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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-13619
 
 
BROWN & BROWN, INC.
(Exact name of Registrant as specified in its charter)
 
 
Florida
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13031164&doc=11
 
59-0864469
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification Number)
220 South Ridgewood Avenue,
 
 
32114
Daytona Beach,
FL
 
 
 
(Address of principal executive offices)
 
 
(Zip Code)
Registrant’s telephone number, including area code: (386252-9601

  
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.10 Par Value
BRO
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares of the Registrant’s common stock, $0.10 par value, outstanding as of July 30, 2019 was 281,274,947.
 



Table of Contents

BROWN & BROWN, INC.
INDEX
 
 
 
 
 
 
PAGE
NO.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 

2

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Disclosure Regarding Forward-Looking Statements
Brown & Brown, Inc., together with its subsidiaries (collectively, “we,” “Brown & Brown” or the “Company”), makes “forward-looking statements” within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995, as amended, throughout this report and in the documents we incorporate by reference into this report. You can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “plan” and “continue” or similar words. We have based these statements on our current expectations about potential future events. Although we believe the expectations expressed in the forward-looking statements included in this Quarterly Report on Form 10-Q and the reports, statements, information and announcements incorporated by reference into this report are based upon reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. Many of these factors have previously been identified in filings or statements made by us or on our behalf. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include but are not limited to the following items, in addition to those matters described in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:
 
The Company's integration of the acquisition of The Hays Group, Inc. and certain of its affiliates (“Hays”), including adequately addressing any matters analyzed in the due diligence process, and material adverse changes in the business and financial condition of Hays, the Company, or both, and their respective customers;
The impact of any regional, national or global political, economic, business, competitive, market, environmental or regulatory conditions on our business operations;
The impact of current market conditions on our results of operations and financial condition;
Changes in macroeconomic conditions;
Risks that could negatively affect the success of our acquisition strategy, including continuing consolidation in our industry, which could make it more difficult to identify targets and could make them more expensive, execution risks, integration risks, the risk of post-acquisition deterioration leading to intangible asset impairment charges, and the risk we could incur or assume unanticipated regulatory liabilities such as those relating to violations of anti-corruption and sanctions laws;
Any insolvencies of, or other difficulties experienced by our clients, insurance carriers or financial institutions; volatility or declines in insurance markets and premiums on which our commissions are based, but which we do not control;
Our ability to continue to manage our indebtedness;
Our ability to compete effectively in our industry, material changes in commercial property and casualty markets generally or the availability of insurance products or changes in premiums resulting from a catastrophic event, such as a hurricane;
Disintermediation within the insurance industry, including increased competition from insurance companies, technology companies and the financial services industry, as well as the shift away from traditional insurance markets;
Our ability to attract and retain key employees and clients and attract new business;
Our ability to maintain our corporate culture;
The timing or ability to carry out share repurchases;
The timing or ability to carry out refinancing or take other steps to manage our capital and the limitations in our long-term debt agreements that may restrict our ability to take these actions;
Fluctuations in our earnings as a result of potential changes to our valuation allowance(s) on our deferred taxes;
Any fluctuations in exchange and interest rates that could affect expenses and revenue;
The potential costs and difficulties in complying with a wide variety of laws and regulations and any related changes;
Changes in the tax or accounting policies or treatment of our operations and fluctuations in our tax rate;
Any potential impact of U.S. healthcare or National Flood Insurance Program legislation;
The impact of federal and state income tax reform;
The impact of the 2018 federal government shutdown and the possibility of a future federal government shutdown;
Uncertainties in U.S. administrative policy regarding trade agreements and international trade relations;
Exposure to potential liabilities arising from errors and omissions and other potential claims against us;
The interruption or loss of our information processing systems or failure to maintain secure information systems and other factors that the Company may not have currently identified or quantified; and

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Other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission (“SEC”) filings.
Assumptions as to any of the foregoing and all statements are not based upon historical fact, but rather reflect our current expectations concerning future results and events. Forward-looking statements that we make or that are made by others on our behalf are based upon a knowledge of our business and the environment in which we operate, but because of the factors listed above, among others, actual results may differ from those in the forward-looking statements. Consequently, these cautionary statements qualify all of the forward-looking statements we make herein. We cannot assure you that the results or developments anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We assume no obligation to update any of the forward-looking statements.

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PART I — FINANCIAL INFORMATION
ITEM 1 — Financial Statements (Unaudited)
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
(in thousands, except per share data)
For the three months 
 ended June 30,
 
For the six months 
 ended June 30,
 
2019
 
2018
 
2019
 
2018
REVENUES
 
 
 
 
 
 
 
Commissions and fees
$
572,932

 
$
472,068

 
$
1,190,395

 
$
972,406

Investment income
1,525

 
731

 
2,606

 
1,332

Other income, net
762

 
388

 
1,498

 
910

Total revenues
575,219

 
473,187

 
1,194,499

 
974,648

EXPENSES
 
 
 
 
 
 
 
Employee compensation and benefits
309,610

 
251,958

 
642,447

 
522,857

Other operating expenses
98,050

 
83,694

 
186,833

 
160,007

(Gain)/loss on disposal
(1,016
)
 
(230
)
 
(511
)
 
(2,650
)
Amortization
25,954

 
20,785

 
52,146

 
41,324

Depreciation
5,666

 
5,599

 
11,701

 
11,151

Interest
16,293

 
10,052

 
31,491

 
19,723

Change in estimated acquisition earn-out payables
(2,860
)
 
419

 
(1,650
)
 
2,885

Total expenses
451,697

 
372,277

 
922,457

 
755,297

Income before income taxes
123,522

 
100,910

 
272,042

 
219,351

Income taxes
30,929

 
26,988

 
65,553

 
54,601

Net income
$
92,593

 
$
73,922

 
$
206,489

 
$
164,750

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.33

 
$
0.27

 
$
0.73

 
$
0.60

Diluted
$
0.33

 
$
0.26

 
$
0.73

 
$
0.58

Dividends declared per share
$
0.080

 
$
0.075

 
$
0.160

 
$
0.150

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(in thousands, except per share data)
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
432,548

 
$
438,961

Restricted cash and investments
382,233

 
338,635

Short-term investments
10,542

 
12,868

Premiums, commissions and fees receivable
913,910

 
844,815

Reinsurance recoverable
77,335

 
65,396

Prepaid reinsurance premiums
343,594

 
337,920

Other current assets
131,386

 
128,716

Total current assets
2,291,548

 
2,167,311

Fixed assets, net
122,511

 
100,395

Operating lease assets
184,027

 

Goodwill
3,551,661

 
3,432,786

Amortizable intangible assets, net
899,583

 
898,807

Investments
24,896

 
17,394

Other assets
90,541

 
71,975

Total assets
$
7,164,767

 
$
6,688,668

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Premiums payable to insurance companies
$
979,417

 
$
857,559

Losses and loss adjustment reserve
77,335

 
65,212

Unearned premiums
343,594

 
337,920

Premium deposits and credits due customers
93,827

 
105,640

Accounts payable
98,869

 
87,345

Accrued expenses and other liabilities
259,068

 
279,310

Current portion of long-term debt
55,000

 
50,000

Total current liabilities
1,907,110

 
1,782,986

Long-term debt less unamortized discount and debt issuance costs
1,426,777

 
1,456,990

Operating lease liabilities
169,555

 

Deferred income taxes, net
310,510

 
315,732

Other liabilities
170,184

 
132,392

Shareholders’ Equity:
 
 
 
Common stock, par value $0.10 per share; authorized 560,000 shares; issued 295,819 shares and outstanding 281,456 shares at 2019, issued 293,380 shares and outstanding 279,583 shares at 2018 - in thousands.
29,582

 
29,338

Additional paid-in capital
653,415

 
615,180

Treasury stock, at cost at 14,363 shares at 2019 and 13,797 shares at 2018 - in thousands
(497,572
)
 
(477,572
)
Retained earnings
2,995,206

 
2,833,622

Total shareholders’ equity
3,180,631

 
3,000,568

Total liabilities and shareholders’ equity
$
7,164,767

 
$
6,688,668

See accompanying Notes to Condensed Consolidated Financial Statements.


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BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
 
Common Stock
 
 
 
 
 
 
 
 
(in thousands, except per share data)
Shares
 
Par Value
 
Additional Paid-In Capital
 
Treasury Stock
 
Retained Earnings
 
Total
Balance at December 31, 2018
293,380
 
$
29,338

 
$
615,180

 
$
(477,572
)
 
$
2,833,622

 
$
3,000,568

Net income
 
 
 

 
 

 
 
 
113,896

 
113,896

Net unrealized holding (loss) gain on available-for-sale securities
 
 
 
 
106

 
 
 
 
 
106

Common stock issued for employee stock benefit plans
2,465
 
246

 
5,963

 
 

 
 

 
6,209

Cash dividends paid ($0.080 per share)
 
 
 

 
 

 
 
 
(22,348
)
 
(22,348
)
Balance at March 31, 2019
295,845
 
29,584

 
621,249

 
(477,572
)
 
2,925,170

 
3,098,431

Net income
 
 
 

 
 

 
 
 
92,593

 
92,593

Net unrealized holding (loss) gain on available-for-sale securities
 
 
 
 
205

 
 
 
(24
)
 
181

Common stock issued for employee stock benefit plans
(54)
 
(5
)
 
11,084

 
 

 
 

 
11,079

Purchase of treasury stock
 
 
 

 
20,000

 
(20,000
)
 
 
 

Common stock issued to directors
28
 
3

 
877

 
 

 
 

 
880

Cash dividends paid ($0.080 per share)
 
 
 

 
 

 
 
 
(22,533
)
 
(22,533
)
Balance at June 30, 2019
295,819
 
29,582

 
653,415

 
(497,572
)
 
2,995,206

 
3,180,631

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
286,895
 
28,689

 
483,733

 
(386,322
)
 
2,456,599

 
2,582,699

Adoption of Topic 606 at January 1, 2018
 
 
 
 
 
 
 
 
117,515

 
117,515

Beginning balance after adoption of Topic 606
286,895
 
28,689

 
483,733

 
(386,322
)
 
2,574,114

 
2,700,214

Net income
 
 
 

 
 

 
 
 
90,828

 
90,828

Net unrealized holding (loss) gain on available-for-sale securities
 
 
 
 
(77
)
 
 
 
(55
)
 
(132
)
Common stock issued for employee stock benefit plans
53
 
6

 
(327
)
 
 

 
 

 
(321
)
Purchase of treasury stock
 
 
 

 
11,250

 
(11,250
)
 
 
 

Common stock issued to directors
13
 
1

 
699

 
 

 
 

 
700

Cash dividends paid ($0.075 per share)
 
 
 

 
 

 
 
 
(20,696
)
 
(20,696
)
Balance at March 31, 2018
286,961
 
28,696

 
495,278

 
(397,572
)
 
2,644,191

 
2,770,593

Net income
 
 
 

 
 

 
 
 
73,922

 
73,922

Net unrealized holding (loss) gain on available-for-sale securities
 
 
 
 
(27
)
 
 
 
(2
)
 
(29
)
Common stock issued for employee stock benefit plans
123
 
12

 
7,699

 
 

 
 

 
7,711

Cash dividends paid ($0.075 per share)
 
 
 

 
 

 
 
 
(20,715
)
 
(20,715
)
Balance at June 30, 2018
287,084
 
$
28,708

 
$
502,950

 
$
(397,572
)
 
$
2,697,396

 
$
2,831,482

See accompanying Notes to Condensed Consolidated Financial Statements.

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BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 
 
Six months ended 
 June 30,
(in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
206,489

 
$
164,750

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization
52,146

 
41,324

Depreciation
11,701

 
11,151

Non-cash stock-based compensation
24,128

 
15,027

Change in estimated acquisition earn-out payables
(1,650
)
 
2,885

Deferred income taxes
(5,342
)
 
(16,437
)
Amortization of debt discount and disposal of deferred financing costs
988

 
819

Accretion of discounts and premiums, investment
(12
)
 
1

Net gain/(loss) on sales of investments, fixed assets and customer accounts
(346
)
 
(2,432
)
Payments on acquisition earn-outs in excess of original estimated payables
(267
)
 
(3,408
)
Changes in operating assets and liabilities, net of effect from acquisitions and divestitures:
 
 
 
Premiums, commissions and fees receivable (increase) decrease
(71,614
)
 
(29,471
)
Reinsurance recoverables (increase) decrease
(11,939
)
 
388,704

Prepaid reinsurance premiums (increase) decrease
(5,674
)
 
10,310

Other assets (increase) decrease
(22,122
)
 
(15,731
)
Premiums payable to insurance companies increase (decrease)
116,472

 
106,839

Premium deposits and credits due customers increase (decrease)
(12,003
)
 
8,360

Losses and loss adjustment reserve increase (decrease)
12,123

 
(388,572
)
Unearned premiums increase (decrease)
5,674

 
(10,310
)
Accounts payable increase (decrease)
23,773

 
31,343

Accrued expenses and other liabilities increase (decrease)
(32,269
)
 
(34,837
)
Other liabilities increase (decrease)
15,447

 
(2,909
)
Net cash provided by operating activities
305,703

 
277,406

Cash flows from investing activities:
 
 
 
Additions to fixed assets
(35,174
)
 
(19,390
)
Payments for businesses acquired, net of cash acquired
(146,646
)
 
(141,803
)
Proceeds from sales of fixed assets and customer accounts
2,101

 
2,906

Purchases of investments
(9,265
)
 
(8,863
)
Proceeds from sales of investments
4,505

 
16,346

Net cash used in investing activities
(184,479
)
 
(150,804
)
Cash flows from financing activities:
 
 
 
Payments on acquisition earn-outs
(6,997
)
 
(5,183
)
Proceeds from long-term debt
350,000

 

Payments on long-term debt
(22,500
)
 
(110,001
)
Deferred debt issuance costs
(3,701
)
 

Payments on revolving credit facilities
(350,000
)
 

Issuances of common stock for employee stock benefit plans
901

 
720

Repurchase shares to fund tax withholdings for non-cash stock-based compensation
(6,861
)
 
(7,656
)
Purchase of treasury stock
(20,000
)
 
(11,250
)
Settlement (prepayment) of accelerated share repurchase program
20,000

 
11,250

Cash dividends paid
(44,881
)
 
(41,411
)
Net cash used in financing activities
(84,039
)
 
(163,531
)
Net increase (decrease) in cash and cash equivalents inclusive of restricted cash
37,185

 
(36,929
)
Cash and cash equivalents inclusive of restricted cash at beginning of period
777,596

 
824,088

Cash and cash equivalents inclusive of restricted cash at end of period
$
814,781

 
$
787,159

See accompanying Notes to Condensed Consolidated Financial Statements. Refer to Note 10 for the reconciliations of cash and cash equivalents inclusive of restricted cash and investments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1· Nature of Operations
Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, insurance programs and service organization that markets and sells insurance products and services, primarily in the property, casualty and employee benefits areas. Brown & Brown’s business is divided into four reportable segments. The Retail Segment 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 Segment, which acts as a managing general agent (“MGA”), provides professional liability and related package products for certain professionals, a range of insurance products for individuals, flood coverage, and targeted products and services designated for specific industries, trade groups, governmental entities and market niches, all of which are delivered through a nationwide network of independent agents, including Brown & Brown retail agents. The Wholesale Brokerage Segment markets and sells excess and surplus commercial and personal lines insurance, primarily through independent agents and brokers, as well as Brown & Brown retail agents. The Services Segment 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, Social Security disability and Medicare benefits advocacy services and claims adjusting services.
NOTE 2· Basis of Financial Reporting
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of recurring accruals) necessary for a fair presentation have been included. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The preparation of these financial statements in conformity with U.S. 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 Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which provides guidance for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The impact of ASU 2018-15 is not expected to be material to the Company.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates Step 2 of the goodwill impairment test. The updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and will be applied prospectively. The Company is currently evaluating the impact of this guidance on future interim or annual goodwill impairment tests performed.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“Topic 842”), which provides guidance for accounting for leases. Under Topic 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. Effective as of January 1, 2019, the Company adopted Topic 842, and all related amendments, which established Accounting Standards Codification (“ASC”) Topic 842. The Company adopted these standards by the recognition of right-of-use assets and related lease liabilities on the balance sheet. As permitted by Topic 842, the Company elected the transition practical expedient to adopt as of January 1, 2019, the date of initial application under the modified retrospective approach for leases existing at that date, with an adjustment to retained earnings. As a result, the Consolidated Balance Sheet at December 31, 2018 was not restated and continues to be reported under ASC Topic 840 (“Topic 840”) which did not require the recognition of operating lease liabilities on the balance sheet, and thus is not comparative. For the six months ended June 30, 2019, all of the Company's leases are classified as

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operating leases, which are primarily real estate leases for office space. The expense recognition for operating leases under Topic 842 is substantially consistent with Topic 840, where operating lease charges are recorded entirely in operating expenses. As a result, there is no significant difference in the Company's results of operations presented in the Company's Condensed Consolidated Statements of Income for each period presented.
The adoption of Topic 842 had a significant impact on the Company's balance sheet with the recognition of the operating lease right-of-use asset and the liability for operating leases. Upon adoption, leases that were classified as operating leases under Topic 840 were classified as operating leases under Topic 842. For the adoption of Topic 842, the Company recorded an adjustment of $202.9 million to operating lease right-of-use asset and the related lease liability, with no impact to retained earnings. The deferred rent previously accrued under Topic 840 was reclassified to the right-of-use asset upon the adoption of Topic 842. The lease liability is the present value of the remaining minimum lease payments, determined under Topic 840, discounted using the Company's incremental borrowing rate at the effective date of January 1, 2019. As permitted under Topic 842, the Company elected to use the practical expedient that permits the Company to not reassess whether a contract is or contains a lease, the classification of the Company's existing operating leases, and initial direct costs for any existing leases. The Company did not elect the practical expedient to use hindsight in determining the lease term (when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the Company's right-of-use assets. The application of the practical expedient did not have a significant impact on the measurement of the operating lease liability.
The impact of the adoption of Topic 842 on the balance sheet at January 1, 2019 was (in thousands):
(in thousands)
Balance at December 31, 2018
 
Adjustments due to Topic 842
 
Balance at January 1, 2019
Balance Sheet
 
 
 
 
 
Assets:
 
 
 
 
 
Other current assets
128,716

 
(3,004
)
 
125,712

Operating lease assets

 
178,304

 
178,304

Total Assets
6,688,668

 
175,300

 
6,863,968

Liabilities:
 
 
 
 
 
Accrued expenses and other liabilities
279,310

 
13,836

 
293,146

Operating lease liabilities

 
161,464

 
161,464

Total Liabilities
3,688,100

 
175,300

 
3,863,400


For contracts entered into on or after the January 1, 2019, at the inception of a contract the Company assesses whether the contract is, or contains, a lease. This assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset. Leases entered into prior to January 1, 2019 are accounted for under Topic 840 and were not reassessed. For real estate leases that contain both lease and non-lease components, the Company elected to account the lease components together with non-lease components (e.g., common-area maintenance).
Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, or the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. All of the Company's real estate leases for office space do not meet the definition of a finance lease. The Company's policy is to own, rather than lease, equipment.
For leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, less any lease incentives received. The lease liability is initially measured at the present value of the lease payments under the lease. For the Company's operating leases, the lease payments are discounted using an incremental borrowing rate, which approximates the rate of interest that would be paid on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms.
Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early. Some of the Company's real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and based on the minimum amount stated in the lease. Lease components are included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate,

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or payments based on a change in the Company's portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the right-of-use assets and the lease liability.
Lease expense for operating leases consists of the lease payments, inclusive of lease incentives, plus any initial direct costs, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability.
The Company elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a total term of 12 months or less. The effect of short-term leases on the Company's right-of-use asset and lease liability would not be significant.
NOTE 3· Revenues
The following tables present the revenues disaggregated by revenue source:
 
Three months ended June 30, 2019
(in thousands)
Retail
 
National Programs
 
Wholesale
Brokerage
 
Services
 
Other
 
Total
Base commissions(1)
$
219,421

 
$
85,093

 
$
65,052

 
$

 
$
26

 
$
369,592

Fees(2)
68,827

 
34,472

 
13,940

 
50,763

 
(287
)
 
167,715

Incentive commissions(3)
12,714

 
(1,846
)
 
125

 

 
(94
)
 
10,899

Profit-sharing contingent commissions(4)
6,659

 
4,093

 
1,231

 

 

 
11,983

Guaranteed supplemental commissions(5)
2,556

 
9,612

 
575

 

 

 
12,743

Investment income(6)
17

 
380

 
43

 
34

 
1,051

 
1,525

Other income, net(7)
544

 
13

 
205

 

 

 
762

    Total Revenues
$
310,738

 
$
131,817

 
$
81,171

 
$
50,797

 
$
696

 
$
575,219

 
Six months ended June 30, 2019
(in thousands)
Retail
 
National Programs
 
Wholesale
Brokerage
 
Services
 
Other
 
Total
Base commissions(1)
$
506,621

 
$
162,271

 
$
119,225

 
$

 
$
14

 
$
788,131

Fees(2)
112,704

 
64,718

 
26,450

 
100,207

 
(575
)
 
303,504

Incentive commissions(3)
55,489

 
(927
)
 
498

 

 
17

 
55,077

Profit-sharing contingent commissions(4)
18,206

 
4,953

 
4,146

 

 

 
27,305

Guaranteed supplemental commissions(5)
5,796

 
9,616

 
966

 

 

 
16,378

Investment income(6)
17

 
696

 
83

 
82

 
1,728

 
2,606

Other income, net(7)
1,136

 
50

 
312

 

 

 
1,498

    Total Revenues
$
699,969

 
$
241,377

 
$
151,680

 
$
100,289

 
$
1,184

 
$
1,194,499

(1)
Base commissions generally represent a percentage of the premium paid by an insured and are affected by fluctuations in both premium rate levels charged by insurance companies and the insureds’ underlying “insurable exposure units,” which are units that insurance companies use to measure or express insurance exposed to risk (such as property values, or sales and payroll levels) to determine what premium to charge the insured. Insurance companies establish these premium rates based upon many factors, including loss experience, risk profile and reinsurance rates paid by such insurance companies, none of which the Company controls.
(2)
Fee revenues relate to fees for services other than securing coverage for the Company's customers and fees negotiated in lieu of commissions.
(3)
Incentive commissions include additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties.
(4)
Profit-sharing contingent commissions are based primarily on underwriting results, but may also reflect considerations for volume, growth and/or retention.
(5)
Guaranteed supplemental commissions represent guaranteed fixed-base agreements in lieu of profit-sharing contingent commissions.
(6)
Investment income consists primarily of interest on cash and investments.
(7)
Other income consists primarily of legal settlements and other miscellaneous income.

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Table of Contents

Contract Assets and Liabilities
The balances of contract assets and contract liabilities arising from contracts with customers as of June 30, 2019 and December 31, 2018 were as follows:
(in thousands)
June 30, 2019
 
December 31, 2018
Contract assets
$
285,099

 
$
265,994

Contract liabilities
$
58,726

 
$
53,496

Unbilled receivables (contract assets) arise when the Company recognizes revenue for amounts which have not yet been billed in the Company's systems and are reflected in premiums, commissions and fee receivables in the Company's Condensed Consolidated Balance Sheet. Deferred revenue (contract liabilities) relates to payments received in advance of performance under the contract before the transfer of a good or service to the customer. Deferred revenue is reflected within accrued expenses and other liabilities for those to be recognized in less than 12 months and in other liabilities for those to be recognized more than 12 months from the date presented in the Company's Condensed Consolidated Balance Sheet.
As of June 30, 2019, deferred revenue consisted of $41.7 million as current portion to be recognized within one year and $17 million in long term to be recognized beyond one year. As of December 31, 2018, deferred revenue consisted of $37.0 million as current portion to be recognized within one year and $16.5 million in long-term deferred revenue to be recognized beyond one year.
During the six months ended June 30, 2019, the amount of revenue recognized related to performance obligations satisfied in a previous period, was $12.8 million. This revenue is primarily related to variable consideration and is inclusive of changes due to estimates.
Other Assets and Deferred Cost
Incremental cost to obtain - The Company defers certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans in the Retail Segment, in which the Company pays an incremental amount of compensation on new business. These incremental costs are deferred and amortized over a 15-year period. The cost to obtain balance within the other assets caption in the Company's Condensed Consolidated Balance Sheet was $19.7 million and $13.2 million as of June 30, 2019 and December 31, 2018, respectively. For the six months ended June 30, 2019, the Company deferred $7.1 million of incremental cost to obtain customer contracts. The Company expensed $0.6 million of the incremental cost to obtain customer contracts for the six months ended June 30, 2019.
Cost to fulfill - The Company defers certain costs to fulfill contracts and recognizes these costs as the associated performance obligations are fulfilled. The cost to fulfill balance within the other current assets caption in the Company's Condensed Consolidated Balance Sheet was $69.0 million and $69.8 million as of June 30, 2019 and December 31, 2018, respectively. For the six months ended June 30, 2019, the Company had net expense of $0.8 million related to the release of previously deferred contract fulfillment costs associated with performance obligations that were satisfied in the period, net of current year deferrals for costs incurred that related to performance obligations yet to be fulfilled.

12

Table of Contents

NOTE 4· Net Income Per Share
Basic net income per share is computed based on the weighted average number of common shares (including participating securities) issued and outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares issued and outstanding plus equivalent shares, assuming the 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 three months 
 ended June 30,
 
For the six months 
 ended June 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net income
$
92,593

 
$
73,922

 
$
206,489

 
$
164,750

Net income attributable to unvested awarded performance stock
(3,020
)
 
(1,618
)
 
(6,273
)
 
(3,529
)
Net income attributable to common shares
$
89,573

 
$
72,304

 
$
200,216

 
$
161,221

Weighted average number of common shares outstanding – basic
281,754

 
276,123

 
281,163

 
276,038

Less unvested awarded performance stock included in weighted average number of common shares outstanding – basic
(9,191
)
 
(6,042
)
 
(8,542
)
 
(5,912
)
Weighted average number of common shares outstanding for basic net income per common share
272,563

 
270,081

 
272,621

 
270,126

Dilutive effect of stock options
1,839

 
5,827

 
2,083

 
5,683

Weighted average number of shares outstanding – diluted
274,402

 
275,908

 
274,704

 
275,809

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.33

 
$
0.27

 
$
0.73

 
$
0.60

Diluted
$
0.33

 
$
0.26

 
$
0.73

 
$
0.58


NOTE 5· Business Combinations
During the six months ended June 30, 2019, Brown & Brown acquired the assets and assumed certain liabilities of eleven insurance intermediaries, all of the stock of one insurance intermediary and two books of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last 12 months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the “Other” category within the following two tables. The recorded purchase price for all acquisitions includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the Condensed Consolidated Statements of Income when incurred.
The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.
Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in ASC 805. For the six months ended June 30, 2019, adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $6.5 million relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the six months ended June 30, 2019 in accordance with the guidance in ASU 2015-16 “Business Combinations.” The measurement period adjustments primarily impacted goodwill, with no effect on earnings or cash in the current period.
Cash paid for acquisitions was $149.9 million in the six-month period ended June 30, 2019. The Company completed 12 acquisitions (excluding book of business purchases) in the six-month period ended June 30, 2019. The Company completed eight acquisitions (excluding book of business purchases) in the six-month period ended June 30, 2018.

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Table of Contents

The following table summarizes the purchase price allocations made as of the date of each acquisition for current year acquisitions and adjustments made during the measurement period for prior year acquisitions. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. These adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Name
Business
segment
 
Effective
date of
acquisition
 
Cash
paid
 
Other
payable
 
Recorded
earn-out
payable
 
Net assets
acquired
 
Maximum
potential earn-
out payable
Smith Insurance Associates, Inc. (Smith)
Retail
 
February 1, 2019
 
$
20,129

 
$

 
$
2,704

 
$
22,833

 
$
4,550

Donald P. Pipino Company, LTD (Pipino)
Retail
 
February 1, 2019
 
16,420

 
135

 
9,821

 
26,376

 
12,996

Cossio Insurance Agency (Cossio)
Retail
 
March 1, 2019
 
13,990

 
10

 
1,710

 
15,710

 
2,000

Medval LLC (Medval)
Services
 
March 1, 2019
 
29,106

 
100

 
1,684

 
30,890

 
2,500

United Development Systems, Inc. (United)
Retail
 
May 1, 2019
 
18,987

 
388

 
3,268

 
22,643

 
8,625

Twinbrook Insurance Brokerage, Inc. (Twinbrook)
Retail
 
June 1, 2019
 
26,251

 
400

 
1,565

 
28,216

 
5,073

Other
Various
 
Various
 
24,980

 
1,126

 
3,214

 
29,320

 
7,709

Total
 
 
 
 
$
149,863

 
$
2,159

 
$
23,966

 
$
175,988

 
$
43,453


The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition and adjustments made during the measurement period of the prior year acquisitions.
(in thousands)
 
Smith
 
Pipino
 
Cossio
 
Medval
 
United
 
Twinbrook
 
Other
 
Total
Cash
 
$

 
$

 
$

 
$
3,218

 
$

 
$

 
$

 
$
3,218

Other current assets
 
473

 
819

 
17

 
1,708

 
477

 

 
(6,658
)
 
(3,164
)
Fixed assets
 
39

 
112

 
29

 
50

 
$
20

 
$
85

 
$
(97
)
 
$
238

Goodwill
 
16,249

 
16,765

 
11,319

 
19,108

 
15,111

 
19,839

 
22,111

 
120,502

Purchased customer accounts
 
6,500

 
11,360

 
4,324

 
7,300

 
7,065

 
8,557

 
9,013

 
54,119

Non-compete agreements
 
41

 
11

 
21

 
1

 
11

 
12

 
106

 
203

Other assets
 

 
772

 

 
14

 

 

 
(732
)
 
54

Total assets acquired
 
23,302

 
29,839

 
15,710

 
31,399

 
22,684

 
28,493

 
23,743

 
175,170

Other current liabilities
 
(469
)
 
(3,463
)
 

 
(480
)
 
(41
)
 
(277
)
 
5,577

 
847

Other liabilities
 

 

 

 
(29
)
 

 

 

 
(29
)
Total liabilities assumed
 
(469
)