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BROWN & BROWN, INC.

 

INDEX

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

(in thousands, except per share data)		For the three months ended September 30,								For the nine months ended September 30,
		2008				2007				2008				2007
REVENUES
Commissions and fees		$	243,766			$	225,421			$	736,129			$	701,456
Investment income			1,228				3,286				5,136				27,855
Other income, net			2,035				8,577				4,199				13,130
Total revenues			247,029				237,284				745,464				742,441
EXPENSES
Employee compensation and benefits			122,172				110,491				363,873				333,937
Non-cash stock-based compensation			1,819				1,491				5,563				4,327
Other operating expenses			36,405				32,928				101,993				96,409
Amortization			12,281				10,331				34,789				29,798
Depreciation			3,391				3,213				9,929				9,492
Interest			3,867				3,395				11,045				10,445
Total expenses			179,935				161,849				527,192				484,408
Income before income taxes			67,094				75,435				218,272				258,033
Income taxes			26,501				29,219				85,521				100,078
Net income		$	40,593			$	46,216			$	132,751			$	157,955
Net income per share:
Basic		$	0.29			$	0.33			$	0.94			$	1.13
Diluted		$	0.29			$	0.33			$	0.94			$	1.12
Weighted average number of shares outstanding:
Basic			141,073				140,593				140,834				140,401
Diluted			141,606				141,288				141,395				141,209
Dividends declared per share		$	0.07			$	0.06			$	0.21			$	0.18

See accompanying notes to condensed consolidated financial statements.

 

 

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BROWN & BROWN, INC.

BALANCE SHEETS

(UNAUDITED)

 

(in thousands, except per share data)		September 30, 2008				December 31, 2007
ASSETS
Current Assets:
Cash and cash equivalents		$	-			$	38,234
Restricted cash and investments			240,616				254,404
Short-term investments			7,287				2,892
Premiums, commissions and fees receivable			256,479				240,680
Deferred income taxes			-				17,208
Other current assets			35,846				33,964
Total current assets			540,228				587,382
Fixed assets, net			63,673				62,327
Goodwill			995,720				846,433
Amortizable intangible assets, net			493,737				443,224
Other assets			13,943				21,293
Total assets		$	2,107,301			$	1,960,659
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Premiums payable to insurance companies		$	390,616			$	394,034
Premium deposits and credits due customers			48,352				41,211
Accounts payable			16,814				18,760
Accrued expenses			77,488				90,599
Current portion of long-term debt			7,703				11,519
Total current liabilities			540,973				556,123
Long-term debt			253,655				227,707
Deferred income taxes, net			83,972				65,736
Other liabilities			11,912				13,635
Shareholders' Equity:
Common stock, par value $0.10 per share;
authorized 280,000 shares; issued and
outstanding 141,412 at 2008 and 140,673 at 2007			14,141				14,067
Additional paid-in capital			247,988				231,888
Retained earnings			954,647				851,490
Accumulated other comprehensive income, net of related income tax
effect of $8 at 2008 and $8 at 2007			13				13
Total shareholders' equity			1,216,789				1,097,458
Total liabilities and shareholders' equity		$	2,107,301			$	1,960,659

See accompanying notes to condensed consolidated financial statements.

 

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 BROWN & BROWN, INC.

CASH FLOWS

(UNAUDITED)

 

 

		For the nine months ended September 30,
(in thousands)		2008				2007
Cash flows from operating activities:
Net income		$	132,751			$	157,955
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization			34,789				29,798
Depreciation			9,929				9,492
Non-cash stock-based compensation			5,563				4,327
Deferred income taxes			33,750				12,368
Net (gain) on sales of investments, fixed
assets and customer accounts			(235	)			(30,198	)
Changes in operating assets and liabilities, net of effect
from acquisitions and divestitures:
Restricted cash and investments decrease			13,788				15,041
Premiums, commissions and fees receivable (increase) decrease			(12,010	)			13,623
Other assets decrease			9,432				4,107
Premiums payable to insurance companies (decrease)			(6,826	)			(42,596	)
Premium deposits and credits due customers increase			7,067				5,072
Accounts payable (decrease) increase			(7,758	)			2,912
Accrued expenses (decrease)			(14,503	)			(14,701	)
Other liabilities (decrease)			(1,672	)			(710	)
Net cash provided by operating activities			204,065				166,490
Cash flows from investing activities:
Additions to fixed assets			(11,115	)			(24,848	)
Payments for businesses acquired, net of cash acquired			(221,616	)			(148,365	)
Proceeds from sales of fixed assets and customer accounts			3,881				6,059
Purchases of investments			(7,874	)			(2,629	)
Proceeds from sales of investments			4,080				21,594
Net cash used in investing activities			(232,644	)			(148,189	)
Cash flows from financing activities:
Proceeds from long-term debt			25,000				-
Payments on long-term debt			(15,672	)			(23,351	)
Borrowings on revolving credit facility			2,180				18,130
Payments on revolving credit facility			(2,180	)			(18,130	)
Income tax benefit from issuance of common stock			-				4,539
Issuances of common stock for employee stock benefit plans			10,611				11,321
Cash dividends paid			(29,594	)			(25,275	)
Net cash (used in) financing activities			(9,655	)			(32,766	)
Net (decrease) in cash and cash equivalents			(38,234	)			(14,465	)
Cash and cash equivalents at beginning of period			38,234				88,490
Cash and cash equivalents at end of period		$	-			$	74,025

 

 

See accompanying notes to condensed consolidated financial statements.

5

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 · Nature of Operations

Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “we” “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, programs, and services organization that markets and sells to its customers insurance products and services, primarily in the property and casualty, and employee benefits arenas. Brown & Brown's business is divided into four reportable segments: the Retail Division, which provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual customers; the Wholesale Brokerage Division, which markets and sells excess and surplus commercial and personal lines insurance and reinsurance, primarily through independent agents and brokers; the National Programs Division, which is comprised of two units - Professional Programs, which provides professional liability and related package products for certain professionals delivered through nationwide networks of independent agents, and Special Programs, which markets targeted products and services designed for specific industries, trade groups, public and quasi-public entities and market niches; and the Services Division, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare set-aside services.

 

NOTE 2 · Basis of Financial Reporting

 

The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited, condensed, consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. 

 

Results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

 

NOTE 3 · Cash and Cash Equivalents, and Restricted Cash and Investments

In its capacity as an insurance agent or broker, Brown & Brown typically collects premiums from insureds and, after deducting its authorized commissions, remits the net premiums to the appropriate insurance companies. Accordingly, as reported in the Consolidated Balance Sheets, “premiums” are receivable from insureds. Unremitted net insurance premiums are held in a fiduciary capacity until disbursed by Brown & Brown. Brown & Brown invests these unremitted funds only in cash, money market accounts, tax-free variable-rate demand bonds and commercial paper held for a short term, and reports such amounts as restricted cash and investments on the Consolidated Balance Sheets. In certain states where Brown & Brown operates, the use and investment alternatives for these funds are prescribed by law.  As of September 30, 2008 and December 31, 2007, the amount of funds in state-mandated “premium trust accounts” was $130.7 million and $132.3 million, respectively.  All cash and investments that will ultimately be used to pay premiums to insurance companies are recorded as restricted cash and investments.

 

 

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NOTE 4 · Net Income Per Share

 

Basic net income per share is computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the period. Basic net income per share excludes dilution. Diluted net income per share reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock.

 

The following table sets forth the computation of basic net income per share and diluted net income per share:

		For the three months ended September 30,								For the nine months ended September 30,
(in thousands, except per share data)		2008				2007				2008				2007
Net income		$	40,593			$	46,216			$	132,751			$	157,955
Weighted average number of common shares
outstanding			141,073				140,593				140,834				140,401
Dilutive effect of stock options using the
treasury stock method			533				695				561				808
Weighted average number of shares
outstanding			141,606				141,288				141,395				141,209
Net income per share:
Basic		$	0.29			$	0.33			$	0.94			$	1.13
Diluted		$	0.29			$	0.33			$	0.94			$	1.12

 

NOTE 5 · New Accounting Pronouncements

 

Fair Value Measurements — In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157,  Fair Value Measurements  (“SFAS 157”). SFAS 157 establishes a framework for the measurement of assets and liabilities that uses fair value and expands disclosures about fair value measurements. SFAS 157 will apply whenever another GAAP standard requires (or permits) assets or liabilities to be measured at fair value, but does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years.  The adoption of SFAS 157 did not have any impact on the amounts reported on the Company’s condensed consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115  (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on assets and liabilities for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company elected not to report any financial assets or liabilities at fair value under SFAS 159.

 

Business Combinations — In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141R”). SFAS 141R requires 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 even if the acquirer has not acquired 100% of its target. 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. Transaction costs will be expensed as incurred. SFAS 141R also modifies the recognition of pre-acquisition contingencies, such as environmental or legal issues, restructuring plans and acquired research and development value in purchase accounting. SFAS 141R amends SFAS No. 109,  Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination, either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. The Company expects to adopt SFAS 141R on January 1, 2009 and is currently assessing the impact that the adoption could have on the Company’s financial statements.

 

 

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Noncontrolling Interests in Consolidated Financial Statements — In December 2007, the FASB issued SFAS No. 160,  Noncontrolling Interests in Consolidated Financial Statements  (“SFAS 160”), an amendment of Accounting Research Bulletin (“ARB”) No. 51 (“ARB 51”). SFAS 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for, and reporting of, transactions between the reporting entity and holders of such noncontrolling interests. Under SFAS 160, noncontrolling interests are considered equity and should be reported as an element of consolidated equity. Net income will encompass the total income of all consolidated subsidiaries and there will be separate disclosure in the income statement of the attribution of that income between the controlling and noncontrolling interests; increases and decreases in the noncontrolling ownership interest amount will be accounted for as equity transactions.  SFAS 160 is required to be adopted prospectively in the first annual reporting period beginning on or after December 15, 2008, except for reclassifying noncontrolling interests to equity separate from the parent’s shareholders’ equity  in the consolidated statement of financial position and the recasting of consolidated net income (loss) to include net income (loss) attributable to both controlling and noncontrolling interests, both of which are required to be adopted retrospectively. Because all of the Company’s subsidiaries are 100% owned, the Company does not expect the adoption of SFAS 160 to have any impact on the Company’s financial statements.

 

NOTE 6 · Business Combinations

 

Acquisitions in 2008

 

For the nine months ended September 30, 2008, Brown & Brown acquired the assets and assumed certain liabilities of 28 insurance intermediaries, the stock of two insurance intermediaries and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $233,988,000, including $215,126,000 of net cash payments, the issuance of $5,213,000 in notes payable and the assumption of $13,649,000 of liabilities. 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 profits earned over a one- to three-year period within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price, and any subsequent contingent consideration (earn-out payment) is allocated to goodwill. Acquisitions are initially recorded at preliminary fair values. Subsequently, the Company completes the final fair value allocations and any adjustments to assets or liabilities acquired are recorded in the current period.

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

(in thousands)   Name		Business Segment		2008 Date of Acquisition		Net Cash Paid				Notes Payable				Recorded Purchase Price
LDP Consulting Group, Inc.		Retail		January 24			39,241				-				39,241
Powers & Effler Insurance Brokers		Retail		April 1			25,036				-				25,036
HBA Insurance Group, Inc.		Retail		June 1			48,306				2,000				50,306
Fullerton & Company, Inc.		Retail		August 1			17,399				-				17,399
Other		Various		Various			85,144				3,213				88,357
Total						$	215,126			$	5,213			$	220,339

 

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

(in thousands)		LDP				Powers				HBA				Fullerton				Other				Total
Fiduciary cash		$	173			$	-			$	-			$	1,541			$	-			$	1,714
Other current assets			1,121				75				-				1,242				1,804				4,242
Fixed assets			19				353				652				41				504				1,569
Goodwill			21,857				17,227				35,158				15,029				49,128				138,399
Purchased customer accounts			21,225				7,545				14,390				5,105				38,421				86,686
Noncompete agreements			55				11				141				80				420				707
Other assets			11				-				-				644				16				671
Total assets acquired			44,461				25,211				50,341				23,682				90,293				233,988
Other current liabilities			(5,220	)			(175	)			(35	)			(4,589	)			(1,936	)			(11,955	)
Deferred income taxes			-				-				-				(1,694	)			-				(1,694	)
Total liabilities assumed			(5,220	)			(175	)			(35	)			(6,283	)			(1,936	)			(13,649	)
Net assets acquired		$	39,241			$	25,036			$	50,306			$	17,399			$	88,357			$	220,339

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.

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Goodwill of $138,399,000, of which $123,797,000 is expected to be deductible for income tax purposes, was assigned to the Retail, Wholesale Brokerage, National Programs and Services Divisions in the amounts of $134,576,000, $3,503,000, $320,000 and nil, respectively.

 

The results of operations for the acquisitions completed during 2008 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as of the beginning of each 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.

  

		For the three months								For the nine months
(UNAUDITED)		ended September 30,								ended September 30,
(in thousands, except per share data)		2008				2007				2008				2007
Total revenues		$	248,448			$	260,223			$	775,833			$	813,676
Income before income taxes			67,561				83,081				228,296				281,641
Net income			40,875				50,901				138,847				172,408
Net income per share:
Basic		$	0.29			$	0.36			$	0.99			$	1.23
Diluted		$	0.29			$	0.36			$	0.98			$	1.22
Weighted average number of shares outstanding:
Basic			141,073				140,593				140,834				140,401
Diluted			141,606				141,288				141,395				141,209

Additional contingent 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 2008 as a result of these adjustments totaled $14,642,000, of which $14,560,000 was allocated to goodwill, $30,000 to noncompete agreements and $52,000 represented net liabilities that were forgiven. Of the $14,642,000 net additional consideration paid, $8,204,000 was paid in cash and $6,438,000 was issued in notes payable. As of September 30, 2008, the maximum future contingency payments related to acquisitions totaled $233,370,000.

Acquisitions in 2007

 

For the nine months ended September 30, 2007, Brown & Brown acquired the assets and assumed certain liabilities of 25 insurance intermediaries, the stock of three insurance intermediaries and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $163,485,000, including $144,022,000 of net cash payments, the issuance of $4,961,000 in notes payable and the assumption of $14,502,000 of liabilities. 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 profits earned over a one- to three-year period within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price, and any subsequent earn-out payment is allocated to goodwill. Acquisitions are initially recorded at preliminary fair values. Subsequently, the Company completes the final fair value allocations and any adjustments to assets or liabilities acquired are recorded in the current period.

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

(in thousands)   Name		Business Segment		2007 Date of Acquisition		Net Cash Paid				Notes Payable				Recorded Purchase Price
ALCOS, Inc.		Retail		March 1		$	30,906			$	3,563			$	34,469
Grinspec, Inc.		Retail		April 1			31,939				-				31,939
Sobel Affiliates, Inc.		Retail		April 1			33,047				-				33,047
The Combined Group, Inc. et al		Wholesale Brokerage		August 1			24,046				-				24,046
Other		Various		Various			24,084				1,398				25,482
Total						$	144,022			$	4,961			$	148,983

 

 

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

(in thousands)		ALCOS				Grinspec				Sobel				Combined				Other				Total
Fiduciary cash		$	627			$	-			$	-			$	2,686			$	716			$	4,029
Other current assets			1,224				669				286				-				800				2,979
Fixed assets			720				-				50				212				214				1,196
Goodwill			26,863				19,235				19,653				16,320				17,817				99,888
Purchased customer accounts			10,046				12,498				13,129				7,448				11,710				54,831
Noncompete agreements			130				-				31				66				210				437
Other assets			115				-				-				-				10				125
Total assets acquired			39,725				32,402				33,149				26,732				31,477				163,485
Other current liabilities			(2,173	)			(463	)			(102	)			(1,383	)			(5,246	)			(9,367	)
Deferred income taxes			(3,083	)			-				-				-				(749	)			(3,832	)
Other liabilities			-				-				-				(1,303	)			-				(1,303	)
Total liabilities assumed			(5,256	)			(463	)			(102	)			(2,686	)			(5,995	)			(14,502	)
Net assets acquired		$	34,469			$	31,939			$	33,047			$	24,046			$	25,482			$	148,983