filings.toolsItem 8. Financial Statements and Supplementary Data.
118K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data.
| --- | --- |
Index to Consolidated Financial Statements
Table of Contents
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF
INCOME
| Year Ended December 31, | ||||||||||||
| (in thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
| REVENUES | ||||||||||||
| Commissions and fees | $ | 966,917 | $ | 964,863 | $ | 965,983 | ||||||
| Investment income | 1,326 | 1,161 | 6,079 | |||||||||
| Other income, net | 5,249 | 1,853 | 5,492 | |||||||||
| Total revenues | 973,492 | 967,877 | 977,554 | |||||||||
| EXPENSES | ||||||||||||
| Employee compensation and benefits | 487,820 | 484,680 | 485,783 | |||||||||
| Non-cash stock-based compensation | 6,845 | 7,358 | 7,314 | |||||||||
| Other operating expenses | 135,851 | 143,389 | 137,352 | |||||||||
| Amortization | 51,442 | 49,857 | 46,631 | |||||||||
| Depreciation | 12,639 | 13,240 | 13,286 | |||||||||
| Interest | 14,471 | 14,599 | 14,690 | |||||||||
| Change in estimated acquisition earn-out payables | (1,674 | ) | — | — | ||||||||
| Total expenses | 707,394 | 713,123 | 705,056 | |||||||||
| Income before income taxes | 266,098 | 254,754 | 272,498 | |||||||||
| Income taxes | 104,346 | 101,460 | 106,374 | |||||||||
| Net income | $ | 161,752 | $ | 153,294 | $ | 166,124 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.14 | $ | 1.08 | $ | 1.18 | ||||||
| Diluted | $ | 1.12 | $ | 1.08 | $ | 1.17 | ||||||
| Weighted average number of shares outstanding: | ||||||||||||
| Basic | 137,924 | 137,173 | 136,319 | |||||||||
| Diluted | 139,318 | 137,507 | 136,884 | |||||||||
| Dividends declared per share | $ | 0.3125 | $ | 0.3025 | $ | 0.2850 | ||||||
See accompanying notes to consolidated financial statements.
Table of Contents
BROWN & BROWN, INC.
CONSOLIDATED
BALANCE SHEETS
| At December 31, | ||||||||
| (in thousands, except per share data) | 2010 | 2009 | ||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 272,984 | $ | 197,113 | ||||
| Restricted cash and investments | 123,594 | 155,257 | ||||||
| Short-term investments | 7,678 | 8,213 | ||||||
| Premiums, commissions and fees receivable | 214,446 | 209,462 | ||||||
| Deferred income taxes | 20,076 | 11,791 | ||||||
| Other current assets | 14,031 | 31,863 | ||||||
| Total current assets | 652,809 | 613,699 | ||||||
| Fixed assets, net | 59,713 | 61,467 | ||||||
| Goodwill | 1,194,827 | 1,074,397 | ||||||
| Amortizable intangible assets, net | 481,900 | 468,862 | ||||||
| Other assets | 11,565 | 5,801 | ||||||
| Total assets | $ | 2,400,814 | $ | 2,224,226 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Premiums payable to insurance companies | $ | 311,346 | $ | 310,296 | ||||
| Premium deposits and credits due customers | 28,509 | 37,715 | ||||||
| Accounts payable | 33,693 | 17,431 | ||||||
| Accrued expenses and other liabilities | 94,947 | 96,387 | ||||||
| Current portion of long-term debt | 1,662 | 17,124 | ||||||
| Total current liabilities | 470,157 | 478,953 | ||||||
| Long-term debt | 250,067 | 250,209 | ||||||
| Deferred income taxes, net | 146,482 | 115,609 | ||||||
| Other liabilities | 27,764 | 9,581 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| Shareholders’ Equity: | ||||||||
| Common stock, par value $0.10 per share; authorized 280,000 shares; issued and outstanding 142,795 at 2010 and 142,076 at 2009 | 14,279 | 14,208 | ||||||
| Additional paid-in capital | 286,997 | 267,856 | ||||||
| Retained earnings | 1,205,061 | 1,087,805 | ||||||
| Accumulated other comprehensive income, net of related income tax effect of $4 at 2010 and $3 at 2009 | 7 | 5 | ||||||
| Total shareholders’ equity | 1,506,344 | 1,369,874 | ||||||
| Total liabilities and shareholders’ equity | $ | 2,400,814 | $ | 2,224,226 | ||||
See accompanying notes to consolidated financial statements.
Table of Contents
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||
| (in thousands, except per share data) | Shares Outstanding | Par Value | ||||||||||||||||||||||
| Balance at January 1, 2008 | 140,673 | $ | 14,067 | $ | 231,888 | $ | 851,490 | $ | 13 | $ | 1,097,458 | |||||||||||||
| Net income and comprehensive income | 166,124 | 166,124 | ||||||||||||||||||||||
| Common stock issued for employee stock benefit plans | 856 | 86 | 17,823 | 17,909 | ||||||||||||||||||||
| Income tax benefit from exercise of stock benefit plans | 138 | 138 | ||||||||||||||||||||||
| Common stock issued to directors | 15 | 1 | 318 | 319 | ||||||||||||||||||||
| Cash dividends paid ($0.285 per share) | (40,207 | ) | (40,207 | ) | ||||||||||||||||||||
| Balance at December 31, 2008 | 141,544 | $ | 14,154 | $ | 250,167 | $ | 977,407 | $ | 13 | $ | 1,241,741 | |||||||||||||
| Net income | 153,294 | 153,294 | ||||||||||||||||||||||
| Net unrealized holding gain on available-for-sale securities | (8 | ) | (8 | ) | ||||||||||||||||||||
| Comprehensive income | 153,286 | |||||||||||||||||||||||
| Common stock issued for employee stock benefit plans | 518 | 52 | 17,160 | 17,212 | ||||||||||||||||||||
| Income tax benefit from exercise of stock benefit plans | 243 | 243 | ||||||||||||||||||||||
| Common stock issued to directors | 14 | 2 | 286 | 288 | ||||||||||||||||||||
| Cash dividends paid ($0.3025 per share) | (42,896 | ) | (42,896 | ) | ||||||||||||||||||||
| Balance at December 31, 2009 | 142,076 | $ | 14,208 | $ | 267,856 | $ | 1,087,805 | $ | 5 | $ | 1,369,874 | |||||||||||||
| Net income | 161,752 | 161,752 | ||||||||||||||||||||||
| Net unrealized holding loss on available-for-sale securities | 2 | 2 | ||||||||||||||||||||||
| Comprehensive income | 161,754 | |||||||||||||||||||||||
| Common stock issued for employee stock benefit plans | 705 | 70 | 7,495 | 7,565 | ||||||||||||||||||||
| Income tax benefit from exercise of stock benefit plans | 11,391 | 11,391 | ||||||||||||||||||||||
| Common stock issued to directors | 14 | 1 | 255 | 256 | ||||||||||||||||||||
| Cash dividends paid ($0.3125 per share) | (44,496 | ) | (44,496 | ) | ||||||||||||||||||||
| Balance at December 31, 2010 | 142,795 | $ | 14,279 | $ | 286,997 | $ | 1,205,061 | $ | 7 | $ | 1,506,344 | |||||||||||||
See accompanying notes to consolidated financial statements.
Table of Contents
BROWN & BROWN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 161,752 | $ | 153,294 | $ | 166,124 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Amortization | 51,442 | 49,857 | 46,631 | |||||||||
| Depreciation | 12,639 | 13,240 | 13,286 | |||||||||
| Non-cash stock-based compensation | 6,845 | 7,358 | 7,314 | |||||||||
| Change in estimated acquisition earn-out payables | (1,674 | ) | — | — | ||||||||
| Deferred income taxes | 22,587 | 27,851 | 25,713 | |||||||||
| Income tax benefit from exercise of shares from the stock benefit plans | (11,391 | ) | — | — | ||||||||
| Net (gain) loss on sales of investments, fixed assets and customer accounts | (1,474 | ) | 374 | (1,071 | ) | |||||||
| Changes in operating assets and liabilities, net of effect from acquisitions and divestitures: | ||||||||||||
| Restricted cash and investments decrease (increase) | 31,663 | (10,507 | ) | 109,654 | ||||||||
| Premiums, commissions and fees receivable (increase) decrease | (2,555 | ) | 36,943 | 3,169 | ||||||||
| Other assets decrease | 14,529 | 8,668 | 12,359 | |||||||||
| Premiums payable to insurance companies increase (decrease) | 436 | (48,491 | ) | (40,045 | ) | |||||||
| Premium deposits and credits due customers (decrease) increase | (9,673 | ) | (6,049 | ) | 2,259 | |||||||
| Accounts payable increase (decrease) | 28,246 | (1,819 | ) | (5,992 | ) | |||||||
| Accrued expenses (decrease) increase | (2,087 | ) | (488 | ) | 4,099 | |||||||
| Other liabilities (decrease) | (5,233 | ) | (8,646 | ) | (1,747 | ) | ||||||
| Net cash provided by operating activities | 296,052 | 221,585 | 341,753 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Additions to fixed assets | (10,454 | ) | (11,310 | ) | (14,115 | ) | ||||||
| Payments for businesses acquired, net of cash acquired | (157,637 | ) | (44,682 | ) | (263,400 | ) | ||||||
| Proceeds from sales of fixed assets and customer accounts | 1,558 | 1,305 | 4,600 | |||||||||
| Purchases of investments | (9,285 | ) | (11,570 | ) | (13,774 | ) | ||||||
| Proceeds from sales of investments | 9,327 | 10,828 | 9,756 | |||||||||
| Net cash used in investing activities | (166,491 | ) | (55,429 | ) | (276,933 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Payments on acquisition earn-outs | (2,136 | ) | — | — | ||||||||
| Proceeds from long-term debt | — | — | 25,000 | |||||||||
| Payments on long-term debt | (19,425 | ) | (15,089 | ) | (20,342 | ) | ||||||
| Borrowings on revolving credit facility | — | 14,390 | 2,180 | |||||||||
| Payments on revolving credit facility | — | (14,390 | ) | (2,180 | ) | |||||||
| Income tax benefit from exercise of shares from the stock benefit plans | 11,391 | 243 | 138 | |||||||||
| Issuances of common stock for employee stock benefit plans | 11,119 | 10,142 | 10,914 | |||||||||
| Repurchase stock benefit plan shares for employee to fund tax withholdings | (10,143 | ) | — | — | ||||||||
| Cash dividends paid | (44,496 | ) | (42,896 | ) | (40,207 | ) | ||||||
| Net cash used in financing activities | (53,690 | ) | (47,600 | ) | (24,497 | ) | ||||||
| Net increase in cash and cash equivalents | 75,871 | 118,556 | 40,323 | |||||||||
| Cash and cash equivalents at beginning of year | 197,113 | 78,557 | 38,234 | |||||||||
| Cash and cash equivalents at end of year | $ | 272,984 | $ | 197,113 | $ | 78,557 | ||||||
See accompanying notes to consolidated financial statements.
Table of Contents
Notes to Consolidated Financial Statements
| NOTE 1 | Summary of Significant Accounting Policies |
|---|
Nature of Operations
Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and services organization that markets and sells to its customers insurance products and services, primarily in the property and casualty area. 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 entity, professional and individual customers; the Wholesale Brokerage Division, which markets and sells excess and surplus commercial insurance and reinsurance, primarily through independent agents and brokers; the National Programs Division, which is composed 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 designated for specific industries, trade groups, governmental 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.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Brown & Brown, Inc. and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in the Consolidated Financial Statements.
Revenue Recognition
Commission revenue is recognized as of the effective date of the insurance policy or the date on which the policy premium is billed to the customer, whichever is later. At that date, the earnings process has been completed, and Brown & Brown can reliably estimate the impact of policy cancellations for refunds and establish reserves accordingly. The reserve for policy cancellations is based upon historical cancellation experience adjusted based on known circumstances. The policy cancellation reserve was $5,559,000 and $7,796,000 at December 31, 2010 and 2009, respectively, and it is periodically evaluated and adjusted as necessary. Subsequent commission adjustments are recognized upon receipt of notification from the insurance companies. Commission revenues are reported net of commissions paid to sub-brokers or co-brokers. Profit-sharing contingent commissions from insurance companies are recognized when determinable, which is when such commissions are received, or when officially notified of the amount of such commissions. Fee income is recognized as services are rendered.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities, at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents principally consist of demand deposits with financial institutions and highly liquid investments with quoted market prices having maturities of three months or less when purchased.
Restricted Cash and Investments, and Premiums, Commissions and Fees Receivable
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 company or 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 Brown & Brown disburses them. 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. In certain states in which Brown & Brown operates, the use and investment alternatives for these funds are regulated and restricted by various state laws and agencies. These restricted funds are reported as restricted cash and investments on the Consolidated Balance Sheets. The interest income earned on these unremitted funds is reported as investment income in the Consolidated Statements of Income.
In other circumstances, the insurance companies collect the premiums directly from the insureds and remit the applicable commissions to Brown & Brown. Accordingly, as reported in the Consolidated Balance Sheets, “commissions” are receivables from insurance companies. “Fees” are primarily receivables due from customers.
Table of Contents
Investments
Marketable equity securities held by Brown & Brown have been classified as “available-for-sale” and are reported at estimated fair value, with the accumulated other comprehensive income (unrealized gains and losses), net of related income tax effect, reported as a separate component of shareholders’ equity. Realized gains and losses and declines in value below cost that are judged to be other-than-temporary on available-for-sale securities are reflected in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income in the Consolidated Statements of Income.
Non-marketable equity securities and certificates of deposit having maturities of more than three months when purchased are reported at cost and are adjusted for other-than-temporary market value declines.
Net unrealized holding gains on available-for-sale securities included in accumulated other comprehensive income reported in shareholders’ equity were $7,000 and $5,000 at December 31, 2010 and 2009, net of deferred income taxes of $4,000 and $3,000, respectively.
Fixed Assets
Fixed assets, including leasehold improvements are carried at cost, less accumulated depreciation and amortization. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed to operations as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in other income. Depreciation has been determined using the straight-line method over the estimated useful lives of the related assets, which range from three to 15 years. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the term of the related lease.
Goodwill and Amortizable Intangible Assets
The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and amortizable intangible assets is assigned to goodwill. While goodwill is not amortizable, it is subject to at least an annual assessment, and more frequently in the presence of certain circumstances, for impairment by applying a fair value-based test. Amortizable intangible assets are amortized over their useful lives and are subject to an impairment review based on an estimate of the undiscounted future cash flows resulting from the use of the asset. The Company compares the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based on multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”). Brown & Brown completed its most recent annual assessment as of November 30, 2010 and identified no impairment as a result of the evaluation. In addition, as of December 31, 2010, there are no accumulated impairment losses.
Amortizable intangible assets are stated at cost, less accumulated amortization, and consist of purchased customer accounts and non-compete agreements. Purchased customer accounts and noncompete agreements are amortized on a straight-line basis over the related estimated lives and contract periods, which range from five to 15 years. Purchased customer accounts primarily consist of records and files that contain information about insurance policies and the related insured parties that are essential to policy renewals.
The carrying value of intangibles attributable to each business “region” comprising Brown & Brown is periodically reviewed by management to determine if the facts and circumstances suggest they may be impaired. In the insurance agency and wholesale brokerage industry, it is common for agencies or customer accounts to be acquired at a price determined as a multiple of either their corresponding revenues or EBITDA. Accordingly, Brown & Brown assesses the carrying value of its intangible assets by considering the estimated future cash flows generated by the corresponding region. Any impairment identified through this assessment may require that the carrying value of related intangible assets be adjusted; however, no impairments have been recorded for the years ended December 31, 2010, 2009 and 2008.
Income Taxes
Brown & Brown records income tax expense using the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and the income tax bases of Brown & Brown’s assets and liabilities.
Brown & Brown files a consolidated federal income tax return and has elected to file consolidated returns in certain states. Deferred income taxes are provided for in the Consolidated Financial Statements and relate principally to expenses charged to income for financial reporting purposes in one period and deducted for income tax purposes in other periods.
Table of Contents
Net Income Per Share
Effective in 2009, the Company adopted new Financial Accounting Standards Board (“FASB”) authoritative guidance that states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share (“EPS”) pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Performance stock shares granted to employees under the Company’s Performance Stock Plan are considered participating securities as they receive non-forfeitable dividend equivalents at the same rate as common stock. This new guidance was adopted via retroactive application for the years ended December 31, 2008 and 2007, resulting in no change in either basic or diluted EPS for periods presented.
Basic EPS is computed based on the weighted average number of common shares issued and outstanding during the period. Diluted EPS is computed based on the weighted average common shares issued and outstanding plus equivalent shares assuming exercise of stock options. The dilutive effect of stock options is computed by application of the treasury stock method. The following is a reconciliation between basic and diluted weighted average shares outstanding for the years ended December 31:
| (in thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
| Net income | $ | 161,752 | $ | 153,294 | $ | 166,124 | ||||||
| Net income attributable to unvested awarded performance stock | (5,097 | ) | (4,937 | ) | (5,506 | ) | ||||||
| Net income attributable to common shares | $ | 156,655 | $ | 148,357 | $ | 160,618 | ||||||
| Weighted average basic number of common shares outstanding | 142,412 | 141,738 | 140,992 | |||||||||
| Less unvested awarded performance stock included in weighted average basic share outstanding | (4,488 | ) | (4,565 | ) | (4,673 | ) | ||||||
| Weighted average number of common shares outstanding for basic earnings per common share | 137,924 | 137,173 | 136,319 | |||||||||
| Dilutive effect of stock options | 1,394 | 334 | 565 | |||||||||
| Weighted average number of shares outstanding | 139,318 | 137,507 | 136,884 | |||||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.14 | $ | 1.08 | $ | 1.18 | ||||||
| Diluted | $ | 1.12 | $ | 1.08 | $ | 1.17 | ||||||
Fair Value of Financial Instruments
The carrying amounts of Brown & Brown’s financial assets and liabilities, including cash and cash equivalents, restricted cash and investments, investments, premiums, commissions and fees receivable, premiums payable to insurance companies, premium deposits and credits due customers and accounts payable, at December 31, 2010 and 2009, approximate fair value because of the short-term maturity of these instruments. The carrying amount of Brown & Brown’s long-term debt approximates fair value at December 31, 2010 and 2009 since the related coupon rate approximates the current market rate.
Stock-Based Compensation
The Company grants stock options and non-vested stock awards to its employees, officers and directors. The Company uses the modified-prospective method to account for share-based payments. Under the modified-prospective method, compensation cost is recognized for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remained unvested on that date_._ The Company uses the alternative transition method to determine the accounting of the income tax effects of payments made related to stock-based compensation.
The Company uses the Black-Scholes valuation model for valuing all stock options and shares purchased under the Employee Stock Purchase Plan (the “ESPP”). Compensation for non-vested stock awards is measured at fair value on the grant-date based upon the number of shares expected to vest. Compensation cost for all awards is recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance establishing two levels of GAAP – authoritative and nonauthoritative – and making the Accounting Standards Codification (“ASC”) the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the U.S. Securities and Exchange Commission (the “SEC”). This guidance, which was incorporated into ASC Topic 105 — Generally Accepted Accounting Principles, was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption changed certain disclosure references to U.S. GAAP, but did not have any other impact on the Company’s Consolidated Financial Statements.
Table of Contents
Business Combinations — In December 2007, the FASB issued 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 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 are expensed as incurred. This guidance 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. This guidance also amends ASC Topic 740 - 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. This guidance, which was incorporated into ASC Topic 805 - Business Combinations, is effective for fiscal years beginning after December 15, 2008. Effective January 1, 2009, the Company adopted this guidance on a prospective basis. As a result, the recorded purchase price for all acquisitions consummated after January 1, 2009 will 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.
In April 2008, the FASB issued authoritative guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC Topic 350 – Intangibles-Goodwill and Other. This guidance requires enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a recognized intangible asset. This guidance, which is incorporated into ASC Topic 350 – Intangibles-Goodwill and Other, is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of this guidance did not have any material impact on our consolidated financial statements.
In November 2008, the FASB ratified authoritative guidance that applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, this guidance requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting which should be amortized to expense over the period the asset is expected to diminish in value. Defensive intangible assets must be recognized at fair value in accordance with ASC Topic 805 – Business Combinations, and ASC Topic 820 – Fair Value Measurements and Disclosures. This guidance, which was incorporated into ASC Topic 350 – Intangibles-Goodwill and Other, was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of guidance did not have any material impact on our consolidated financial statements.
Subsequent Events — In May 2009, the FASB issued authoritative guidance establishing general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance, which was incorporated into ASC Topic 855 - Subsequent Events, was effective on a prospective basis for interim or annual periods ending after June 15, 2009, and was adopted on June 1, 2009.
International Accounting Standards — International Financial Reporting Standards (“IFRS”) are a set of standards and interpretations adopted by the International Accounting Standards Board. The SEC is currently considering a potential IFRS adoption process in the United States, which could, in the near term, provide domestic issuers with an alternative accounting method and which could ultimately replace U.S. GAAP reporting requirements with IFRS reporting requirements. We are currently investigating the implications should we be required to adopt IFRS in the future.
| NOTE 2 | Business Combinations |
|---|
Acquisitions in 2010
During 2010, Brown & Brown acquired the assets and assumed certain liabilities of 33 insurance intermediaries and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $186,783,000, including $158,636,000 of cash payments, the issuance of $759,000 in notes payable, the assumption of $2,298,000 of liabilities and $25,090,000 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 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.
Table of Contents
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 acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s consolidated financial statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC Topic 805-Business Combinations.
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 | Recorded Purchase Price | 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 | 15,825 | — | 124 | 15,949 | 3,000 | |||||||||||||||||||||
| Crowe Paradis Holding Company, et al. | Services | September 1 | 75,000 | — | 8,665 | 83,665 | 15,000 | |||||||||||||||||||||
| Thomas R Jones, Inc. | Retail | October 1 | 14,634 | — | — | 14,634 | — | |||||||||||||||||||||
| Other | Various | Various | 46,130 | 759 | 12,899 | 59,788 | 30,668 | |||||||||||||||||||||
| Total | $ | 158,636 | $ | 759 | $ | 25,090 | $ | 184,485 | $ | 54,305 | ||||||||||||||||||
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 | TR Jones | Other | Total | ||||||||||||||||||
| Cash | $ | — | $ | — | $ | 1,000 | $ | — | $ | — | $ | 1,000 | ||||||||||||
| Other current assets | 137 | 516 | 118 | 259 | 1,528 | 2,558 | ||||||||||||||||||
| Fixed assets | 21 | 70 | 500 | 120 | 180 | 891 | ||||||||||||||||||
| Goodwill | 6,890 | 11,128 | 53,573 | 8,683 | 36,119 | 116,393 | ||||||||||||||||||
| Purchased customer accounts | 3,380 | 5,172 | 28,440 | 5,643 | 22,841 | 65,476 | ||||||||||||||||||
| Non-compete agreements | 21 | 74 | 33 | — | 332 | 460 | ||||||||||||||||||
| Other assets | — | — | 1 | 4 | — | 5 | ||||||||||||||||||
| Total assets acquired | 10,449 | 16,960 | 83,665 | 14,709 | 61,000 | 186,783 | ||||||||||||||||||
| Other current liabilities | — | (1,011 | ) | — | (75 | ) | (1,212 | ) | (2,298 | ) | ||||||||||||||
| Total liabilities assumed | — | (1,011 | ) | — | (75 | ) | (1,212 | ) | (2,298 | ) | ||||||||||||||
| Net assets acquired | $ | 10,449 | $ | 15,949 | $ | 83,665 | $ | 14,634 | $ | 59,788 | $ | 184,485 | ||||||||||||
The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts are 15.0 years, and noncompete agreements are 5.0 years.
Goodwill of $116,393,000, was assigned to the Retail and Services Divisions in the amounts of $57,423,000 and $58,970,000, respectively. Of the total goodwill of $116,393,000, $91,303,000 is currently deductible for income tax purposes. The remaining $25,090,000 relates to the earn-out payables and will not be deductible until it is earned and paid.
Table of Contents
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 December 31, 2010 included in the Consolidated Statement of Income for the twelve months ended December 31, 2010 were $30,172,000 and $3,255,000, respectively. If the acquisitions had occurred as of the beginning of the comparable prior annual reporting 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.
| (UNAUDITED) | For the Year Ended December 31, | |||||||
| (in thousands, except per share data) | 2010 | 2009 | ||||||
| Total revenues | $ | 1,015,043 | $ | 1,035,286 | ||||
| Income before income taxes | $ | 278,635 | $ | 274,908 | ||||
| Net income | $ | 169,373 | $ | 165,420 | ||||
| Net income per share: | ||||||||
| Basic | $ | 1.19 | $ | 1.17 | ||||
| Diluted | $ | 1.18 | $ | 1.16 | ||||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 137,924 | 137,173 | ||||||
| Diluted | 139,318 | 137,507 |
Acquisitions in 2009
During 2009, Brown & Brown acquired the assets and assumed certain liabilities of 11 insurance intermediaries and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $56,289,000, including $40,386,000 of net cash payments, the issuance of $6,889,000 in notes payable, the assumption of $1,788,000 of liabilities and $7,226,000 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 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. The change to the fair value of earn-out obligations recorded in net income for the year ended December 31, 2009 was not material.
Table of Contents
These acquisitions have been accounted for as business combinations and are as follows:
| (in thousands) | ||||||||||||||||||||||||||||
| Name | Business Segment | 2009 Date of Acquisition | Net Cash Paid | Note Payable | Recorded Earn-out Payable | Recorded Purchase Price | Maximum Potential Earn-out Payable | |||||||||||||||||||||
| Conner Strong Companies -Small Business Unit | Retail | January 2 | $ | 22,748 | $ | — | $ | — | $ | 22,748 | $ | — | ||||||||||||||||
| Irving Weber Associates, Inc. | Retail | May 1 | 6,181 | — | 1,282 | 7,463 | 3,980 | |||||||||||||||||||||
| Alamo Insurance Group, Inc. | Retail | December 31 | (152 | ) | 6,484 | 1,684 | 8,016 | 3,242 | ||||||||||||||||||||
| Other | Various | Various | 11,609 | 405 | 4,260 | 16,274 | 10,102 | |||||||||||||||||||||
| Total | $ | 40,386 | $ | 6,889 | $ | 7,226 | $ | 54,501 | $ | 17,324 | ||||||||||||||||||
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:
| (in thousands) | Strong | Weber | Alamo | Other | Total | |||||||||||||||
| Fiduciary cash | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Other current assets | 556 | 250 | — | 1,084 | 1,890 | |||||||||||||||
| Fixed assets | 52 | 80 | 33 | 42 | 207 | |||||||||||||||
| Goodwill | 13,583 | 4,466 | 5,310 | 7,748 | 31,107 | |||||||||||||||
| Purchased customer accounts | 8,698 | 2,810 | 2,797 | 8,618 | 22,923 | |||||||||||||||
| Non-compete agreements | — | 11 | 21 | 125 | 157 | |||||||||||||||
| Other assets | — | — | 7 | (2 | ) | 5 | ||||||||||||||
| Total assets acquired | 22,889 | 7,617 | 8,168 | 17,615 | 56,289 | |||||||||||||||
| Other current liabilities | (141 | ) | (154 | ) | (152 | ) | (1,341 | ) | (1,788 | ) | ||||||||||
| Deferred income taxes | — | — | — | — | — | |||||||||||||||
| Total liabilities assumed | (141 | ) | (154 | ) | (152 | ) | (1,341 | ) | (1,788 | ) | ||||||||||
| Net assets acquired | $ | 22,748 | $ | 7,463 | $ | 8,016 | $ | 16,274 | $ | 54,501 | ||||||||||
The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts are 14.9 years, and non-compete agreements are 5.0 years.
Goodwill of $31,107,000 was assigned to the Retail, National Programs, Wholesale Brokerage and Services Divisions in the amounts of $25,610,000, $3,781,000, $1,716,000 and zero, respectively. Of the total goodwill of $31,107,000, $24,639,000 is currently deductible for income tax purposes. The remaining $6,468,000 relates to the earn-out payables and will not be deductible until it is earned and paid.
Table of Contents
The results of operations for the acquisitions completed during 2009 have been combined with those of the Company since their respective acquisition dates. The total revenues and net pre-tax income from the acquisitions completed during 2009 included in the Consolidated Statement of Income for the twelve months ended December 31, 2009 were $13,879,000 and $981,000, respectively. If the acquisitions had occurred as of the beginning of the comparable prior annual reporting 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.
| (UNAUDITED) | For the Year Ended December 31, | |||||||
| (in thousands, except per share data) | 2009 | 2008 | ||||||
| Total revenues | $ | 977,749 | $ | 1,003,441 | ||||
| Income before income taxes | $ | 258,111 | $ | 281,203 | ||||
| Net income | $ | 155,314 | $ | 171,430 | ||||
| Net income per share: | ||||||||
| Basic | $ | 1.10 | $ | 1.22 | ||||
| Diluted | $ | 1.09 | $ | 1.21 | ||||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 137,173 | 136,319 | ||||||
| Diluted | 137,507 | 136,884 |
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 2010 as a result of these adjustments totaled $4,037,000, all of which was allocated to goodwill. Of the $4,037,000 net additional consideration paid, $975,000 was paid in cash and $3,062,000 was issued in notes payable. The net additional consideration paid by the Company in 2009 as a result of these adjustments totaled $20,052,000, of which $19,918,000 was allocated to goodwill, $109,000 to noncompete agreements and $25,000 to purchased customer accounts. Of the $20,052,000 net additional consideration paid, $4,296,000 was paid in cash and $15,756,000 was issued in notes payable.
As of December 31, 2010, the maximum future contingency payments related to all acquisitions totaled $144,383,000, of which $77,588,000 relates to acquisitions consummated prior to January 1, 2009 and $66,795,000 relates to acquisitions consummated subsequent to January 1, 2009.
For acquisitions consummated after January 1, 2009, $32,316,000 was initially recorded as the estimated earn-out payables. As of December 31, 2010, the fair value of the estimated earn-out payables was re-evaluated and reduced by $2,606,000, which resulted in a credit to the Condensed Consolidated Statement of Income. Additionally, the interest expense accretion to the Condensed Consolidated Statement of Income for the twelve months ended December 31, 2010 and 2009 was $932,000 and $129,000, respectively. As of December 31, 2010, the estimated earn-out payables were $29,609,000, of which $7,651,000 was recorded as current liabilities and $21,958,000 was recorded as non-current liabilities. As of December 31, 2009, the estimated earn-out payables were $7,226,000, all of which were recorded as non-current liabilities.
Table of Contents
| NOTE 3 | Goodwill |
|---|
The changes in goodwill for the years ended December 31, are as follows:
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Service | Total | |||||||||||||||
| Balance as of January 1, 2009 | $ | 620,588 | $ | 147,298 | $ | 246,216 | $ | 9,270 | $ | 1,023,372 | ||||||||||
| Goodwill of acquired businesses | 35,520 | 5,303 | 10,202 | — | 51,025 | |||||||||||||||
| Goodwill disposed of relating to sales of businesses | — | — | — | — | — | |||||||||||||||
| Balance as of December 31, 2009 | $ | 656,108 | $ | 152,601 | $ | 256,418 | $ | 9,270 | $ | 1,074,397 | ||||||||||
| Goodwill of acquired businesses | 60,518 | — | 942 | 58,970 | 120,430 | |||||||||||||||
| Goodwill disposed of relating to sales of businesses | — | — | — | — | — | |||||||||||||||
| Balance as of December 31, 2010 | $ | 716,626 | $ | 152,601 | $ | 257,360 | $ | 68,240 | $ | 1,194,827 | ||||||||||
| NOTE 4 | Amortizable Intangible Assets |
|---|
Amortizable intangible assets at December 31 consisted of the following:
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Life (years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Weighted Average Life (years) | ||||||||||||||||||||||||
| Purchased customer accounts | $ | 811,143 | $ | (330,627 | ) | $ | 480,516 | 14.9 | $ | 747,717 | $ | (280,473 | ) | $ | 467,244 | 14.9 | ||||||||||||||||
| Non-compete agreements | 25,181 | (23,797 | ) | 1,384 | 7.3 | 24,721 | (23,103 | ) | 1,618 | 7.3 | ||||||||||||||||||||||
| Total | $ | 836,324 | $ | (354,424 | ) | $ | 481,900 | $ | 772,438 | $ | (303,576 | ) | $ | 468,862 | ||||||||||||||||||
Amortization expense recorded for other amortizable intangible assets for the years ended December 31, 2010, 2009 and 2008 was $51,442,000, $49,857,000 and $46,631,000, respectively.
Amortization expense for other amortizable intangible assets for the years ending December 31, 2011, 2012, 2013, 2014 and 2015 is estimated to be $52,524,000, $51,882,000, $50,982,000, $49,796,000, and $48,449,000, respectively.
| NOTE 5 | Investments |
|---|
Investments at December 31 consisted of the following:
| 2010 Carrying Value | 2009 Carrying Value | |||||||||||||||
| (in thousands) | Current | Non- Current | Current | Non- Current | ||||||||||||
| Available-for-sale marketable equity securities | $ | 36 | $ | — | $ | 33 | $ | — | ||||||||
| Non-marketable certificates of deposit and other securities | 7,642 | 517 | 8,180 | 15 | ||||||||||||
| Total investments | $ | 7,678 | $ | 517 | $ | 8,213 | $ | 15 | ||||||||
The following table summarizes available-for-sale securities at December 31:
| (in thousands) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
| Marketable equity securities: | ||||||||||||||||
| 2010 | $ | 25 | $ | 11 | — | $ | 36 | |||||||||
| 2009 | $ | 25 | $ | 8 | — | $ | 33 |
The following table summarizes the proceeds and realized gains/(losses) on non-marketable equity securities and certificates of deposit for the years ended December 31:
| (in thousands) | Proceeds | Gross Realized Gains | Gross Realized Losses | |||||||||
| 2010 | $ | 9,327 | $ | 6 | $ | — | ||||||
| 2009 | $ | 10,828 | $ | — | $ | (299 | ) | |||||
| 2008 | $ | 9,652 | $ | 542 | $ | (9 | ) |
Table of Contents
| NOTE 6 | Fixed Assets |
|---|
Fixed assets at December 31 consisted of the following:
| (in thousands) | 2010 | 2009 | ||||||
| Furniture, fixtures and equipment | $ | 125,963 | $ | 123,824 | ||||
| Leasehold improvements | 16,151 | 15,555 | ||||||
| Land, buildings and improvements | 438 | 428 | ||||||
| Total cost | 142,552 | 139,807 | ||||||
| Less accumulated depreciation and amortization | (82,839 | ) | (78,340 | ) | ||||
| Total | $ | 59,713 | $ | 61,467 | ||||
Depreciation and amortization expense amounted to $12,639,000 in 2010, $13,240,000 in 2009, and $13,286,000 in 2008.
| NOTE 7 | Accrued Expenses and Other Liabilities |
|---|
Accrued expenses and other liabilities at December 31 consisted of the following:
| (in thousands) | 2010 | 2009 | ||||||
| Accrued bonuses | $ | 43,896 | $ | 41,770 | ||||
| Accrued compensation and benefits | 16,040 | 15,204 | ||||||
| Accrued rent and vendor expenses | 10,445 | 9,524 | ||||||
| Reserve for policy cancellations | 5,559 | 7,796 | ||||||
| Accrued interest | 4,727 | 4,747 | ||||||
| Other | 14,280 | 17,346 | ||||||
| Total | $ | 94,947 | $ | 96,387 | ||||
| NOTE 8 | Long-Term Debt |
|---|
Long-term debt at December 31 consisted of the following:
| (in thousands) | 2010 | 2009 | ||||||
| Unsecured Senior Notes | $ | 250,000 | $ | 250,000 | ||||
| Acquisition notes payable | 1,729 | 17,289 | ||||||
| Revolving credit facility | — | — | ||||||
| Other notes payable | — | 44 | ||||||
| Total debt | 251,729 | 267,333 | ||||||
| Less current portion | (1,662 | ) | (17,124 | ) | ||||
| Long-term debt | $ | 250,067 | $ | 250,209 | ||||
In July 2004, the Company completed a private placement of $200.0 million of unsecured senior notes (the “Notes”). The $200.0 million is divided into two series: (1) Series A, which closed on September 15, 2004, for $100.0 million due in 2011 and bearing interest at 5.57% per year; and (2) Series B, which closed on July 15, 2004, for $100.0 million due in 2014 and bearing interest at 6.08% per year. The closing on the Series B Notes occurred on July 15, 2004. The closing on the Series A Notes occurred on September 15, 2004. Brown & Brown has used the proceeds from the Notes for general corporate purposes, including acquisitions and repayment of existing debt. As of December 31, 2010 and 2009, there was an outstanding balance of $200.0 million on the Notes.
Table of Contents
On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company (the “Purchaser”). The Purchaser also purchased Notes issued by the Company in 2004. The Master Agreement provides for a $200.0 million private uncommitted “shelf” facility for the issuance of senior unsecured notes over a three-year period, with interest rates that may be fixed or floating and with such maturity dates, not to exceed 10 years, as the parties may determine. The Master Agreement includes various covenants, limitations and events of default similar to the Notes issued in 2004. The initial issuance of notes under the Master Agreement occurred on December 22, 2006, through the issuance of $25.0 million in Series C Senior Notes due December 22, 2016, with a fixed interest rate of 5.66% per year. On February 1, 2008, $25.0 million in Series D Senior Notes due January 15, 2015, with a fixed interest rate of 5.37% per year were issued. As of December 31, 2010 and 2009 there was an outstanding balance of $50.0 million under the Master Agreement.
On January 21, 2011, the Company entered into a Confirmation of Acceptance (the “Confirmation”) in connection with the Master Agreement in which the Company agreed to issue to the Purchaser and certain of the Purchaser’s affiliates an aggregate of $100.0 million principal amount of unsecured Series E Senior Notes due September 15, 2018, with a fixed interest rate of 4.5% per year. The closing and funding date for the unsecured Series E Senior Notes is identified as September 15, 2011 in order to correspond with maturity date of the Series A Notes. In accordance with ASC Topic 470 – Debt, the Company has classified the related principal balance as long-term debt as of December 31, 2010, as the Company has both the intent and ability to refinance the obligation on a long-term basis, as evidenced by the Confirmation.
On June 12, 2008, the Company entered into an Amended and Restated Revolving Loan Agreement (the “Loan Agreement”) with a national banking institution that was dated as of June 3, 2008, amending and restating the existing Revolving Loan Agreement dated September 29, 2003, as amended (the “Revolving Agreement”), in order to increase the lending commitment to $50.0 million (subject to potential increases up to $100.0 million) and to extend the maturity date from December 20, 2011 to June 3, 2013. The Revolving Agreement initially provided for a revolving credit facility in the maximum principal amount of $75.0 million. After a series of amendments that provided covenant exceptions for the notes issued or to be issued under the Master Agreement and relaxed or deleted certain other covenants, the maximum principal amount was reduced to $20.0 million. The calculation of interest and fees is generally based on the Company’s quarterly ratio of funded debt to earnings before interest, taxes, depreciation, amortization, and non-cash stock-based compensation. Interest is charged at a rate equal to 0.50% to 1.00% above the London Interbank Offering Rate (“LIBOR”) or 1.00% below the base rate, each as more fully defined in the Loan Agreement. Fees include an upfront fee, an availability fee of 0.10% to 0.20%, and a letter of credit usage fee of 0.50% to 1.00%. The Loan Agreement contains various covenants, limitations, and events of default customary for similar facilities for similar borrowers. The 90-day LIBOR was 0.300% and 0.251% as of December 31, 2010 and 2009, respectively. There were no borrowings against this facility at December 31, 2010 or 2009.
All three of these credit agreements require Brown & Brown to maintain certain financial ratios and comply with certain other covenants. Brown & Brown was in compliance with all such covenants as of December 31, 2010 and 2009.
Acquisition notes payable represent debt incurred to former owners of certain insurance operations acquired by Brown & Brown. These notes and future contingent payments are payable in monthly, quarterly and annual installments through July 2013, including interest in the range from 0.0% to 6.0%.
Interest paid in 2010, 2009 and 2008 was $14,491,000, $14,636,000 and $14,394,000, respectively.
At December 31, 2010, maturities of long-term debt were $1,662,000 in 2011, $33,000 in 2012, $33,000 in 2013, $100,000,000 in 2014, $25,000,000 in 2015 and $125,000,000 in 2016 and beyond.
Table of Contents
| NOTE 9 | Income Taxes |
|---|
Significant components of the provision (benefit) for income taxes for the years ended December 31 are as follows:
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 70,715 | $ | 62,547 | $ | 70,634 | ||||||
| State | 10,236 | 10,730 | 10,056 | |||||||||
| Foreign | 860 | 286 | 56 | |||||||||
| Total current provision | 81,811 | 73,563 | 80,746 | |||||||||
| Deferred: | ||||||||||||
| Federal | 19,890 | 24,913 | 21,508 | |||||||||
| State | 2,645 | 2,984 | 4,120 | |||||||||
| Total deferred provision | 22,535 | 27,897 | 25,628 | |||||||||
| Total tax provision | $ | 104,346 | $ | 101,460 | $ | 106,374 | ||||||
A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended December 31 is as follows:
| 2010 | 2009 | 2008 | ||||||||||
| Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net of federal income tax benefit | 3.5 | 4.0 | 3.4 | |||||||||
| Non-deductible employee stock purchase plan expense | 0.3 | 0.4 | 0.4 | |||||||||
| Non-deductible meals and entertainment | 0.3 | 0.3 | 0.3 | |||||||||
| Interest exempt from taxation and dividend exclusion | — | (0.1 | ) | (0.2 | ) | |||||||
| Other, net | 0.1 | 0.2 | 0.1 | |||||||||
| Effective tax rate | 39.2 | % | 39.8 | % | 39.0 | % | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes.
Significant components of Brown & Brown’s current deferred tax assets as of December 31 are as follows:
| (in thousands) | 2010 | 2009 | ||||||
| Current deferred tax assets: | ||||||||
| Deferred profit-sharing contingent commissions | $ | 12,274 | $ | 11,791 | ||||
| Accruals and reserves | 7,802 | — | ||||||
| Total current deferred tax assets | $ | 20,076 | $ | 11,791 | ||||
Significant components of Brown & Brown’s non-current deferred tax liabilities and assets as of December 31 are as follows:
| (in thousands) | 2010 | 2009 | ||||||
| Non-current deferred tax liabilities: | ||||||||
| Fixed assets | $ | 9,263 | $ | 7,875 | ||||
| Net unrealized holding gain of available-for-sale securities | 4 | 3 | ||||||
| Prepaid insurance and pension | 28 | 3,555 | ||||||
| Intangible assets | 146,815 | 120,887 | ||||||
| Total non-current deferred tax liabilities | 156,110 | 132,320 | ||||||
| Non-current deferred tax assets: | ||||||||
| Deferred compensation | 8,232 | 8,031 | ||||||
| Accruals and reserves | — | 7,422 | ||||||
| Net operating loss carryforwards | 1,721 | 1,536 | ||||||
| Valuation allowance for deferred tax assets | (325 | ) | (278 | ) | ||||
| Total non-current deferred tax assets | 9,628 | 16,711 | ||||||
| Net non-current deferred tax liability | $ | 146,482 | $ | 115,609 | ||||
Income taxes paid in 2010, 2009 and 2008 were $69,828,000, $76,373,000, and $79,339,000, respectively.
At December 31, 2010, Brown & Brown had net operating loss carryforwards of $323,000 and $34,713,000 for federal and state income tax reporting purposes, respectively, portions of which expire in the years 2011 through 2030. The federal carryforward is derived from insurance operations acquired by Brown & Brown in 2001. The state carryforward is derived from the operating results of certain subsidiaries.
Table of Contents
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Unrecognized tax benefits balance at January 1 | $ | 635 | $ | 611 | $ | 507 | ||||||
| Gross increases for tax positions of prior years | 229 | 489 | 197 | |||||||||
| Gross decreases for tax positions of prior years | — | (274 | ) | — | ||||||||
| Settlements | (208 | ) | (182 | ) | — | |||||||
| Lapse of statute of limitations | — | (9 | ) | (93 | ) | |||||||
| Unrecognized tax benefits balance at January 1 | $ | 656 | $ | 635 | $ | 611 | ||||||
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2010 and 2009, we had approximately $140,000 and $140,000 of accrued interest related to uncertain tax positions, respectively.
Total amount of unrecognized tax benefits that would affect our effective tax rate if recognized is $656,000 as of December 31, 2010 and $635,000 as of December 31, 2009. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.
As a result of a 2006 Internal Revenue Service (“IRS”) audit, we agreed to accrue at each December 31, for tax purposes only, a known amount of profit-sharing contingent commissions represented by the actual amount of profit-sharing contingent commissions received in the first quarter of the related year, with a true-up adjustment to the actual amount received by the end of the following March 31. Since this method for tax purposes differs from the method used for book purposes, it will result in a current deferred tax asset as of December 31 each year with that balance reversing by the following March 31 when the related profit-sharing contingent commissions are recognized for financial accounting purposes.
The Company is subject to taxation in the United States and various state jurisdictions. The Company is also subject to taxation in the United Kingdom. In the United States, federal returns for fiscal years 2007 through 2010 remain open and subject to examination by the Internal Revenue Service. The Company files and remits state income taxes in various states where the Company has determined it is required to file state income taxes. The Company’s filings with those states remain open for audit for the fiscal years 2006 through 2010. In the United Kingdom, the Company’s filings remain open for audit for the fiscal years 2008 through 2010. The Company currently has no ongoing federal, state or foreign income tax audits.
| NOTE 10 | Employee Savings Plan |
|---|
Brown & Brown has an Employee Savings Plan (401(k)) under which substantially all employees with more than 30 days of service are eligible to participate. Under this plan, Brown & Brown makes matching contributions, subject to a maximum of 2.5% of each participant’s salary. Further, Brown & Brown provides for a discretionary profit-sharing contribution of 1.5% of the employee’s salary for all eligible employees. Brown & Brown’s contributions to the plan totaled $11,376,000 in 2010, $11,750,000 in 2009, and $11,061,000 in 2008.
| NOTE 11 | Stock-Based Compensation |
|---|
Stock Incentive Plan
On April 28, 2010, the shareholders of Brown & Brown, Inc. approved the 2010 Stock Incentive Plan (the “SIP”) that provides for the granting of stock options, stock and/or stock appreciation rights to employees and Board members contingent on criteria established by the Compensation Committee of the Board of Directors of Brown & Brown, Inc. The principal purpose of the SIP is to attract, incentivize and retain key employees by offering those persons an opportunity to acquire or increase a direct proprietary interest in the Company’s operations and future success. The SIP includes a sub-plan applicable to Decus Insurance Brokers Limited (“Decus”) which, together with its parent company, Decus Holdings (U.K.) Limited, are the Company’s only foreign subsidiaries. The shares of stock reserved for issuance under the Plan are any shares that are authorized to be issued under the Performance Stock Plan (“PSP”) that are not already subject to grants under the PSP, and that were outstanding as of April 28, 2010, the date of suspension of the PSP, together with PSP shares and SIP shares that are forfeited after that date. As of April 28, 2010, 6,046,768 shares were available for issuance under the PSP.
Table of Contents
In 2010, a grant of 187,040 shares was made under the SIP. This grant was conditioned upon the surrender of 187,040 shares previously granted under the PSP in 2009, which were accordingly treated as forfeited PSP shares. The vesting conditions of this grant were identical to those provided for in connection with the 2009 PSP grant; thus the target stock prices and the periods associated with satisfaction of the first and second conditions of vesting were unchanged. Additionally, grants totaling 5,205 shares were made in 2010 to Decus employees under the SIP sub-plan applicable to Decus. As of December 31, 2010, 38,449 shares met the first condition for vesting and had been awarded. At December 31, 2010, 6,340,384 shares are available for future grants, of which 1,507,755 of these shares are reserved for grants with PSP-type vesting conditions.
Performance Stock Plan
Brown & Brown has adopted and the shareholders have approved a performance stock plan, under which up to 14,400,000 PSP shares may be granted to key employees contingent on the employees’ future years of service with Brown & Brown and other criteria established by the Compensation Committee of Brown & Brown’s Board of Directors. Before participants may take full title to Performance Stock, two vesting conditions must be met. Of the grants currently outstanding, specified portions will satisfy the first condition for vesting based on 20% incremental increases in the 20-trading-day average stock price of Brown & Brown’s common stock from the initial grant price specified by Brown & Brown. Performance Stock that has satisfied the first vesting condition is considered “awarded shares.” Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted EPS. Dividends are paid on awarded shares and participants may exercise voting privileges on such shares. Awarded shares satisfy the second condition for vesting on the earlier of a participant’s: (i) 15 years of continuous employment with Brown & Brown from the date shares are granted to the participants (or, in the case of the July 2009 grant to Powell Brown, 20 years); (ii) attainment of age 64; or (iii) death or disability. At December 31, 2010, 7,867,371 shares had been granted under the plan at initial stock prices ranging from $1.90 to $30.55. As of December 31, 2010, 3,391,519 shares met the first condition for vesting and had been awarded, and 2,075,517 shares satisfied both conditions for vesting and had been distributed to the participants. On April 28, 2010, the PSP was suspended and any remaining authorized but unissued shares, as well as any shares forfeited in the future, will be reserved for issuance under the SIP.
The Company uses a path-dependent lattice model to estimate the fair value of PSP grants on the grant date. A summary of PSP activity for the years ended December 31, 2010, 2009 and 2008 is as follows:
| Weighted- Average Grant Date Fair Value | Granted Shares | Awarded Shares | Shares Not Yet Awarded | |||||||||||||
| Outstanding at January 1, 2008 | $ | 6.38 | 5,574,956 | 4,686,732 | 888,224 | |||||||||||
| Granted | $ | 9.41 | 2,607,885 | — | 2,607,885 | |||||||||||
| Awarded | $ | 8.22 | — | 17,023 | (17,023 | ) | ||||||||||
| Vested | $ | 6.41 | (38,004 | ) | (38,004 | ) | — | |||||||||
| Forfeited | $ | 11.78 | (322,761 | ) | (36,530 | ) | (286,231 | ) | ||||||||
| Outstanding at December 31, 2008 | $ | 7.21 | 7,822,076 | 4,629,221 | 3,192,855 | |||||||||||
| Granted | $ | 11.80 | 389,580 | — | 389,580 | |||||||||||
| Awarded | $ | — | — | — | — | |||||||||||
| Vested | $ | 6.05 | (73,860 | ) | (73,860 | ) | — | |||||||||
| Forfeited | $ | 10.42 | (379,249 | ) | (131,925 | ) | (247,324 | ) | ||||||||
| Outstanding at December 31, 2009 | $ | 7.39 | 7,758,547 | 4,423,436 | 3,335,111 | |||||||||||
| Granted | $ | 9.67 | 384,420 | — | 384,420 | |||||||||||
| Awarded | $ | 9.49 | — | 474,113 | (474,113 | ) | ||||||||||
| Vested | $ | 2.02 | (1,388,789 | ) | (1,388,789 | ) | — | |||||||||
| Forfeited | $ | 7.91 | (962,324 | ) | (117,241 | ) | (845,083 | ) | ||||||||
| Outstanding at December 31, 2010 | $ | 7.32 | 5,791,854 | 3,391,519 | 2,400,335 | |||||||||||
The weighted average grant-date fair value of PSP grants for years ended December 31, 2010, 2009 and 2008 was $9.67, $11.80, and $9.41, respectively. The total fair market value of PSP grants that vested during each of the years ended December 31, 2010, 2009 and 2008 was $31,965,000, $1,412,000, and $685,000, respectively.
Table of Contents
Employee Stock Purchase Plan
The Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a total of 12,000,000 authorized shares and 2,785,310 available for future subscriptions. Employees of the Company who regularly work more than 20 hours per week are eligible to participate in the ESPP. Participants, through payroll deductions, may allot up to 10% of their compensation, to a maximum of $25,000, to purchase Company stock between August 1 of each year to the following July 31st (the “Subscription Period”) at a cost of 85% of the lower of the stock price as of the beginning or ending of the Subscription Period.
The Company estimates the fair value of an ESPP share option as of the beginning of the Subscription Period as the sum of: (1) 15% of the quoted market price of the Company’s stock on the day prior to the beginning of the Subscription Period, and (2) 85% of the value of a one-year stock option on the Company stock using the Black-Scholes option-pricing model. The estimated fair value of an ESPP share option as of the Subscription Period beginning in August 2010 was $4.01. The fair value of an ESPP share option as of the Subscription Periods beginning in August 2009 and 2008, was $5.78 and $4.41, respectively.
For the plan years ended July 31, 2010, 2009 and 2008, the Company issued 500,334, 579,104 and 672,222 shares of common stock in August 2010, 2009 and 2008, respectively. These shares were issued at an aggregate purchase price of $8,325,548 or $16.64 per share in 2010, $9,358,000 or $16.16 per share in 2009 and $10,036,000 or $14.93 per share in 2008.
For the five months ended December 31, 2010, 2009 and 2008 of the 2010-2011, 2009-2010 and 2008-2009 plan years, 206,201, 250,414 and 257,643 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by participants for proceeds of approximately $3,400,000, $3,826,000 and $4,164,000, respectively.
Incentive Stock Option Plan
On April 21, 2000, Brown & Brown adopted, and the shareholders approved, a qualified incentive stock option plan (the “ISOP”) that provides for the granting of stock options to certain key employees for up to 4,800,000 shares of common stock. On December 31, 2008, the ISOP expired. The objective of the ISOP was to provide additional performance incentives to grow Brown & Brown’s pre-tax income in excess of 15% annually. The options were granted at the most recent trading day’s closing market price and vest over a one-to-10-year period, with a potential acceleration of the vesting period to three to six years based upon achievement of certain performance goals. All of the options expire 10 years after the grant date.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the grant date. The Company granted 1,445,000 option shares during the year ended December 31, 2008 under the ISOP but did not grant any options during the year ended December 31, 2007. The weighted average fair value of the incentive stock options granted during 2008 estimated on the date of grant, using the Black-Scholes option-pricing model, was $4.92 per share. The fair value of these options granted was estimated on the date of grant using the following assumptions: dividend yield of 1.41%; expected volatility of 26.0%; risk-free interest rate of 3.14%; and an expected term of six years.
The risk-free interest rate is based upon the U.S. Treasury yield curve on the date of grant with a remaining term approximating the expected term of the option granted. The expected term of the options granted is derived from historical data; grantees are divided into two groups based upon expected exercise behavior and are considered separately for valuation purposes. The expected volatility is based upon the historical volatility of the Company’s common stock over the period of time equivalent to the expected term of the options granted. The dividend yield is based upon the Company’s best estimate of future dividend yield.
A summary of stock option activity for the years ended December 31, 2010, 2009 and 2008 is as follows:
| Stock Options | Shares Under Option | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||
| Outstanding at January 1, 2008 | 1,253,468 | $ | 12.49 | 4.3 | $ | 22,679 | ||||||||||
| Granted | 1,445,000 | $ | 18.48 | |||||||||||||
| Exercised | (223,453 | ) | $ | 4.84 | ||||||||||||
| Forfeited | — | — | ||||||||||||||
| Expired | — | — | ||||||||||||||
| Outstanding at December 31, 2008 | 2,475,015 | $ | 16.68 | 6.9 | $ | 22,587 | ||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | (69,659 | ) | $ | 4.84 | ||||||||||||
| Forfeited | (16,672 | ) | $ | 15.40 | ||||||||||||
| Expired | — | — | ||||||||||||||
| Outstanding at December 31, 2009 | 2,388,684 | $ | 17.03 | 6.1 | $ | 21,629 | ||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | (313,514 | ) | $ | 13.13 | ||||||||||||
| Forfeited | (200,000 | ) | $ | 18.48 | ||||||||||||
| Expired | — | — | ||||||||||||||
| Outstanding at December 31, 2010 | 1,875,170 | $ | 17.53 | 5.4 | $ | 17,147 | ||||||||||
| Ending vested and expected to vest at December 31, 2010 | 1,875,170 | $ | 17.53 | 5.4 | $ | 17,147 | ||||||||||
| Exercisable at December 31, 2010 | 257,040 | $ | 17.92 | 6.0 | $ | 1,546 | ||||||||||
| Exercisable at December 31, 2009 | 317,020 | $ | 12.68 | 2.4 | $ | 1,676 | ||||||||||
| Exercisable at December 31, 2008 | 383,701 | $ | 11.22 | 3.0 | $ | 3,715 |
Table of Contents
The following table summarizes information about stock options outstanding at December 31, 2010:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||
| $15.78 | 673,636 | 2.2 | $ | 15.78 | 58,972 | $ | 15.78 | |||||||||||||
| $22.06 | 12,000 | 4.0 | $ | 22.06 | 4,534 | $ | 22.06 | |||||||||||||
| $18.48 | 1,189,534 | 7.2 | $ | 18.48 | 193,534 | $ | 18.48 | |||||||||||||
| Totals | 1,875,170 | 5.4 | $ | 17.53 | 257,040 | $ | 17.92 | |||||||||||||
The weighted average grant-date fair value of stock options granted during the years ended December 31, 2010, 2009 and 2008 was $0.00, $0.00 and $4.92, respectively. The total intrinsic value of options exercised, determined as of the date of exercise, during the years ended December 31, 2010, 2009 and 2008 was $2,344,000, $948,000, and $3,298,000, respectively. The total intrinsic value is calculated as the difference between the exercise price of all underlying awards and the quoted market price of the Company’s stock for all in-the-money stock options at December 31, 2010, 2009 and 2008, respectively.
There are no option shares available for future grant under the ISOP since this plan expired as of December 31, 2008.
Summary of Non-Cash Stock-Based Compensation Expense
The non-cash stock-based compensation expense for the years ended December 31 is as follows:
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Performance Stock Plan | $ | 2,836 | $ | 2,878 | $ | 2,761 | ||||||
| Employee Stock Purchase Plan | 2,511 | 2,878 | 2,951 | |||||||||
| Incentive Stock Option Plan | 1,438 | 1,602 | 1,602 | |||||||||
| Stock Incentive Plan | 60 | — | — | |||||||||
| Total | $ | 6,845 | $ | 7,358 | $ | 7,314 | ||||||
Summary of Unrecognized Compensation Expense
As of December 31, 2010, there was approximately $26.7 million of unrecognized compensation expense related to all non-vested share-based compensation arrangements granted under the Company’s stock-based compensation plans. That expense is expected to be recognized over a weighted-average period of 9.3 years.
| NOTE 12 | Supplemental Disclosures of Cash Flow Information |
|---|
Brown & Brown’s significant non-cash investing and financing activities for the years ended December 31 are summarized as follows:
| (in thousands) | 2010 | 2009 | 2008 | |||||||||
| Unrealized holding gain (loss) on available-for-sale securities, net of tax effect of $1 for 2010, net of tax benefit of $5 for 2009 and net of tax benefit of $0 for 2008 | 2 | (8 | ) | — | ||||||||
| Notes payable issued or assumed for purchased customer accounts | $ | 3,821 | $ | 22,645 | $ | 15,987 | ||||||
| Estimated acquisition earn-out payables and related charges | $ | 25,090 | $ | 7,226 | $ | — | ||||||
| Notes received on the sale of fixed assets and customer accounts | $ | 1,825 | $ | (958 | ) | $ | 3,610 |
Table of Contents
| NOTE 13 | Commitments and Contingencies |
|---|
Operating Leases
Brown & Brown leases facilities and certain items of office equipment under non-cancelable operating lease arrangements expiring on various dates through 2020. The facility leases generally contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges. Brown & Brown anticipates that most of these leases will be renewed or replaced upon expiration. At December 31, 2010, the aggregate future minimum lease payments under all non-cancelable lease agreements were as follows:
| (in thousands) | ||||
| 2011 | $ | 24,491 | ||
| 2012 | 19,804 | |||
| 2013 | 15,345 | |||
| 2014 | 12,345 | |||
| 2015 | 9,174 | |||
| Thereafter | 13,983 | |||
| Total minimum future lease payments | $ | 95,142 | ||
Rental expense in 2010, 2009 and 2008 for operating leases totaled $35,216,000, $37,598,000, and $36,032,000, respectively.
Legal Proceedings
The Company is involved in numerous pending or threatened proceedings by or against Brown & Brown, Inc. or one or more of its subsidiaries that arise in the ordinary course of business. The damages that may be claimed against the Company in these various proceedings are in some cases substantial, including in many instances claims for punitive or extraordinary damages. Some of these claims and lawsuits have been resolved, others are in the process of being resolved and others are still in the investigation or discovery phase. The Company will continue to respond appropriately to these claims and lawsuits and to vigorously protect its interests.
Although the ultimate outcome of such matters cannot be ascertained and liabilities in indeterminate amounts may be imposed on Brown & Brown, Inc. or its subsidiaries. On the basis of present information, availability of insurance and legal advice, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the Company’s consolidated financial position. However, as (i) one or more of the Company’s insurance carriers could take the position that portions of these claims are not covered by the Company’s insurance, (ii) to the extent that payments are made to resolve claims and lawsuits, applicable insurance policy limits are eroded and (iii) the claims and lawsuits relating to these matters are continuing to develop, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by unfavorable resolutions of these matters.
| NOTE 14 | Quarterly Operating Results (Unaudited) |
|---|
Quarterly operating results for 2010 and 2009 were as follows:
| (in thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| 2010 | ||||||||||||||||
| Total revenues | $ | 252,273 | $ | 243,665 | $ | 247,616 | $ | 229,938 | ||||||||
| Total expenses | $ | 179,189 | $ | 175,652 | $ | 174,582 | $ | 177,971 | ||||||||
| Income before income taxes | $ | 73,084 | $ | 68,013 | $ | 73,034 | $ | 51,967 | ||||||||
| Net income | $ | 44,128 | $ | 41,185 | $ | 44,293 | $ | 32,146 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.31 | $ | 0.29 | $ | 0.31 | $ | 0.23 | ||||||||
| Diluted | $ | 0.31 | $ | 0.29 | $ | 0.31 | $ | 0.22 | ||||||||
| 2009 | ||||||||||||||||
| Total revenues | $ | 263,580 | $ | 246,369 | $ | 243,766 | $ | 214,162 | ||||||||
| Total expenses | $ | 184,373 | $ | 179,390 | $ | 176,275 | $ | 173,085 | ||||||||
| Income before income taxes | $ | 79,207 | $ | 66,979 | $ | 67,491 | $ | 41,077 | ||||||||
| Net income | $ | 48,012 | $ | 40,668 | $ | 40,961 | $ | 23,653 | ||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | 0.34 | $ | 0.29 | $ | 0.29 | $ | 0.17 | ||||||||
| Diluted | $ | 0.34 | $ | 0.29 | $ | 0.29 | $ | 0.17 |
Quarterly financial information is affected by seasonal variations. The timing of profit-sharing contingent commissions, policy renewals and acquisitions may cause revenues, expenses and net income to vary significantly between quarters.
Table of Contents
| NOTE 15 | Segment Information |
|---|
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, and to professional and individual customers; 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; the Wholesale Brokerage Division, which markets and sells excess and surplus commercial and personal lines insurance, and reinsurance, primarily through independent agents and brokers; 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 and Social Security disability and Medicare benefits advocacy services. Brown & Brown conducts all of its operations within the United States of America, except for one wholesale brokerage operation based in London, England which commenced business in March 2008. This operation earned $9.9 million, $6.6 million and $2.6 million of total revenues for the years ended December 31, 2010, 2009 and 2008, respectively.
The accounting policies of the reportable segments are the same as those described in Note 1. Brown & Brown evaluates the performance of its segments based upon revenues and income before income taxes. Inter-segment revenues are eliminated.
Summarized financial information concerning Brown & Brown’s reportable segments is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the inter-company interest expense charge to the reporting segment.
| Year Ended December 31, 2010 | ||||||||||||||||||||||||
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other | Total | ||||||||||||||||||
| Total revenues | $ | 575,061 | $ | 189,165 | $ | 158,699 | $ | 46,447 | $ | 4,120 | $ | 973,492 | ||||||||||||
| Investment income | $ | 170 | $ | 1 | $ | 29 | $ | 15 | $ | 1,111 | $ | 1,326 | ||||||||||||
| Amortization | $ | 30,725 | $ | 9,213 | $ | 10,201 | $ | 1,264 | $ | 39 | $ | 51,442 | ||||||||||||
| Depreciation | $ | 5,349 | $ | 3,049 | $ | 2,695 | $ | 352 | $ | 1,194 | $ | 12,639 | ||||||||||||
| Interest expense | $ | 27,037 | $ | 3,242 | $ | 10,770 | $ | 2,592 | $ | (29,170 | ) | $ | 14,471 | |||||||||||
| Income before income taxes | $ | 128,026 | $ | 74,941 | $ | 25,234 | $ | 7,693 | $ | 30,204 | $ | 266,098 | ||||||||||||
| Total assets | $ | 1,914,587 | $ | 667,123 | $ | 631,344 | $ | 145,321 | $ | (957,561 | ) | $ | 2,400,814 | |||||||||||
| Capital expenditures | $ | 4,852 | $ | 2,432 | $ | 1,838 | $ | 419 | $ | 913 | $ | 10,454 |
| Year Ended December 31, 2009 | ||||||||||||||||||||||||
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other | Total | ||||||||||||||||||
| Total revenues | $ | 583,374 | $ | 190,593 | $ | 158,341 | $ | 32,743 | $ | 2,826 | $ | 967,877 | ||||||||||||
| Investment income | $ | 282 | $ | 3 | $ | 62 | $ | 23 | $ | 791 | $ | 1,161 | ||||||||||||
| Amortization | $ | 29,943 | $ | 9,175 | $ | 10,239 | $ | 462 | $ | 38 | $ | 49,857 | ||||||||||||
| Depreciation | $ | 6,060 | $ | 2,725 | $ | 2,894 | $ | 333 | $ | 1,228 | $ | 13,240 | ||||||||||||
| Interest expense | $ | 31,596 | $ | 5,365 | $ | 14,289 | $ | 668 | $ | (37,319 | ) | $ | 14,599 | |||||||||||
| Income before income taxes | $ | 121,769 | $ | 70,436 | $ | 17,030 | $ | 6,996 | $ | 38,523 | $ | 254,754 | ||||||||||||
| Total assets | $ | 1,764,249 | $ | 627,392 | $ | 618,704 | $ | 47,829 | $ | (833,948 | ) | $ | 2,224,226 | |||||||||||
| Capital expenditures | $ | 3,459 | $ | 4,318 | $ | 3,201 | $ | 160 | $ | 172 | $ | 11,310 |
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
| (in thousands) | Retail | National Programs | Wholesale Brokerage | Services | Other | Total | ||||||||||||||||||
| Total revenues | $ | 590,238 | $ | 178,286 | $ | 170,645 | $ | 32,144 | $ | 6,241 | $ | 977,554 | ||||||||||||
| Investment income | $ | 999 | $ | 327 | $ | 1,414 | $ | 13 | $ | 3,326 | $ | 6,079 | ||||||||||||
| Amortization | $ | 26,827 | $ | 9,098 | $ | 10,205 | $ | 462 | $ | 39 | $ | 46,631 | ||||||||||||
| Depreciation | $ | 6,061 | $ | 2,693 | $ | 2,892 | $ | 421 | $ | 1,219 | $ | 13,286 | ||||||||||||
| Interest expense | $ | 30,287 | $ | 7,531 | $ | 18,033 | $ | 751 | $ | (41,912 | ) | $ | 14,690 | |||||||||||
| Income before income taxes | $ | 138,595 | $ | 63,287 | $ | 17,593 | $ | 7,153 | $ | 45,870 | $ | 272,498 | ||||||||||||
| Total assets | $ | 1,687,137 | $ | 607,599 | $ | 618,662 | $ | 45,360 | $ | (839,178 | ) | $ | 2,119,580 | |||||||||||
| Capital expenditures | $ | 4,152 | $ | 2,867 | $ | 4,794 | $ | 301 | $ | 2,001 | $ | 14,115 |
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Brown & Brown, Inc.
Daytona Beach, Florida
We have audited the accompanying consolidated balance sheets of Brown & Brown, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Brown & Brown, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Jacksonville, Florida
March 1, 2011
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Brown & Brown, Inc.
Daytona Beach, Florida
We have audited the internal control over financial reporting of Brown & Brown, Inc. and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Medical Settlement Protocols; DiMartino Associates, Inc; Crowe Paradis Holding Company, et al.; Thomas R Jones, Inc. and Martin Benefits Consulting, LLC (collectively the “2010 Excluded Acquisitions”), which were acquired during 2010 and whose financial statements constitute 7.3 % and 5.5% of net and total assets, respectively, 2.0% of revenues, and 2.1% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2010. Accordingly, our audit did not include the internal control over financial reporting of the 2010 Excluded Acquisitions. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated March 1, 2011 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Jacksonville, Florida
March 1, 2011
Table of Contents
Management’s Report on Internal Control Over Financial Reporting
The management of Brown & Brown, Inc. and its subsidiaries (“Brown & Brown”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including Brown & Brown’s principal executive officer and principal financial officer, Brown & Brown conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In conducting Brown & Brown’s evaluation of the effectiveness of its internal control over financial reporting, Brown & Brown has excluded the following acquisitions completed by Brown & Brown during 2010: Medical Settlement Protocols; DiMartino Associates, Inc; Crowe Paradis Holding Company, et al.; Thomas R Jones, Inc. and Martin Benefits Consulting, LLC (collectively the “2010 Excluded Acquisitions”), which were acquired during 2010 and whose financial statements constitute 7.3 % and 5.5% of net and total assets, respectively, 2.0% of revenues, and 2.1% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2010. Refer to Note 2 to the Consolidated Financial Statements for further discussion of these acquisitions and their impact on Brown & Brown’s Consolidated Financial Statements.
Based on Brown & Brown’s evaluation under the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission_,_ management concluded that internal control over financial reporting was effective as of December 31, 2010. Management’s internal control over financial reporting as of December 31, 2010 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Brown & Brown, Inc.
Daytona Beach, Florida
March 1, 2011
| /s/ J. Powell Brown | /s/ Cory T. Walker | |||
| J. Powell Brown | Cory T. Walker | |||
| Chief Executive Officer | Chief Financial Officer |
Table of Contents
Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk. · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.