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8-K - 8-K - Arthur J. Gallagher & Co.d914561d8k.htm

Exhibit 99.1

NEWS RELEASE

 

LOGO

ARTHUR J. GALLAGHER & CO. ANNOUNCES

FIRST QUARTER 2015 FINANCIAL RESULTS

ITASCA, IL, April 24, 2015 — Arthur J. Gallagher & Co. (NYSE: AJG) today reported its financial results for the quarter ended March 31, 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 their most comparable GAAP measures, please see “Information Regarding Non-GAAP Measures” beginning on page 7.

“We are off to an excellent start in 2015,” said J. Patrick Gallagher, Jr., Chairman, President and CEO. “Our revenue momentum continues. In the first quarter, our combined Brokerage and Risk Management segments posted 30% growth in adjusted revenues, of which 6.0% was total organic growth. Our adjusted EBITDAC increased 46% and adjusted net earnings per share grew 18%. We also improved our adjusted EBITDAC margin 208 basis points compared to the first quarter of 2014.”

 

    Our Brokerage segment had a terrific quarter. Adjusted revenues increased 36%, of which 4.5% was total organic growth, adjusted EBITDAC increased 52% and we improved our adjusted EBITDAC margin 214 basis points. During the first quarter, we completed 11 acquisitions with annualized revenues of nearly $34 million.

 

    Our Risk Management segment had an outstanding quarter. Total organic revenues increased 10.9%, improved our adjusted EBITDAC margin 124 basis points and we exceeded our 16.5% margin target.

 

    Our clean energy investments had an excellent quarter.

“We remain comfortable with the current rate environment and believe it is rational. We are seeing insurance carriers continuing to focus on profitable underwriting, quoting appropriate prices on a line-by-line basis which allows us to demonstrate our expertise and high-quality value-added service. In addition, we are seeing our clients slowly expand their businesses and payrolls. Our global team is energized and well positioned for 2015.”

The following table provides information that management believes is helpful when comparing 2015 revenues, EBITDAC and diluted net earnings per share with the same periods 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, and the reconciliation for EBITDAC is provided on page 9.

Quarter Ended March 31

 

     Revenues     EBITDAC    

Diluted Net

Earnings Per Share

 

Segment

   1st Q 15      1st Q 14      Chg     1st Q 15     1st Q 14     Chg     1st Q 15     1st Q 14     Chg  
     (in millions)        (in millions)       

Brokerage, as adjusted

   $ 750.2       $ 552.6         36   $ 166.9      $ 109.6        52   $ 0.36      $ 0.29     

Gains on book sales

     0.9         1.0           0.9        1.0          —          —       

Acquisition integration

     —           —             (20.8     (6.5       (0.08     (0.03  

Workforce & lease termination

     —           —             (8.5     (2.0       (0.03     (0.01  

Acquisition related adjustments

     —           —             —          (1.1       (0.03     (0.01  

Levelized foreign currency translation

     —           10.8           —          0.6          —          —       
  

 

 

    

 

 

      

 

 

   

 

 

     

 

 

   

 

 

   

Brokerage, as reported

  751.1      564.4      138.5      101.6      0.22      0.24   
  

 

 

    

 

 

      

 

 

   

 

 

     

 

 

   

 

 

   

Risk Management, as adjusted

  177.2      160.0      11   29.8      24.9      20   0.09      0.09   

Workforce & lease termination

  —        —        (0.2   (0.4   —        —     

Claim portfolio transfer ramp up

  —        —        —        (1.2   —        (0.01

Levelized foreign currency translation

  —        4.2      —        1.2      —        0.01   
  

 

 

    

 

 

      

 

 

   

 

 

     

 

 

   

 

 

   

Risk Management, as reported

  177.2      164.2      29.6      24.5      0.09      0.09   
  

 

 

    

 

 

      

 

 

   

 

 

     

 

 

   

 

 

   

Total Brokerage & Risk Management, as reported

$ 928.3    $ 728.6    $ 168.1    $ 126.1      0.31      0.33   
  

 

 

    

 

 

      

 

 

   

 

 

     

 

 

   

 

 

   

Corporate, as adjusted

  (0.18   (0.12

Non-cash gains on changes in ownership levels

  —        0.15   
                

 

 

   

 

 

   

Corporate, as reported

  (0.18   0.03   
                

 

 

   

 

 

   

Total Company, as reported

$ 0.13    $ 0.36   
                

 

 

   

 

 

   

Total Brokerage & Risk Management, as adjusted

$ 927.4    $ 712.6      30 $ 196.7    $ 134.5      46 $ 0.45    $ 0.38      18
  

 

 

    

 

 

      

 

 

   

 

 

     

 

 

   

 

 

   

 

(1 of 11)


Brokerage Segment First 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).

 

Organic Revenues (non-GAAP)

        1st Q 15     1st Q 14  

Base Commissions and Fees

       

Commissions as reported

      $ 519.7      $ 411.5   

Fees as reported

        146.1        93.4   

Less commissions and fees from acquisitions

        (143.6     —     

Less non-owned portion of consolidated entities

   *      (8.4     —     

Less disposed of operations

        —          (3.5

Levelized foreign currency translation

        —          (9.6
     

 

 

   

 

 

 

Organic base commissions and fees

$ 513.8    $ 491.8   
     

 

 

   

 

 

 

Organic change in base commissions and fees

  4.5
     

 

 

   

Supplemental Commissions

Supplemental commissions as reported

$ 26.9    $ 25.4   

Less supplemental commissions from acquisitions

  (5.1   —     

Levelized foreign currency translation

  —        (0.9
     

 

 

   

 

 

 

Organic supplemental commissions

$ 21.8    $ 24.5   
     

 

 

   

 

 

 

Organic change in supplemental commissions

  -11.0
     

 

 

   

Contingent Commissions

Contingent commissions as reported

$ 44.5    $ 32.2   

Less contingent commissions from acquisitions

  (6.8   —     

Levelized foreign currency translation

  —        (0.1
     

 

 

   

 

 

 

Organic contingent commissions

$ 37.7    $ 32.1   
     

 

 

   

 

 

 

Organic change in contingent commissions

  17.5
     

 

 

   

Total organic change

  4.5
     

 

 

   

 

* Gallagher controls, but owns less than 50% of, certain entities and must consolidate 100% of their results. Accordingly, we have excluded the non-owned portion of those entities’ revenues from the organic revenue computation.

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

 

         1st Q 15      1st Q 14  

Shares issued for acquisitions and earnouts

       1,280,000         738,000   

Number of acquisitions closed

       11         9   

Annualized revenues acquired (in millions)

     $ 33.6       $ 17.8   
    

 

 

    

 

 

 

Rollover revenues recognized in period from 2014 acquisitions (in millions)

$ 162.4   

Portion of Q1 2015 acquisitions revenues recognized in period (in millions)

  5.6   
    

 

 

    

Total

*

$ 168.0   
    

 

 

    

 

* Consists of $143.6 million recognized in commissions and fees, $11.9 million in supplemental and contingent commissions and $12.5 million in investment income and gains related to premium funding operations acquired.

 

(2 of 11)


Brokerage Segment First Quarter Highlights (continued)

 

Adjusted Compensation Expense and Ratio (non-GAAP)

       1st Q 15     1st Q 14  

Reported amounts

     $ 460.3      $ 352.6   

Acquisition integration

       (11.6     (3.6

Workforce and lease termination related charges

       (8.5     (1.5

Acquisition related adjustments

       —          (1.1

Levelized foreign currency translation

       —          (7.7
    

 

 

   

 

 

 

Adjusted amounts

$ 440.2    $ 338.7   
    

 

 

   

 

 

 

Adjusted ratios using adjusted revenues on page 1

*   58.7   61.3
    

 

 

   

 

 

 

 

  * Adjusted first quarter compensation ratio was 2.6 pts lower than the same period in 2014. This ratio was primarily impacted by lower overall compensation ratios of the combined larger recent acquisitions of 1.1 pts and salary and benefits savings of 1.1 pts related to headcount controls.

 

Adjusted Operating Expense and Ratio (non-GAAP)

       1st Q 15     1st Q 14  

Reported amounts

     $ 152.3      $ 110.2   

Acquisition integration

       (9.2     (2.9

Workforce and lease termination related charges

       —          (0.5

Levelized foreign currency translation

       —          (2.5
    

 

 

   

 

 

 

Adjusted amounts

$ 143.1    $ 104.3   
    

 

 

   

 

 

 

Adjusted ratios using adjusted revenues on page 1

*

  19.1   18.9
    

 

 

   

 

 

 

 

  * Adjusted first quarter operating expense ratio was 0.2 pts higher than the same period in 2014. All items were essentially consistent with the prior year.

 

Adjusted EBITDAC (non-GAAP)

        1st Q 15     1st Q 14  

Total EBITDAC — see page 9 for computation

      $ 138.5      $ 101.6   

Gains from books of business sales

        (0.9     (1.0

Acquisition integration **

        20.8        6.5   

Acquisition related adjustments

        —          1.1   

Workforce and lease termination related charges

        8.5        2.0   

Levelized foreign currency translation

        —          (0.6
     

 

 

   

 

 

 

Adjusted EBITDAC

$ 166.9    $ 109.6   
     

 

 

   

 

 

 

Adjusted EBITDAC change

  52.3   34.4
     

 

 

   

 

 

 

Adjusted EBITDAC margin

*   22.3   19.8
     

 

 

   

 

 

 

 

  * Adjusted first quarter EBITDAC margin was 2.5 pts higher than the same period in 2014 (2.1 pts higher excluding the noncontrolled portion of consolidated entities). Of this 2.1 pts improvement, 1.0 pts was attributed to higher overall EBITDAC margins of the combined larger recent acquisitions, 0.9 pts from Gallagher’s remaining businesses and 0.2 pts related to Gallagher’s portion of partially owned consolidated entities. The contribution to EBITDAC of the partially owned consolidated entities is seasonally the largest by far in the first quarter.
  ** Acquisition integration costs consist mostly of IT system conversion costs, professional fees, branding and compensation related to the larger recent acquisitions.

 

(3 of 11)


Risk Management Segment First 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):

 

Organic Revenues (non-GAAP)

       1st Q 15     1st Q 14  

Fees

     $ 173.8      $ 159.7   

International performance bonus fees

       3.3        4.1   
    

 

 

   

 

 

 

Fees as reported

  177.1      163.8   

Levelized foreign currency translation

  —        (4.1
    

 

 

   

 

 

 

Organic fees

$ 177.1    $ 159.7   
    

 

 

   

 

 

 

Organic change in fees

*

  10.9   5.7
    

 

 

   

 

 

 

 

  * Includes approximately $5.0 million of fee revenues in both first quarter 2015 and 2014 related to the previously announced run-off of a contract with the new South Wales Workers Compensation Scheme in Australia.

 

Adjusted Compensation Expense and Ratio (non-GAAP)

       1st Q 15     1st Q 14  

Reported amounts

     $ 106.9      $ 103.4   

Claim portfolio transfer ramp up costs

       —          (0.8

Workforce and lease termination related charges

       (0.2     (0.4

Levelized foreign currency translation

       —          (2.5
    

 

 

   

 

 

 

Adjusted amounts

$ 106.7    $ 99.7   
    

 

 

   

 

 

 

Adjusted ratios using adjusted revenues on page 1

*   60.2   62.3
    

 

 

   

 

 

 

 

  * Adjusted first quarter compensation ratio was 2.1 pts lower than the same period in 2014. This ratio was primarily impacted by reductions in salary and incentive compensation of 1.1 pts, savings in employee benefits of 0.4 pts and savings in temporary help of 0.4 pts, all related to headcount controls.

 

Adjusted Operating Expense and Ratio (non-GAAP)

       1st Q 15     1st Q 14  

Reported amounts

     $ 40.7      $ 36.3   

Claim portfolio transfer and ramp up costs

       —          (0.4

Levelized foreign currency translation

       —          (0.5
    

 

 

   

 

 

 

Adjusted amounts

$ 40.7    $ 35.4   
    

 

 

   

 

 

 

Adjusted ratios using adjusted revenues on page 1

*   23.0   22.1
    

 

 

   

 

 

 

 

  * Adjusted first quarter operating expense ratio was 0.9 pts higher than the same period in 2014. This ratio was primarily impacted by higher professional fees of 0.7 pts.

 

Adjusted EBITDAC (non-GAAP)

   1st Q 15     1st Q 14  

Total EBITDAC — see page 9 for computation

   $ 29.6      $ 24.5   

Workforce and lease termination related charges

     0.2        0.4   

Claim portfolio transfer and ramp up

     —          1.2   

Levelized foreign currency translation

     —          (1.2
  

 

 

   

 

 

 

Adjusted EBITDAC

$ 29.8    $ 24.9   
  

 

 

   

 

 

 

Adjusted EBITDAC change

  19.7   6.5
  

 

 

   

 

 

 

Adjusted EBITDAC margin

  16.8   15.6
  

 

 

   

 

 

 

 

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Corporate Segment First 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):

 

     2015     2014-Adjusted (1)        
     Pretax
Earnings
(Loss)
    Income
Tax
Benefit
     Net
Earnings
(Loss)
    Pretax
Earnings
(Loss) (2)
    Income
Tax
Benefit
     Net
Earnings
(Loss)
       

1st Quarter

                

Interest and banking costs

   $ (26.3   $ 10.5       $ (15.8   $ (16.6   $ 6.6       $ (10.0  

Clean energy related (2)

     (23.3     17.8         (5.5     (21.2     21.0         (0.2  

Acquisition costs

     (1.7     0.2         (1.5     (2.9     0.4         (2.5  

Corporate

     (9.0     2.1         (6.9     (5.0     1.2         (3.8  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

Total 1st quarter

$ (60.3 $ 30.6    $ (29.7 $ (45.7 $ 29.2    $ (16.5
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

Diluted net earnings (loss) per share, as adjusted

  

$ (0.18 $ (0.12

Non-cash gains on changes in ownership levels

  

  —        0.15      (1
       

 

 

        

 

 

   

Diluted net earnings (loss) per share, as reported

  

$ (0.18 $ 0.03   
       

 

 

        

 

 

   

 

(1) Excludes non-cash tax gain from re-consolidation accounting gains related to clean-energy investments recorded in the first quarter of 2014 and related tax credit recognition.
(2) Pretax earnings are presented net of amounts attributable to noncontrolling interests of $6.6 million in 2015 and $8.8 million in 2014.

Debt, interest and banking - At March 31, 2015, Gallagher had $2,125.0 million of borrowings from private placements and $115.0 million of short-term borrowings under its line of credit facility. On June 16, 2014 we entered into a 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 $175.0 million, of which $95.8 million was outstanding at March 31, 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.

At-the-market equity program - Gallagher has an at-the-market equity program under which up to $166.3 million of its common stock remaining in the program may be sold through Morgan Stanley & Co. LLC as sales agent. During first quarter 2015, Gallagher did not sell 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 Portion of Estimated  
($ in millions)    Gallagher’s
Tax-Effected
Book Value At
March 31, 2015
     Additional
Required

Tax-Effected
Capital
Investment
     Ultimate
Annual
After-tax
Earnings *
 

Investments that own 2009 Era Plants

        

10 Under long-term production contracts

   $ 8.6       $ —         $ 20.0   

4 In negotiations for long-term production contracts

     1.3         Not Estimable         Not Estimable   

Investments that own 2011 Era Plants

        

16 Under long-term production contracts

     31.8         3.3         75.0   

4 In negotiations for long-term production contracts

     1.3         Not Estimable         Not Estimable   

 

* Reflects management’s current best estimate of the ultimate future potential annual after-tax earnings based on production estimates from the host utilities. However, host utilities do not consistently utilize the refined fuel plants at ultimate production levels due to seasonal electricity demand, as well as for many other operational, regulatory and environmental compliance reasons.

 

(5 of 11)


Corporate Segment First Quarter Highlights (continued)

 

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 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 Taxes

Gallagher 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 March 31, 2015 and 2014 was (4.9)% and (5.7)%, respectively. Gallagher’s tax rate for the quarters ended March 31, 2015 and 2014 was lower than the statutory rate due to the amount of IRC Section 45 tax credits earned.

Segment Reclassification

In first quarter 2015, Gallagher transferred management of claims handling operation from the Brokerage segment to the Risk Management segment. Totals revenues related to this operation were $4.9 million and $4.2 million in first quarter 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 the Gallagher’s previously reported consolidated net earnings. See the quarterly results in the financial supplement for the reclassification of all quarters provided.

Webcast Conference Call

Gallagher will host a webcast conference call on Friday, April 24, 2015 at 8:00 a.m. ET/7:00 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 30 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, including 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 could impact (i) and (ii) above; and

 

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    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 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 related to organic revenues and EBITDAC, 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, provides 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.

 

    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, 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, 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, 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.

 

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    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 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. In addition, for entities where we consolidate their operations into our results, but own less than 60%, we only include our proportional share of the revenues in the organic computation. 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 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 9), for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share (on page 1), for organic revenue measures (on pages 2 and 4, respectively, for the Brokerage and Risk Management segments), for adjusted compensation and operating expenses and adjusted EBITDAC margin (on pages 3 and 4, 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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Arthur J. Gallagher & Co.

Reported Statement of Earnings and EBITDAC - 1st Qtr Ended March 31,

(Unaudited - in millions except per share, percentage and workforce data)

 

     1st Q Ended
Mar 31, 2015
     1st Q Ended
Mar 31, 2014
 

Brokerage Segment

     

Commissions

   $ 519.7       $ 411.5   

Fees

     146.1         93.4   

Supplemental commissions

     26.9         25.4   

Contingent commissions

     44.5         32.2   

Investment income and gains realized on books of business sales (1)

     13.9         1.9   
  

 

 

    

 

 

 

Revenues

  751.1      564.4   
  

 

 

    

 

 

 

Compensation

  460.3      352.6   

Operating

  152.3      110.2   

Depreciation

  12.9      8.9   

Amortization

  54.0      37.3   

Change in estimated acquisition earnout payables

  10.6      5.1   
  

 

 

    

 

 

 

Expenses

  690.1      514.1   
  

 

 

    

 

 

 

Earnings before income taxes

  61.0      50.3   

Provision for income taxes (2)

  20.4      17.8   
  

 

 

    

 

 

 

Net earnings

  40.6      32.5   

Net earnings (loss) attributable to noncontrolling interests

  3.9      (0.3
  

 

 

    

 

 

 

Net earnings attributable to controlling interests

$ 36.7    $ 32.8   
  

 

 

    

 

 

 

EBITDAC

Net earnings

$ 40.6    $ 32.5   

Provision for income taxes

  20.4      17.8   

Depreciation

  12.9      8.9   

Amortization

  54.0      37.3   

Change in estimated acquisition earnout payables

  10.6      5.1   
  

 

 

    

 

 

 

EBITDAC

$ 138.5    $ 101.6   
  

 

 

    

 

 

 

 

     1st Q Ended
Mar 31, 2015
     1st Q Ended
Mar 31, 2014
 

Risk Management Segment

     

Fees

   $ 177.1       $ 163.8   

Investment income

     0.1         0.4   
  

 

 

    

 

 

 

Revenues

  177.2      164.2   
  

 

 

    

 

 

 

Compensation

  106.9      103.4   

Operating

  40.7      36.3   

Depreciation

  5.3      5.0   

Amortization

  0.7      0.8   

Change in estimated acquisition earnout payables

  —        —     
  

 

 

    

 

 

 

Expenses

  153.6      145.5   
  

 

 

    

 

 

 

Earnings before income taxes

  23.6      18.7   

Provision for income taxes

  8.7      6.8   
  

 

 

    

 

 

 

Net earnings

  14.9      11.9   

Net earnings attributable to noncontrolling interests

  —        —     
  

 

 

    

 

 

 

Net earnings attributable to controlling interests

$ 14.9    $ 11.9   
  

 

 

    

 

 

 

EBITDAC

Net earnings

$ 14.9    $ 11.9   

Provision for income taxes

  8.7      6.8   

Depreciation

  5.3      5.0   

Amortization

  0.7      0.8   
  

 

 

    

 

 

 

EBITDAC

$ 29.6    $ 24.5   
  

 

 

    

 

 

 

 

     1st Q Ended
Mar 31, 2015
    1st Q Ended
Mar 31, 2014
 

Corporate Segment

    

Revenues from consolidated clean coal facilities

   $ 289.5      $ 154.3   

Royalty income from clean coal licenses

     14.7        14.6   

Loss from unconsolidated clean coal facilities

     (0.3     (2.5

Other net revenues

     (0.9     20.0   
  

 

 

   

 

 

 

Revenues

  303.0      186.4   
  

 

 

   

 

 

 

Cost of revenues from consolidated clean coal facilities

  309.3      171.0   

Compensation

  8.0      10.3   

Operating

  10.5      2.3   

Interest

  25.6      16.2   

Depreciation

  3.3      0.9   
  

 

 

   

 

 

 

Expenses

  356.7      200.7   
  

 

 

   

 

 

 

Loss before income taxes

  (53.7   (14.3

Benefit for income taxes

  (30.6   (27.7
  

 

 

   

 

 

 

Net earnings (loss)

  (23.1   13.4   

Net earnings attributable to noncontrolling interests

  6.6      8.8   
  

 

 

   

 

 

 

Net earnings (loss) attributable to controlling interests

$ (29.7 $ 4.6   
  

 

 

   

 

 

 

EBITDAC

Net earnings (loss)

$ (23.1 $ 13.4   

Benefit for income taxes

  (30.6   (27.7

Interest

  25.6      16.2   

Depreciation

  3.3      0.9   
  

 

 

   

 

 

 

EBITDAC

$ (24.8 $ 2.8   
  

 

 

   

 

 

 

See “Information Regarding Non-GAAP Measures” on page 7 of 11 and notes to first quarter 2015 earnings release on page 11 of 11.

 

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Arthur J. Gallagher & Co.

Reported Statement of Earnings and EBITDAC - 1st Qtr Ended March 31,

(Unaudited - in millions except share and per share data)

 

     1st Q Ended
Mar 31, 2015
    1st Q Ended
Mar 31, 2014
 

Total Company

    

Commissions

   $ 519.7      $ 411.5   

Fees

     323.2        257.2   

Supplemental commissions

     26.9        25.4   

Contingent commissions

     44.5        32.2   

Investment income and gains realized on books of business sales

     14.0        2.3   

Revenues from clean coal activities

     303.9        166.4   

Other net revenues - Corporate

     (0.9     20.0   
  

 

 

   

 

 

 

Revenues

  1,231.3      915.0   
  

 

 

   

 

 

 

Compensation

  575.2      466.3   

Operating

  203.5      148.8   

Cost of revenues from clean coal activities

  309.3      171.0   

Interest

  25.6      16.2   

Depreciation

  21.5      14.8   

Amortization

  54.7      38.1   

Change in estimated acquisition earnout payables

  10.6      5.1   
  

 

 

   

 

 

 

Expenses

  1,200.4      860.3   
  

 

 

   

 

 

 

Earnings before income taxes

  30.9      54.7   

Benefit for income taxes

  (1.5   (3.1
  

 

 

   

 

 

 

Net earnings

  32.4      57.8   

Net earnings attributable to noncontrolling interests

  10.5      8.5   
  

 

 

   

 

 

 

Net earnings attributable to controlling interests

$ 21.9    $ 49.3   
  

 

 

   

 

 

 

Diluted net earnings per share

$ 0.13    $ 0.36   
  

 

 

   

 

 

 

Dividends declared per share

$ 0.37    $ 0.36   
  

 

 

   

 

 

 

EBITDAC

Net earnings

$ 32.4    $ 57.8   

Benefit for income taxes

  (1.5   (3.1

Interest

  25.6      16.2   

Depreciation

  21.5      14.8   

Amortization

  54.7      38.1   

Change in estimated acquisition earnout payables

  10.6      5.1   
  

 

 

   

 

 

 

EBITDAC

$ 143.3    $ 128.9   
  

 

 

   

 

 

 

Arthur J. Gallagher & Co.

Consolidated Balance Sheet

(Unaudited - in millions except per share data)

 

     Mar 31, 2015     Dec 31, 2014  

Cash and cash equivalents

   $ 276.8      $ 314.4   

Restricted cash

     1,186.6        1,367.6   

Premiums and fees receivable

     1,543.6        1,462.5   

Other current assets

     587.8        666.7   
  

 

 

   

 

 

 

Total current assets

  3,594.8      3,811.2   

Fixed assets - net

  190.6      195.4   

Deferred income taxes

  395.4      392.6   

Other noncurrent assets

  408.5      385.2   

Goodwill - net

  3,418.0      3,449.6   

Amortizable intangible assets - net

  1,723.6      1,776.0   
  

 

 

   

 

 

 

Total assets

$ 9,730.9    $ 10,010.0   
  

 

 

   

 

 

 

Premiums payable to insurance and reinsurance companies

$ 2,447.0    $ 2,623.3   

Accrued compensation and other accrued liabilities

  654.1      623.7   

Unearned fees

  76.3      66.1   

Other current liabilities

  50.5      61.7   

Premium financing borrowings

  95.8      127.9   

Corporate related borrowings - current

  115.0      140.0   
  

 

 

   

 

 

 

Total current liabilities

  3,438.7      3,642.7   

Corporate related borrowings - noncurrent

  2,125.0      2,125.0   

Other noncurrent liabilities

  947.6      937.2   
  

 

 

   

 

 

 

Total liabilities

  6,511.3      6,704.9   
  

 

 

   

 

 

 

Stockholders’ equity:

Common stock - issued and outstanding

  166.7      164.6   

Capital in excess of par value

  2,722.7      2,649.4   

Retained earnings

  636.0      676.0   

Accumulated other comprehensive loss

  (380.2   (260.6
  

 

 

   

 

 

 

Total controlling interests stockholders’ equity

  3,145.2      3,229.4   

Noncontrolling interests

  74.4      75.7   
  

 

 

   

 

 

 

Total stockholders’ equity

  3,219.6      3,305.1   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 9,730.9    $ 10,010.0   
  

 

 

   

 

 

 

See “Information Regarding Non-GAAP Measures” on page 7 of 11 and notes to first quarter 2015 earnings release on page 11 of 11.

 

(10 of 11)


Arthur J. Gallagher & Co.

Other Information and Notes

(Unaudited - data is rounded where indicated)

 

     1st Q Ended
Mar 31, 2015
     1st Q Ended
Mar 31, 2014
 

OTHER INFORMATION

     

Basic weighted average shares outstanding (000s)

     165,574         134,230   

Diluted weighted average shares outstanding (000s)

     166,777         135,840   

Common shares issued for acquisitions and earnouts (000s)

     1,280         738   

Number of acquisitions closed

     11         9   

Annualized revenues acquired (in millions)

   $ 33.6       $ 17.8   

Number of common shares outstanding at end of period (000s)

     166,657         135,083   

Workforce at end of period (includes acquisitions):

     

Brokerage

     15,118         11,060   

Risk Management

     5,046         4,944   

Total Company

     20,567         16,340   

Notes to First Quarter 2015 Earnings Release

 

(1) The reported investment income and gains realized on books of business sales for 2015 include premium financing income primarily generated by the Crombie/OAMPS operations which were acquired on June 16, 2014. Operating results of the Crombie/OAMPS premium financing business recognized by Gallagher in 2014 and 2015 are as follows (in millions):

 

     2nd Q 2014      3rd Q 2014      4th Q 2014      Full Year 2014      1st Q 2015  

Premium financing interest and fee income (included in investment income line)

   $ 2.1       $ 13.0       $ 11.6       $ 26.7       $ 9.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

  2.1      13.0      11.6      26.7      9.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Compensation and commissions (included in compensation expense line)

  0.9      4.7      4.3      9.9      3.5   

Operating costs and premium financing interest (included in operating expense line)

  0.8      5.3      4.7      10.8      3.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Expenses

  1.7      10.0      9.0      20.7      7.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDAC

$ 0.4    $ 3.0    $ 2.6    $ 6.0    $ 2.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) The Brokerage segment 1st quarter reported income tax rate of 33.4% computed from reported amounts on page 9 of 11 appears to be lower than the 1st quarter 2014 rate of 35.4%. This apparent difference only results because of how we account for non-owned portions of consolidated entities that are organized as limited partnerships and limited liability companies which generate pass-through taxable income (i.e. are not subject to taxes at the entity level). We consolidate the full revenues and expenses of these entities, yet pursuant to ASC 740, Accounting for Income Taxes, we only include in our “Provision for income taxes” line our ownership portion of these entities’ income tax expense. Then, we present on the line “Net earnings attributable to noncontrolling interests” the deduction for the non-owned portion of these entities using an untaxed amount. Conversely, if these entities were corporations, our income tax provision line would reflect the full income tax amount for all of the earnings we consolidate, and then the deduction for the non-owned portion would be at an after-tax amount. While this accounting does not have any impact on our EBITDAC, our bottom-line net earnings, nor our net earnings per share (reported or adjusted), it does produce a perception of a lower income tax rate. The table below makes a reclassification for this accounting and provides an “as if” computation of our Brokerage segment’s income tax rate which we believe is more comparable to the 1st quarter 2014 income tax rate.

 

     1st Q Ended Mar 31, 2015     1st Q Ended
Mar 31, 2014
Reported
 
     Reported     Reclass     “As If”    
           (in millions)        

Earnings before income taxes

   $ 61.0        $  61.0      $ 50.3   

Provision for income taxes

     20.4      $ 1.2        21.6        17.8   
  

 

 

     

 

 

   

 

 

 

Net earnings

  40.6      39.4      32.5   

Net earnings attributable to noncontrolling interests

  3.9      (1.2   2.7      (0.3
  

 

 

     

 

 

   

 

 

 

Net earnings attributable to controlling interests

$ 36.7    $ 36.7    $ 32.8   
  

 

 

     

 

 

   

 

 

 

Reported effective tax rate on earnings attributable to controlling interests

  33.4   35.4
  

 

 

       

 

 

 

“As if” effective tax rate on earnings attributable to controlling interests

  35.4
      

 

 

   

Contact: Marsha Akin

Director - Investor Relations

630-285-3501 or marsha_akin@ajg.com

 

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