Arthur J. Gallagher & Co. Announces Third Quarter 2015 Financial Results

ITASCA, Ill., Oct. 27, 2015 /PRNewswire/ -- Arthur J. Gallagher & Co. (NYSE: AJG) today reported its financial results for the quarter ended September 30, 2015.  A printer-friendly format and supplemental quarterly data are available at www.ajg.com.  For a description of the non-GAAP measures used to report financial results in this earnings release and information regarding  their most comparable GAAP measures, please see "Information Regarding Non-GAAP Measures" beginning on page 8. 

"We had another excellent quarter," said J. Patrick Gallagher, Jr., Chairman, President and CEO.  "In the third quarter, our combined Brokerage and Risk Management segments posted 9% growth in adjusted revenues, of which 4.1% was total organic growth, adjusted EBITDAC increased 11% and our adjusted EBITDAC margin improved 30 basis points.  Total company adjusted net earnings per share grew 15%."

• Our Brokerage segment had a solid quarter.  Adjusted revenues increased 10%, of which 3.0% was total organic growth, adjusted EBITDAC increased 10% and we improved our adjusted EBITDAC margin 10 basis points.  During the third quarter, we completed 5 acquisitions with annualized revenues of $61 million bringing our year-to-date totals to 27 acquisitions with estimated annualized revenues totaling $177 million. 
• Our Risk Management segment had an outstanding quarter.  Total organic revenues increased 9.3%, adjusted EBITDAC increased 15%, we improved our adjusted EBITDAC margin 90 basis points and we exceeded our 16.5% margin target. 
• Our clean energy investments had another quarter of consistent production and demand for our remaining plants is robust.  Accordingly, we anticipate annualized net after-tax earnings from our clean-energy investments could increase by approximately 15% per annum in 2016 and 2017.

"Domestically, we see the rate environment flat within professional lines, casualty and auto, and we see modest weakening within property, workers comp and certain specialty lines such as marine and aviation.  Interestingly, we are seeing smaller accounts holding firm, with some weakening in larger accounts.  We are seeing similar conditions as we start the January 1, 2016 renewal season.  Internationally, we are seeing a similar market in U.K. Retail and in Canada, but substantially more softening in London Specialty, Australia and New Zealand.  Overall, we believe a modestly-down rate environment can be partially mitigated through exposure unit growth in certain lines and by our professionals demonstrating our expertise and high quality value added capabilities by strengthening our clients' insurance portfolio in these times."

The following table provides information that management believes is helpful when comparing third quarter 2015 revenues, EBITDAC and diluted net earnings per share with the same period in 2014.  In addition, this table provides reconciliations to the most comparable GAAP measures for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share. A reconciliation of EBITDAC is provided on page 10. 

 

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The following table provides information that management believes is helpful when comparing the nine-month period 2015 revenues, EBITDAC and diluted net earnings per share with the same period in 2014. 

 

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Brokerage Segment Third Quarter Highlights - The following tables provide information that management believes is helpful when comparing certain 2015 financial information with the same period in 2014 (in millions).

 

The following is a summary of Brokerage segment acquisition activity for 2015 and 2014:

 

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Brokerage Segment Third Quarter Highlights (continued)

 

 

 

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Risk Management Segment Third Quarter Highlights - The following tables provide information that management believes is helpful when comparing certain 2015 financial information with the same period in 2014 (in millions):

During the nine-month period ended September 30, 2015, we completed 2 acquisitions in the Risk Management segment with annualized revenues of $7.6 million.

 

 

 

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Corporate Segment Third Quarter Highlights - The following table provides information that management believes is helpful when comparing 2015 operating results for the Corporate segment with the same periods in 2014 (in millions):

 

Debt, interest and banking - At September 30, 2015, Gallagher had $2,125.0 million of borrowings from private placements and $153.0 million of short-term borrowings under its line of credit facility.  On May 18, 2015 we entered into a two year revolving loan facility that provides funding for the three acquired Australian and New Zealand premium finance subsidiaries.  This facility comprises four tranches which total approximately $155.0 million, of which $114.6 million was outstanding at September 30, 2015.  These premium funding related borrowings are fully collateralized by the underlying premium finance related receivables and as such are excluded from our debt covenant computations.  This facility replaced a previous facility which was originally entered into on June 16, 2014.

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Corporate Segment Third Quarter Highlights (continued)

At-the-market equity program - Gallagher has an at-the-market equity program under which up to $15.6 million of its common stock remaining in the program may be sold through Morgan Stanley & Co. LLC as sales agent.  During third quarter 2014, Gallagher did not sell any shares of its common stock under the program.

Clean energy investments - The following provides certain information related to Gallagher's investments in limited liability companies that own 34 clean coal production plants, which produce refined coal using proprietary technologies owned by Chem-Mod.  We believe that the production and sale of refined coal at these plants qualifies to receive refined coal tax credits under IRC Section 45 through 2019 for the fourteen 2009 Era Plants and through 2021 for the twenty 2011 Era Plants.  The underlying operations of those investments where Gallagher has a controlling ownership interest are consolidated.

Gallagher's investment in Chem-Mod generates royalty income from clean energy plants owned by those limited liability companies in which it invests as well as refined coal production plants owned by other unrelated parties.  Based on current production estimates provided by licensees, Chem-Mod could generate for Gallagher an average of approximately $4.0 million to $5.0 million of net after‑tax earnings per quarter.

All estimates set forth above regarding the potential future earnings impact of our clean energy investments are subject to significant risks.  Please refer to Gallagher's filings with the SEC, including Item 1A, "Risk Factors," of its Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for a more detailed discussion of these and other factors that could impact the information above.

Acquisition costs - Consists mostly of external professional fees and other due diligence costs related to acquisitions.Corporate - Consists of overhead allocations mostly related to corporate staff compensation. 

Income TaxesGallagher allocates the provision for income taxes to its Brokerage and Risk Management segments using the local country statutory rates.  Gallagher historically has reported, and anticipates reporting for the foreseeable future, an effective tax rate of approximately 34% to 36% in both its Brokerage and Risk Management segments.  Gallagher's consolidated effective tax rate for the quarters ended September 30, 2015 and 2014 was (33.3)% and (6.2)%, respectively.  Gallagher's tax rate for the quarters ended September 30, 2015 and 2014 was lower than the statutory rate due to the amount of IRC Section 45 tax credits earned.

Segment ReclassificationIn first quarter 2015, Gallagher transferred management of a claims handling operation from the Brokerage segment to the Risk Management segment.  Total revenues related to this operation were $4.9 million and $4.6 million in third quarter 2015 and 2014, respectively, $14.7 million and $13.5 million in the nine month periods ended September 30, 2015 and 2014, respectively.  Gallagher made the applicable segment reclassifications to the prior-period amounts to conform to the current-period presentation.  The changes in the segment structure affect only the manner in which the results for the reportable segments were previously reported.  These reclassifications did not impact Gallagher's previously reported consolidated net earnings.  See the quarterly results in the financial supplement for the reclassification of all quarters provided.

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Webcast Conference Call

Gallagher will host a webcast conference call on Wednesday, October 28, 2015 at 9:00 a.m. ET/8:00 a.m. CT.  To listen to this call, please go to www.ajg.com.  The call will be available for replay at such website for not less than 90 days. 

About Arthur J. Gallagher & Co.

Arthur J. Gallagher & Co., an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois, has operations in 31 countries and offers client-service capabilities in more than 140 countries around the world through a network of correspondent brokers and consultants.

Cautionary Information

This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  When used in this press release, the words "anticipates," "believes," "contemplates," "see," "should," "could," "will," "estimates," "expects," "intends," "plans" and variations thereof and similar expressions, are intended to identify forward-looking statements.  Examples of forward-looking statements include, but are not limited to, statements regarding (i) the amount of, and potential uses for, investment returns generated by Gallagher's clean energy investments; (ii) our corporate income tax rate; (iii) anticipated future results or performance of any segment or the Company as a whole; (iv) the premium rate environment; and (v) the economic environment.

Gallagher's actual results may differ materially from those contemplated by the forward-looking statements.  Readers are therefore cautioned against relying on any of the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance.  Important factors that could cause actual results to differ materially from those in the forward-looking statements include the following:

• Risks and uncertainties related to Gallagher's clean energy investments, including uncertainties related to political and regulatory risks, such as potential actions by Congress or challenges by the IRS eliminating or reducing the availability of tax credits under IRC Section 45 retroactively and/or going forward; the ability to maintain and find co-investors; the potential for divergent business objectives by co-investors and other stakeholders; plant operational risks, including supply-chain risks; utilities' future use of, or demand for, coal; the market price of coal; the costs of moving a clean coal plant; intellectual property litigation risks; and environmental risks - all of which could impact (i) and (ii) above; and
• Changes in worldwide and national economic conditions, changes in premium rates and in insurance markets generally and changes in the insurance brokerage industry's competitive landscape - all of which could impact (iii) - (v) above.

Please refer to Gallagher's filings with the SEC, including Item 1A, "Risk Factors," of its Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for a more detailed discussion of these and other factors that could impact its forward-looking statements.  Any forward-looking statement made by Gallagher in this press release speaks only as of the date on which it is made.  Except as required by applicable law, Gallagher does not undertake to update the information included herein or the corresponding earnings release posted on Gallagher's website.

Information Regarding Non-GAAP Measures

In addition to reporting financial results in accordance with GAAP, this press release provides information regarding EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, diluted net earnings per share (as adjusted) for the Brokerage and Risk Management segments, adjusted revenues, adjusted compensation and operating expenses, adjusted compensation expense ratio, adjusted operating expense ratio and organic revenue measures for each operating segment.  These measures are not in accordance with, or an alternative to, the GAAP information provided in this press release.  Gallagher's management believes that these presentations provide useful information to management, analysts and investors regarding financial and business trends relating to Gallagher's results of operations and financial condition.  Gallagher's industry peers may provide similar supplemental non-GAAP information with respect to one or more of these measures, although they may not use the same or comparable terminology and may not make identical adjustments.  The non-GAAP information provided by Gallagher should be used in addition to, but not as a substitute for, the GAAP information provided.  Certain reclassifications have been made to the prior year amounts reported in this press release in order to conform them to the current year presentation.

Adjusted presentation - Gallagher believes that the adjusted presentations of the current and prior year information, presented in this earnings release, provide stockholders and other interested persons with useful information regarding certain financial metrics of Gallagher that may assist such persons in analyzing Gallagher's operating results as they develop a future earnings outlook for Gallagher.  The after-tax amounts related to the adjustments were computed using the normalized effective tax rate for each respective period.

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• Adjusted revenues and expenses - Gallagher defines these measures as revenues, compensation expense and operating expense, respectively, each adjusted to exclude net gains realized from sales of books of business, acquisition integration costs, claim portfolio transfer ramp up fees/costs, client bankruptcy impact, workforce related charges, lease termination related charges, acquisition related adjustments and the impact of foreign currency translation, as applicable.  Integration costs include costs related to transactions not expected to occur on an ongoing basis in the future once we fully assimilate the applicable acquisition.  These costs are typically associated with redundant workforce, extra lease space, duplicate services and external costs incurred to assimilate the acquisition with our IT related systems.
• Adjusted ratios - Adjusted compensation expense ratio and adjusted operating expense ratio are defined as adjusted compensation expense and adjusted operating expense, respectively, each divided by adjusted revenues.

Earnings Measures - Gallagher believes that each of EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin and diluted net earnings per share (as adjusted) for the Brokerage and Risk Management segments, as defined below, provides a meaningful representation of its operating performance.  Gallagher considers EBITDAC and EBITDAC margin as a way to measure financial performance on an ongoing basis.  Adjusted EBITDAC, adjusted EBITDAC margin and diluted net earnings per share (as adjusted) for the Brokerage and Risk Management segments are presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.

• EBITDAC - Gallagher defines this measure as net earnings before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables.
• EBITDAC margin - Gallagher defines this measure as EBITDAC divided by total revenues.
• Adjusted EBITDAC - Gallagher defines this measure as EBITDAC adjusted to exclude net gains realized from sales of books of business, acquisition integration costs, client bankruptcy impact, workforce related charges, lease termination related charges, claim portfolio transfer ramp up fees/costs, acquisition related adjustments and the period-over-period impact of foreign currency translation, as applicable.
• Adjusted EBITDAC margin - Gallagher defines this measure as adjusted EBITDAC divided by total adjusted revenues (defined above).
• Diluted net earnings per share (as adjusted) for the Brokerage and Risk Management segments - Gallagher defines this measure as net earnings adjusted to exclude the after-tax impact of net gains realized from sales of books of business, acquisition integration costs, client bankruptcy impact, claim portfolio transfer ramp up fees/costs, the impact of foreign currency translation, workforce related charges, lease termination related charges and acquisition related adjustments divided by diluted weighted average shares outstanding. 
• Organic Revenues - For the Brokerage segment, organic change in base commission and fee revenues excludes the first twelve months of net commission and fee revenues generated from acquisitions accounted for as purchases and the net commission and fee revenues related to operations disposed of in each year presented.  These commissions and fees are excluded from organic revenues in order to help interested persons analyze the revenue growth associated with the operations that were a part of Gallagher in both the current and prior year.  In addition, change in base commission and fee organic growth excludes the impact of supplemental commission and contingent commission revenues, the impact of prior year large account wins and the period-over-period impact of foreign currency translation.  The amounts excluded with respect to foreign currency translation are calculated by applying current year foreign exchange rates to the same periods in the prior year.  For the Risk Management segment, organic change in fee revenues excludes the first twelve months of fee revenues generated from acquisitions accounted for as purchases and the fee revenues related to operations disposed of in each year presented.  In addition, change in organic growth excludes the impact of run-off of the New South Wales Workers' Compensation Scheme and the period-over-period impact of foreign currency translation to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability or are due to the limited-time nature of these revenue sources. 

These revenue items are excluded from organic revenues in order to determine a comparable measurement of revenue growth that is associated with the revenue sources that are expected to continue in the current year and beyond.  Gallagher has historically viewed organic revenue growth as an important indicator when assessing and evaluating the performance of its Brokerage and Risk Management segments.  Gallagher also believes that using this measure allows readers of our financial statements to measure, analyze and compare the growth from its Brokerage and Risk Management segments in a meaningful and consistent manner.

Reconciliation of Non-GAAP Information Presented to GAAP Measures - This press release includes tabular reconciliations to the most comparable GAAP measures, as follows: for EBITDAC (on page 10), for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share (on pages 1 and 2), for organic revenue measures (on pages 3 and 5, respectively, for the Brokerage and Risk Management segments), for adjusted compensation and operating expenses and adjusted EBITDAC margin (on pages 4 and 5, respectively, for the Brokerage and Risk Management segments).  Reported compensation and operating expense ratios can be found in the supplemental quarterly data available at www.ajg.com.

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Contact: Marsha Akin Director - Investor Relations 630-285-3501 or [email protected]

 

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SOURCE Arthur J. Gallagher & Co.