Business Combinations

3 Months Ended

Mar. 31, 2018

During the three months ended March 31, 2018, Brown & Brown acquired the assets and assumed certain liabilities of two insurance intermediaries. Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve 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 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 Condensed 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, 2018, several adjustments were made within the permitted measurement period that resulted in an increase in the aggregate purchase price of the affected acquisitions of $21.4 thousand relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the three months ended March 31, 2018 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 $33.6 million in the three-month period ended March 31, 2018. We completed two acquisitions (excluding book of business purchases) in the three-month period ended March 31, 2018. We completed zero acquisitions (excluding book of business purchases) in the three-month period ended March 31, 2017.

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		Other Payable		Recorded Earn-Out Payable		Net Assets Acquired		Maximum Potential Earn- Out Payable
Other	Various	Various	$	33,576	$	1,690	$	4,524	$	39,790	$	6,520
Total			$	33,576	$	1,690	$	4,524	$	39,790	$	6,520

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)	Other			Total
Fixed assets	$	21		$	21
Goodwill	31,367			31,367
Purchased customer accounts	9,774			9,774
Non-compete agreements	42			42
Total assets acquired	41,204			41,204
Other current liabilities	(1,414		)	(1,414		)
Total liabilities assumed	(1,414		)	(1,414		)
Net assets acquired	$	39,790		$	39,790

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 $31.4 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail Segment. Of the total goodwill of $31.4 million, the amount currently deductible for income tax purposes is $26.9 million and the remaining $4.5 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2018, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through March 31, 2018, included in the Condensed Consolidated Statement of Income for the three months ended March 31, 2018, was $0.9 million. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through March 31, 2018, included in the Condensed Consolidated Statement of Income for the three months ended March 31, 2018, was $0.1 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 March 31,
(in thousands, except per share data)	2018		2017
Total revenues	$	502,679	$	467,198
Income before income taxes	$	118,807	$	111,618
Net income	$	91,109	$	70,522
Net income per share:
Basic	$	0.33	$	0.25
Diluted	$	0.32	$	0.25
Weighted average number of shares outstanding:
Basic	270,172		273,487
Diluted	275,714		278,052

As of March 31, 2018 and 2017, 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 three months ended March 31, 2018 and 2017, were as follows:



	Three months ended March 31,
(in thousands)	2018			2017
Balance as of the beginning of the period	$	36,175		$	63,821
Additions to estimated acquisition earn-out payables	4,524			(211		)
Payments for estimated acquisition earn-out payables	(2,565		)	(10,230		)
Subtotal	38,134			53,380
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	2,062			3,335
Interest expense accretion	404			693
Net change in earnings from estimated acquisition earn-out payables	2,466			4,028
Balance as of March 31,	$	40,600		$	57,408

Of the $40.6 million estimated acquisition earn-out payables as of March 31, 2018, $29.1 million was recorded as accounts payable and $11.5 million was recorded as other non-current liabilities. As of March 31, 2018, the maximum future acquisition contingency payments related to all acquisitions was $84.2 million, inclusive of the $40.6 million estimated acquisition earn-out payables as of March 31, 2018. 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.