Arthur J. Gallagher & Co. Announces Third Quarter 2016 Financial Results

ITASCA, Ill., Oct. 27, 2016 /PRNewswire/ -- Arthur J. Gallagher & Co. (NYSE: AJG) today reported its financial results for the quarter ended September 30, 2016.  Management will host a webcast conference call to discuss these results on Friday, October 28, 2016 at 9:00 a.m. ET/8:00 a.m. CT.  To listen to the call, and for printer-friendly formats of this release and the "Supplemental Quarterly Data" and "CFO Commentary," which may also be referenced during the call, please visit ajg.com/IR.  These documents contain both GAAP and non-GAAP measures.  Investors and other users of this information should read carefully the section entitled "Information Regarding Non-GAAP Measures" beginning on page 9. 

"My recent meetings with dozens of insurance carriers, and our own internal data suggests the domestic insurance market remains stable," said J. Patrick Gallagher, Jr., Chairman, President and CEO.  "This is a market where expertise and value added service should drive growth. Around the world, we are successfully executing our strategies – we are growing organically, expanding through M&A, making strides in productivity and quality and our culture is thriving. We are well positioned for a strong finish to 2016 and for another excellent year in 2017."

(1 of 14)

 

(2 of 14)

 

(3 of 14)

Brokerage Segment Reported GAAP to Adjusted Non-GAAP Reconciliations (dollars in millions):

Of the 3.4% growth in total organic revenues for third quarter 2016, domestic posted approximately 4% growth and international posted approximately 2% growth. 

(4 of 14)

Brokerage Segment Reported GAAP to Adjusted Non-GAAP Reconciliations (continued):

 

 

(5 of 14)

Risk Management Segment Reported GAAP to Adjusted Non-GAAP Reconciliations (dollars in millions):

Third quarter 2016 organic fees were unfavorably impacted primarily by lesser arising domestic claim counts and lower international performance bonus fees.

 

(6 of 14)

Risk Management Segment Reported GAAP to Adjusted Non-GAAP Reconciliations (continued):

Corporate Segment Reported GAAP to Adjusted Non-GAAP Reconciliations (dollars in millions):

Interest and banking costs and debt - At September 30, 2016, Gallagher had $2,400.0 million of borrowings from private placements, $258.0 million of short-term borrowings under its line of credit facility and $133.1 million outstanding under a two year revolving loan facility that provides funding for premium finance receivables, which are fully collateralized by the underlying premiums held by insurance carriers and as such are excluded from our debt covenant computations.  

(7 of 14)

Clean energy - Consists of the operating results related to our investments in 34 clean coal production plants and royalty income from clean coal licenses related to Chem-Mod LLC.  Additional information regarding these results is available in the "CFO Commentary" at ajg.com/IR.

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 Taxes

Gallagher allocates the provision for income taxes to its Brokerage and Risk Management segments using the local country statutory rates.  Gallagher's consolidated effective tax rate for the quarters ended September 30, 2016 and 2015 was (37.4)% and (33.3)%, respectively, which was lower than the statutory rate due to the amount of IRC Section 45 tax credits earned.

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 2016, Gallagher did not sell any shares of its common stock under the program.

Balance Sheet Reclassifications

In first quarter 2016, Gallagher adopted new accounting guidance related to the presentation of both debt issuance costs and income taxes in the consolidated balance sheet.  The new debt issuance costs guidance requires such costs to be presented in the balance sheet as a direct deduction from the associated debt liability.  The new income tax guidance requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent components.  The new guidance has been applied on a retrospective basis.  Accordingly, Gallagher reclassified debt issuance costs of $3.3 million included in Other noncurrent assets to Corporate related borrowings - noncurrent in its consolidated balance sheet as of December 31, 2015.  In addition, Gallagher reclassified the current deferred taxes to noncurrent in its consolidated balance sheet as of December 31, 2015, which increased Noncurrent deferred income taxes by $122.1 million and increased Other noncurrent liabilities by $4.6 million.

Webcast Conference Call

Gallagher will host a webcast conference call on Friday, October 28, 2016 at 9:00 a.m. ET/8:00 a.m. CT.  To listen to this call, please go to ajg.com/IR.  The call will be available for replay at such website for at least 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 33 countries and offers client-service capabilities in more than 150 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; (v) the economic environment; and (vi) anticipated acquisition integration costs.

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 (including a possible economic downturn or recession in the U.K. because of the recent Brexit vote), changes in premium rates and in insurance markets generally, changes in the insurance brokerage industry's competitive landscape and the uncertainties and challenges inherent in the acquisition integration process - all of which could impact (iii) - (vi) above.

(8 of 14)

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, 2015 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 (adjusted EPS), 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.  See further below for definitions and the reason each of these measures is useful to investors.  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.  As disclosed in its most recent Proxy Statement, Gallagher does not make determinations regarding executive officer incentive compensation on the basis of "adjusted" measures such as those described below in "Adjusted revenues and expenses" or "Adjusted EBITDAC".  Instead, incentive compensation determinations for executive officers are made on the basis of revenue and EBITAC (defined as earnings before interest, taxes, amortization and change in estimated earnout payables) for the combined brokerage and risk management segments.  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 Non-GAAP presentation - Gallagher believes that the adjusted non-GAAP 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.  See pages 13 and 14 for a reconciliation of the adjustments made to income taxes.

• Adjusted revenues and expenses - Revenues, compensation expense and operating expense, respectively, each adjusted to exclude the following:
  • Net gains realized from sales of books of business, which are primarily net proceeds received related to sales of books of business and other divestiture transactions.
  • Acquisition integration costs, which include costs related to certain of our large acquisitions, outside the scope of our usual tuck-in strategy, 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.
  • Workforce related charges, which primarily include severance costs related to employee terminations and other costs associated with redundant workforce.
  • Lease termination related charges, which primarily include costs related to terminations of real estate leases and abandonment of leased space.
  • Acquisition related adjustments, which include change in estimated acquisition earnout payables adjustments, impacts of acquisition valuation true-ups, impairment charges and acquisition related compensation charges.
  • The impact of foreign currency translation, as applicable.  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.
• Adjusted ratios - Adjusted compensation expense and adjusted operating expense, respectively, each divided by adjusted revenues.

Non-GAAP Earnings Measures - Gallagher believes that each of EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS for the Brokerage and Risk Management segments, as defined below, provides a meaningful representation of its operating performance.  Adjusted EPS is a performance measure and should not be used as a measure of Gallagher's liquidity.  Gallagher also considers EBITDAC and EBITDAC margin as ways to measure financial performance on an ongoing basis.  In addition, adjusted EBITDAC, adjusted EBITDAC margin and adjusted EPS 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 - Net earnings before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables.
• EBITDAC margin - EBITDAC divided by total revenues.

(9 of 14)

• Adjusted EBITDAC - EBITDAC adjusted to exclude net gains realized from sales of books of business, acquisition integration costs,  workforce related charges, lease termination related charges, acquisition related adjustments and the period-over-period impact of foreign currency translation, as applicable. 
• Adjusted EBITDAC margin - Adjusted EBITDAC divided by total adjusted revenues (defined above).
• Adjusted EPS for the Brokerage and Risk Management segments - Net earnings adjusted to exclude the after-tax impact of net gains realized from sales of books of business, acquisition integration 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 (a non-GAAP measure) - 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 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 period-over-period impact of foreign currency translation.  For the Risk Management segment, organic change in fee revenues excludes the first twelve months of fee revenues generated from acquisitions 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 other closed down operations 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, but non-GAAP, 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 non-GAAP 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 pages 11 and 12), for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share (on pages 2 and 3), for organic revenue measures (on pages 4 and 6, respectively, for the Brokerage and Risk Management segments), for adjusted compensation and operating expenses and adjusted EBITDAC margin (on pages 5 and 7, respectively, for the Brokerage and Risk Management segments).  Reported compensation and operating expense ratios can be found in the "Supplemental Quarterly Data" available at ajg.com/IR.

(10 of 14)

(11 of 14)

(12 of 14)

 

(13 of 14)

 

(14 of 14)

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/arthur-j-gallagher--co-announces-third-quarter-2016-financial-results-300353003.html

SOURCE Arthur J. Gallagher & Co.