodwill of $277.2 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Segments in the amounts of $15.9 million, $175.3 million, $85.9 million and $0.1 million, respectively. Of the total goodwill of $277.2 million, the amount currently deductible for income tax purposes is $202.4 million and the remaining $74.8 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid. For the acquisitions completed during 2020, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through June 30, 2020, included in the Condensed Consolidated Statement of Income for the six months ended June 30, 2020, was $24.3 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through June 30, 2020, included in the Condensed Consolidated Statement of Income for the six months ended June 30, 2020, was $0.2 million. If the acquisitions had occurred as of the beginning of the respective periods, 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) |  | Three months ended June 30, |  |  | Six months ended June 30, |
(in thousands, except per share data) |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Total revenues |  | $ | 602,143 |  |  | $ | 597,784 |  |  | $ | 1,316,330 |  |  | $ | 1,235,519 |
Income before income taxes |  | $ | 130,378 |  |  | $ | 129,909 |  |  | $ | 340,312 |  |  | $ | 283,667 |
Net income |  | $ | 97,514 |  |  | $ | 97,381 |  |  | $ | 253,396 |  |  | $ | 215,312 |
Net income per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.34 |  |  | $ | 0.35 |  |  | $ | 0.90 |  |  | $ | 0.77 |
Diluted |  | $ | 0.34 |  |  | $ | 0.34 |  |  | $ | 0.89 |  |  | $ | 0.76 |
Weighted average number of shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 273,100 |  |  |  | 272,563 |  |  |  | 272,938 |  |  |  | 272,621 |
Diluted |  |  | 274,362 |  |  |  | 274,402 |  |  |  | 274,519 |  |  |  | 274,704 |
As of June 30, 2020 and 2019, 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) as defined in ASC 820- Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the six months ended June 30, 2020 and 2019, were as follows:
|  | Three months ended June 30, |  |  | Six months ended June 30, |
(in thousands) |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Balance as of the beginning of the period |  | $ | 157,720 |  |  | $ | 108,710 |  |  | $ | 161,513 |  |  | $ | 89,924 |
Additions to estimated acquisition earn-out payables |  |  | 60,776 |  |  |  | 5,811 |  |  |  | 74,754 |  |  |  | 23,966 |
Payments for estimated acquisition earn-out payables |  |  | (664 | ) |  |  | (6,685 | ) |  |  | (7,478 | ) |  |  | (7,264 | )
Subtotal |  |  | 217,832 |  |  |  | 107,836 |  |  |  | 228,789 |  |  |  | 106,626 |
Net change in earnings from estimated acquisition earn-out payables: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in fair value on estimated acquisition earn-out payables |  |  | (1,308 | ) |  |  | (4,350 | ) |  |  | (13,949 | ) |  |  | (4,301 | )
Interest expense accretion |  |  | 1,943 |  |  |  | 1,490 |  |  |  | 3,627 |  |  |  | 2,651 |
Net change in earnings from estimated acquisition earn-out payables |  |  | 635 |  |  |  | (2,860 | ) |  |  | (10,322 | ) |  |  | (1,650 | )
Balance as of June 30, |  | $ | 218,467 |  |  | $ | 104,976 |  |  | $ | 218,467 |  |  | $ | 104,976 |
Of the $218.5 million estimated acquisition earn-out payables as of June 30, 2020, $22.1 million was recorded as accounts payable and $196.4 million was recorded as other non-current liabilities. As of June 30, 2020, the maximum future acquisition contingency payments related to all acquisitions was $446.5 million, inclusive of the $218.5 million estimated acquisition earn-out payables as of June 30, 2020. Included within the additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items within the allowable measurement period, which may therefore differ from previously reported amounts. During the six months ended June 30, 2020, the Company recorded a decrease in the estimated acquisition earn-out payables for acquisitions completed in the last three years partially as a result of the potential for lower future financial performance associated with COVID-19. On July 27, 2020, the Company, The Hays Group, Inc., and certain of their affiliates entered into an amendment to the asset purchase agreement, dated as of October 22, 2018. Pursuant to the amendment, the parties agreed, among other things, that (i) based on the financial performance of the acquired business from the period from January 1, 2019, through June 30, 2020, the acquired business has achieved sufficient average annual EBITDA that the calculated earn-out payments will exceed the maximum earn-out payments amount of $25.0 million, (ii) the maximum earn-out payments of $25.0 million were deemed to have been achieved as of the date of the amendment, and (iii) the earn-out payments of $25.0 million will be paid in accordance with the asset purchase agreement in the first quarter of calendar year 2022. The amendment will not have an any impact on the Company’s financial statements, as the estimated acquisition earn-out payable as of June 30, 2020 had already been recorded at the present value of the maximum amount of $25.0 million.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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