ARTHUR J. GALLAGHER & CO. ITASCA, Ill., Feb. 2, 2016 /PRNewswire/ -- Arthur J. Gallagher & Co. (NYSE: AJG) today reported its financial results for the quarter ended December 31, 2015. A printer-friendly format of this earnings release, "Supplemental Quarterly Data" and "CFO Commentary," which includes certain estimates relating to 2016 quarterly results, are available at ajg.com/IR. 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 9.
"We had a strong quarter to finish an excellent year," said J. Patrick Gallagher, Jr., Chairman, President and CEO. "In the fourth quarter, our combined Brokerage and Risk Management segments posted 10% growth in adjusted revenues, of which 4.2% was total organic growth, adjusted EBITDAC increased 12% and our adjusted EBITDAC margin improved 46 basis points. For the year, our combined Brokerage and Risk Management segments posted 17% growth in adjusted revenues, of which 5.1% was total organic growth, adjusted EBITDAC increased 22% and adjusted margins increased 92 basis points. Total company adjusted net earnings per share grew 12%."
-- Our Brokerage segment had a strong quarter. Adjusted total revenues
increased 11%, of which 2.8% was total organic growth, adjusted EBITDAC
increased 12% and we improved our adjusted EBITDAC margin 30 basis
points. For the year, adjusted total revenues increased 19%, of which
3.6% was total organic growth, adjusted EBITDAC increased 22% and we
improved our adjusted EBITDAC margin 70 basis points. During the fourth
quarter, we completed 15 acquisitions with annualized revenues of over
$46 million, bringing our year-to-date total to 42 acquisitions with
estimated annualized revenues totaling $223 million. In 2016, while we
see retail P&C rates as a headwind, we do see P&C exposure growth
offsetting this partially. We also see employment growth and complexity
surrounding the Affordable Care Act as tailwinds for our employee
benefit units. In addition, our history of strong new business
generation, solid retentions and enhanced value-added services for our
carrier partners should all result in further organic growth
opportunities around the world. Integration efforts related to larger
mergers we did in the U.S., Australia, New Zealand and Canada are
effectively done, and we expect our integration efforts in the U.K. to
be nearly done by the end of 2016. Integration costs in 2016 should be
less than half of 2015 amounts. Margins are excellent in most of our
units around the world with some further opportunities for efficiencies
in Australia and our U.K. retail and underwriting businesses.
-- Our Risk Management segment had an outstanding quarter. Total organic
revenues increased 10.5%, adjusted EBITDAC increased 17% and we improved
our adjusted EBITDAC margin 140 basis points. For the year, total
organic revenues increased 11.3%, adjusted EBITDAC increased 18% and we
improved our adjusted EBITDAC margin 120 basis points.
-- Our clean energy investments had a good quarter of consistent production
but warmer weather did adversely impact fourth quarter results by about
a penny. For the year, we topped $100 million in net after-tax
earnings. As we look towards 2016, demand for our remaining plants is
robust and nearly all are committed to locations. Accordingly, we
anticipate that annualized net after-tax earnings from our clean-energy
investments could increase by approximately 15% per annum in 2016 and
2017.
"Finally, our culture is thriving around the world. I am thrilled with the many awards and recognitions we are receiving which are testaments to our unique culture, our high-quality service, and our excellence in leadership and talent development. Most recently, we were recognized by JD Power & Associates as ranking the highest in customer satisfaction among brokers for large commercial insurance, by the Strategic Risk magazine as being the best broker for service in the U.K. and by Advisen's claims satisfaction survey of risk managers and brokers as being the best Third Party Administrator for casualty claims handling. These rankings demonstrate that we are delivering valuable, trusted and thought-leading solutions to our clients."
(1 of 13)
The following table provides information that management believes is helpful when comparing fourth 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 11.
Quarter Ended December 31 Diluted Net
Revenues EBITDAC Earnings Per Share
Segment 4th Q 15 4th Q 14 Chg 4th Q 15 4th Q 14 Chg 4th Q 15 4th Q 14
------- -------- -------- --- -------- -------- --- -------- --------
(in millions) (in millions)
Brokerage, as adjusted $852.1 $770.6 11% $210.9 $189.0 12% $0.50 $0.48
U.K. statutory
income tax rate
change - - - - 0.02 -
Effective
income tax
rate impact - - - - - (0.01)
Gains on book
sales (0.3) 4.7 (0.3) 4.7 - 0.02
Acquisition
integration - - (34.4) (26.5) (0.11) (0.12)
Workforce &
lease
termination - - (5.1) (1.8) (0.02) (0.01)
Acquisition
related
adjustments - - (0.7) - (0.09) 0.01
Levelized foreign
currency
translation - 23.5 - 6.0 - 0.02
Brokerage, as reported 851.8 798.8 170.4 171.4 0.30 0.39
----- ----- ----- ----- ---- ----
Risk Management, as adjusted 181.3 167.8 8% 31.1 26.5 17% 0.08 0.08
Client run-
off - - (3.0) (12.9) (0.02) (0.05)
Workforce &
lease
termination - - (1.0) (0.2) - -
Claim
portfolio
transfer
ramp up - - - (1.7) - (0.01)
Levelized foreign
currency
translation - 4.6 - 1.4 - -
Risk Management, as reported 181.3 172.4 27.1 13.1 0.06 0.02
---- ----
Total Brokerage & Risk
Management,
as reported $1,033.1 $971.2 $197.5 $184.5 0.36 0.41
======== ======
Corporate, as adjusted 0.01 (0.02)
Retirement plan
de-risking
strategies - (0.08)
Litigation
settlement (0.02) -
-----
Corporate, as reported (0.01) (0.10)
----- -----
Total Company, as reported $0.35 $0.31
===== =====
Total Brokerage & Risk
Management,
as adjusted $1,033.4 $938.4 10% $242.0 $215.5 12% $0.58 $0.56
======== ====== =====
Total Company, as adjusted $0.59 $0.54
===== =====
(2 of 13)
The following table provides information that management believes is helpful when comparing 2015 revenues, EBITDAC and diluted net earnings per share with the same period in 2014.
Year Ended December 31 Diluted Net
Revenues EBITDAC Earnings Per Share
Segment Year 15 Year 14 Chg Year 15 Year 14 Chg Year 15 Year 14
------- ------- ------- --- ------- ------- --- ------- -------
(in millions) (in millions)
Brokerage, as adjusted $3,317.3 $2,795.0 19% $866.8 $709.5 22% $2.14 $1.99
U.K. statutory
income tax rate
change - - - - 0.02 -
Gains on book
sales 6.7 7.3 6.7 7.3 0.03 0.03
Acquisition
integration - - (100.9) (67.1) (0.40) (0.33)
Workforce &
lease
termination - - (23.0) (7.8) (0.09) (0.03)
Acquisition
related
adjustments - - (3.4) (1.1) (0.16) (0.02)
Levelized foreign
currency
translation - 94.0 - 22.3 - 0.06
------------------ --- ---
Brokerage, as reported 3,324.0 2,896.3 746.2 663.1 1.54 1.70
------- ------- ----- ----- ---- ----
Risk Management, as adjusted 728.1 660.4 10% 126.0 106.6 18% 0.36 0.34
Client run-
off/
bankruptcy (1.0) - (4.0) (12.9) (0.02) (0.05)
Workforce &
lease
termination - - (2.9) (1.0) (0.01) -
Claim
portfolio
transfer ramp
up - - - (6.4) - (0.03)
Levelized foreign
currency
translation - 21.9 - 5.4 - 0.02
Risk Management, as reported 727.1 682.3 119.1 91.7 0.33 0.28
---- ----
Total Brokerage & Risk
Management, as
reported $4,051.1 $3,578.6 $865.3 $754.8 1.87 1.98
======== ======
Corporate, as adjusted 0.09 (0.02)
Non-cash gains on changes in
ownership levels - 0.09
Retirement plan
de-risking
strategies - (0.08)
Litigation
settlement
net gain 0.10 -
----
Corporate, as reported 0.19 (0.01)
---- -----
Total Company, as reported $2.06 $1.97
===== =====
Total Brokerage & Risk
Management, as
adjusted $4,045.4 $3,455.4 17% $992.8 $816.1 22% $2.50 $2.33
======== ====== =====
Total Company, as adjusted $2.59 $2.31
===== =====
(3 of 13)
Brokerage Segment Fourth 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) 4th Q 15 4th Q 14 Year 15 Year 14
----------------------
Base Commissions and
Fees
Commissions as reported $590.1 $559.5 $2,338.7 $2,083.0
Fees as reported 200.0 173.8 705.8 577.0
Less commissions and
fees from acquisitions (60.5) - (390.6) -
Less disposed of
operations - (1.1) - (9.1)
Levelized foreign
currency translation - (19.7) - (82.1)
Organic base commissions
and fees $729.6 $712.5 $2,653.9 $2,568.8
====== ====== ======== ========
Organic change in base
commissions and fees 2.4% 3.3%
=== ===
Supplemental Commissions
Supplemental commissions
as reported $34.6 $26.5 $125.5 $104.0
Less supplemental
commissions from
acquisitions (0.2) - (9.1) -
Levelized foreign
currency translation - (0.7) - (3.5)
Organic supplemental
commissions $34.4 $25.8 $116.4 $100.5
===== ===== ====== ======
Organic change in
supplemental
commissions 33.3% 15.8%
==== ====
Contingent Commissions
Contingent commissions
as reported $11.9 $16.3 $93.7 $84.7
Less contingent
commissions from
acquisitions (0.4) - (11.6) -
Levelized foreign
currency translation - (0.4) - (1.4)
Organic contingent
commissions $11.5 $15.9 $82.1 $83.3
===== ===== ===== =====
Organic change in
contingent commissions -27.7% -1.4%
===== ====
Total organic change 2.8% 3.6%
=== ===
The following is a summary of Brokerage segment acquisition activity for 2015 and 2014 (in millions except number of acquisitions closed):
4th Q 15 4th Q 14 Year 15 Year 14
Shares issued for acquisitions,
earnouts, secondary offering and
the at-the-market equity
program
0.1 2.4 10.4 28.9
Number of acquisitions closed 15 15 42 60
Estimated annualized revenues
acquired $46.3 $67.6 $223.2 $761.2
===== ===== ====== ======
Rollover revenues recognized in
period from 2014 and Q1, Q2 and
Q3 2015 acquisitions
$55.9 $426.3
Portion of Q4 2015 acquisitions
revenues recognized in period
5.2 5.2
--- ---
Total $61.1 $431.5
===== ======
(4 of 13)
Brokerage Segment Fourth Quarter Highlights (continued)
Adjusted Compensation
Expense and Ratio (non-
GAAP) 4th Q 15 4th Q 14 Year 15 Year 14
------------------------
Reported amounts $509.5 $473.7 $1,939.7 $1,703.1
Acquisition
integration (8.5) (16.1) (38.3) (45.3)
Workforce and
lease
termination
related charges (4.5) (1.8) (20.0) (7.2)
Acquisition
related
adjustments (0.7) - (3.4) (1.1)
Levelized
foreign
currency
translation - (13.1) - (53.6)
Adjusted amounts $495.8 $442.7 $1,878.0 $1,595.9
====== ====== ======== ========
Adjusted ratios
using adjusted
revenues on
pages 2 and 3 * 58.2% 57.5% 56.6% 57.1%
==== ==== ==== ====
* Adjusted fourth quarter
compensation ratio was 0.7 pts
higher compared to the same
period in 2014. This ratio was
primarily impacted by increased
incentive compensation of 0.4
pts. All other items were
essentially consistent with the
prior year.
Adjusted
Operating
Expense and
Ratio (non-
GAAP) 4th Q 15 4th Q 14 Year 15 Year 14
------------
Reported
amounts $171.9 $153.7 $638.1 $530.1
Acquisition
integration (25.9) (10.4) (62.6) (21.8)
Workforce and
lease
termination
related
charges (0.6) - (3.0) (0.6)
Levelized
foreign
currency
translation - (4.4) - (18.1)
Adjusted
amounts $145.4 $138.9 $572.5 $489.6
====== ====== ====== ======
Adjusted ratios
using adjusted
revenues on
pages 2 and 3 * 17.1% 18.0% 17.3% 17.5%
==== ==== ==== ====
* Adjusted fourth quarter
operating expense ratio was
0.9 pts lower than the same
period in 2014. This ratio
was primarily impacted by non-
recurring professional fees in
the prior year quarter of 0.5
pts. The full year operating
expense ratio is in line with
the same period in 2014.
Adjusted EBITDAC
(non-GAAP) 4th Q 15 4th Q 14 Year 15 Year 14
----------------
Total EBITDAC -
see page 11 for
computation $170.4 $171.4 $746.2 $663.1
Gains from books
of business
sales 0.3 (4.7) (6.7) (7.3)
Acquisition
integration * 34.4 26.5 100.9 67.1
Acquisition
related
adjustments 0.7 - 3.4 1.1
Workforce and
lease
termination
related charges 5.1 1.8 23.0 7.8
Levelized
foreign
currency
translation - (6.0) - (22.3)
Adjusted EBITDAC $210.9 $189.0 $866.8 $709.5
====== ====== ====== ======
Adjusted EBITDAC
change 11.6% 47.6% 22.2% 43.5%
==== ==== ==== ====
Adjusted EBITDAC
margin 24.8% 24.5% 26.1% 25.4%
==== ==== ==== ====
* Acquisition integration costs
consist mostly of IT system
conversion costs, professional
fees, branding and compensation
related to the larger 2013 and
2014 acquisitions.
(5 of 13)
Risk Management Segment Fourth 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) 4th Q 15 4th Q 14 Year 15 Year 14
----------------
Fees $178.9 $167.8 $710.9 $662.6
International
performance
bonus fees 2.2 4.4 15.6 18.7
Fees as reported 181.1 172.2 726.5 681.3
Less fees from
acquisitions (1.8) - (3.9) -
Less client run-
off (0.6) (5.9) (17.5) (25.8)
Levelized foreign
currency
translation - (4.6) - (21.8)
Organic fees $178.7 $161.7 $705.1 $633.7
====== ====== ====== ======
Organic change in
fees 10.5% 12.7% 11.3% 10.0%
==== ==== ==== ====
During the year ended December 31, 2015, we completed 2 acquisitions in the Risk Management segment with annualized revenues of $7.6 million.
Adjusted Compensation
Expense and Ratio (non-
GAAP) 4th Q 15 4th Q 14 Year 15 Year 14
------------------------
Reported
amounts $105.7 $103.8 $427.2 $414.2
Client run-off (0.7) (1.7) (0.7) (1.7)
Claim portfolio
transfer ramp
up costs - (1.2) - (3.6)
Workforce and
lease
termination
related
charges (0.5) - (2.2) (0.8)
Levelized
foreign
currency
translation - (2.1) - (12.5)
Adjusted
amounts $104.5 $98.8 $424.3 $395.6
====== ===== ====== ======
Adjusted ratios
using adjusted
revenues on
pages 2 and 3 * 57.6% 58.9% 58.3% 59.9%
==== ==== ==== ====
* Adjusted fourth quarter
compensation ratio was 1.3 pts
lower than the same period in
2014. This ratio was primarily
impacted by non-recurring
adverse medical plan severity in
the prior year quarter of 1.5
pts.
Adjusted
Operating
Expense and
Ratio (non-
GAAP) 4th Q 15 4th Q 14 Year 15 Year 14
------------
Reported
amounts $48.5 $55.5 $180.8 $176.4
Client run-off (2.3) (11.2) (2.3) (11.2)
Claim portfolio
transfer and
ramp up costs - (0.5) - (2.8)
Workforce and
lease
termination
related
charges (0.5) (0.2) (0.7) (0.2)
Levelized
foreign
currency
translation - (1.1) - (4.0)
Adjusted
amounts $45.7 $42.5 $177.8 $158.2
===== ===== ====== ======
Adjusted ratios
using adjusted
revenues on
pages 2 and 3 * 25.2% 25.3% 24.4% 24.0%
==== ==== ==== ====
* Adjusted fourth quarter
operating expense ratio
was 0.1 pts lower than the
same period in 2014. All
items were essentially
consistent with the prior
year.
Adjusted EBITDAC
(non-GAAP) 4th Q 15 4th Q 14 Year 15 Year 14
----------------
Total EBITDAC -see
page 11 for
computation $27.1 $13.1 $119.1 $91.7
Client run-off/
bankruptcy 3.0 12.9 4.0 12.9
Workforce and lease
termination related
charges 1.0 0.2 2.9 1.0
Claim portfolio
transfer and ramp up - 1.7 - 6.4
Levelized foreign
currency translation - (1.4) - (5.4)
Adjusted EBITDAC $31.1 $26.5 $126.0 $106.6
===== ===== ====== ======
Adjusted EBITDAC
change 17.4% 28.6% 18.2% 15.1%
==== ==== ==== ====
Adjusted EBITDAC
margin 17.2% 15.8% 17.3% 16.1%
==== ==== ==== ====
(6 of 13)
Corporate Segment Fourth 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
Pretax Income Net Pretax Income Net
Earnings Tax Earnings Earnings Tax Earnings
(Loss) Benefit (Loss) (Loss) Benefit (Loss)
4th Quarter
-----------
Interest and banking
costs $(26.3) $10.5 $(15.8) $(26.4) $10.6 $(15.8)
Clean energy related
(1) (27.3) 47.7 20.4 (29.8) 52.6 22.8
Acquisition costs (0.9) 0.1 (0.8) (6.9) 2.2 (4.7)
Corporate (11.8) 10.2 (1.6) (9.0) 4.2 (4.8)
Adjusted 4th quarter $(66.3) $68.5 2.2 $(72.1) $69.6 (2.5)
====== ===== ====== =====
Retirement plan de-risking strategies (3) - (12.5)
Litigation settlement
(4) (4.6) -
Reported 4th quarter $(2.4) $(15.0)
===== ======
Year
----
Interest and banking
costs $(105.4) $42.1 $(63.3) $(91.2) $36.5 $(54.7)
Clean energy related
(1) (116.1) 217.0 100.9 (88.7) 179.2 90.5 (2)
Acquisition costs (4.3) 0.6 (3.7) (23.1) 3.3 (19.8)
Corporate (33.2) 14.8 (18.4) (21.5) 2.3 (19.2)
Adjusted full year $(259.0) $274.5 15.5 $(224.5) $221.3 (3.2)
======= ====== ======= ======
Impact from re-consolidation accounting gains - 14.1
Retirement plan de-risking strategies (3) - (12.5)
Litigation settlement
(4) 17.7 -
---- ---
Reported full year $33.2 $(1.6)
===== =====
(1) Pretax earnings for the fourth
quarter are presented net of
amounts attributable to
noncontrolling interests of $7.5
million in 2015 and $3.4 million
in 2014. Pretax earnings for the
year ended December 31 are
presented net of amounts
attributable to noncontrolling
interests of $30.6 million in
2015 and $23.2 million in 2014.
(2) Excludes non-cash gain from re-
consolidation accounting gains
related to clean-energy
investments recorded in the first
quarter of 2014 and reflects the
impact on related tax credit
recognition.
(3) In fourth quarter 2014, Gallagher
recognized a non-cash after-tax
settlement charge of $12.5
million related to retirement
plan de-risking strategies.
(4) During the third quarter of 2015,
Gallagher settled litigation
against certain former U.K.
executives and their advisors for
a pretax gain of $31.0 million
($22.3 million net of costs and
taxes). Incremental expenses
that arose in connection with
this matter will result in after-
tax charges of approximately $4.5
million per quarter through June
30, 2017, which will also be
presented in the Corporate
segment.
Debt, interest and banking - At December 31, 2015, Gallagher had $2,125.0 million of borrowings from private placements and $195.0 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 $160.0 million, of which $137.0 million was outstanding at December 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.
(7 of 13)
Corporate Segment Fourth Quarter Highlights (continued)
At-the-market equity program - Gallagher has an at-the-market equity program under which up to $15.6 million of its common stock remaining in the program may be sold through Morgan Stanley & Co. LLC as sales agent. During fourth quarter 2015, Gallagher did not sell any shares of its common stock under the program.
Clean energy investments - The following provides certain information related to Gallagher's investments in limited liability companies that own 34 clean coal production plants, which produce refined coal using proprietary technologies owned by Chem-Mod. We believe that the production and sale of refined coal at these plants qualifies to receive refined coal tax credits under IRC Section 45 through 2019 for the fourteen 2009 Era Plants and through 2021 for the twenty 2011 Era Plants. The underlying operations of those investments where Gallagher has a controlling ownership interest are consolidated.
Gallagher's Portion of
Estimated
-----------------------
Additional
Gallagher's Required Ultimate
Tax-Effected Tax-Effected Annual
Book Value At Capital After-tax
($ in millions) December 31, 2015 Investment Earnings (1)
----------------- ---------- ------------
Investments that own 2009 Era Plants
------------------------------------
12 Under long-term production contracts $7.8 $4.9 $35.0
2 In late stages of negotiations for long-term
production contracts 0.6 4.2 15.0
Investments that own 2011 Era Plants
------------------------------------
16 Under long-term production contracts 32.4 - 75.0
1 Under long-term production contract estimated
to resume production in 1st quarter 2016 3.2 1.3 10.0
3 In very early discussions with several host
utilities 1.0 Not Estimable Not Estimable
(1) Reflects management's current best
estimate of the ultimate future
potential annual after-tax
earnings based on production
estimates from the host utilities
and preliminary investment partner
assumptions. It is unlikely
Gallagher will fully achieve these
earnings in 2016 as the clean-
coal production plants are
forecasted to start or resume
production at various dates
throughout 2016. Further, host
utilities do not consistently
utilize the refined fuel plants at
ultimate production levels due to
seasonal electricity demand, as
well as many other operational,
regulatory and environmental
compliance reasons. Achieving
these ultimate estimates in 2017
may be possible assuming
successful progress in 2016 in
both plant deployments and
recruitment of investment partners
to purchase portions of our
Section 45 portfolio.
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 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 on adjusted results of approximately 34% to 36% in its Brokerage segment and 36% to 38% in its Risk Management segment. Gallagher's consolidated effective tax rate for the quarters ended December 31, 2015 and 2014 was (140.1)% and (83.2)%, respectively. Gallagher's tax rate for the quarters ended December 31, 2015 and 2014 was lower than the statutory rate due to the amount of IRC Section 45 tax credits earned. In fourth quarter 2015, new tax legislation was enacted in the U.K., which will decrease the U.K. corporation tax rate from the current 20% to 19% effective April 1, 2017 and from 19% to 18% effective April 1, 2020. Accordingly, Gallagher has adjusted its deferred tax asset and liability balances in the quarter to reflect these rate changes, which decreased the provision for income taxes in the Brokerage segment by $4.2 million, or $0.02 per share.
(8 of 13)
Segment Reclassification
In 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 $4.5 million in fourth quarter 2015 and 2014, respectively, and $19.6 million and $18.0 million in the year ended December 31, 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.
Webcast Conference Call
Gallagher will host a webcast conference call on Wednesday, February 3, 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 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 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; 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.
(9 of 13)
-- 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 costs,
client run-off/bankruptcy impact, workforce related charges, lease
termination related charges, acquisition related adjustments and the
impact of foreign currency translation, as applicable. Acquisition
related adjustments include impairment charges, change in estimated
acquisition earnout payables adjustments, impacts of acquisition
valuation true-ups and acquisition related compensation charges.
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 run-off/bankruptcy impact, workforce related
charges, lease termination related charges, claim portfolio transfer
ramp up 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
run-off/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 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 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 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 11), 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 6, 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 13)
Arthur J. Gallagher & Co.
Reported Statement of Earnings and EBITDAC - 4th Qtr and Year Ended December 31,
(Unaudited - in millions except per share, percentage and workforce data)
4th Q Ended 4th Q Ended Year Ended Year Ended
Brokerage Segment Dec 31, 2015 Dec 31, 2014 Dec 31, 2015 Dec 31, 2014
------------ ------------ ------------ ------------
Commissions $590.1 $559.5 $2,338.7 $2,083.0
Fees 200.0 173.8 705.8 577.0
Supplemental commissions 34.6 26.5 125.5 104.0
Contingent commissions 11.9 16.3 93.7 84.7
Investment income and
gains realized on books
of business sales 15.2 22.7 60.3 47.6
Revenues 851.8 798.8 3,324.0 2,896.3
Compensation 509.5 473.7 1,939.7 1,703.1
Operating 171.9 153.7 638.1 530.1
Depreciation 15.2 12.6 54.4 44.4
Amortization 67.2 53.4 237.3 186.3
Change in estimated
acquisition earnout
payables 14.7 0.9 41.1 17.6
Expenses 778.5 694.3 2,910.6 2,481.5
----- ----- ------- -------
Earnings before income
taxes 73.3 104.5 413.4 414.8
Provision for income
taxes 21.6 40.9 145.3 151.0
Net earnings 51.7 63.6 268.1 263.8
Net earnings (loss)
attributable to
noncontrolling interests (1.6) 0.6 1.7 0.9
Net earnings attributable
to controlling interests $53.3 $63.0 $266.4 $262.9
===== ===== ====== ======
EBITDAC
Net earnings $51.7 $63.6 $268.1 $263.8
Provision for income
taxes 21.6 40.9 145.3 151.0
Depreciation 15.2 12.6 54.4 44.4
Amortization 67.2 53.4 237.3 186.3
Change in estimated
acquisition earnout
payables 14.7 0.9 41.1 17.6
EBITDAC $170.4 $171.4 $746.2 $663.1
====== ====== ====== ======
4th Q Ended 4th Q Ended Year Ended Year Ended
Risk Management Segment Dec 31, 2015 Dec 31, 2014 Dec 31, 2015 Dec 31, 2014
------------ ------------ ------------ ------------
Fees $181.1 $172.2 $726.5 $681.3
Investment income 0.2 0.2 0.6 1.0
Revenues 181.3 172.4 727.1 682.3
----- ----- ----- -----
Compensation 105.7 103.8 427.2 414.2
Operating 48.5 55.5 180.8 176.4
Depreciation 6.7 5.8 24.3 21.2
Amortization 0.8 0.8 3.0 3.2
Change in estimated
acquisition earnout
payables - - (0.5) (0.1)
Expenses 161.7 165.9 634.8 614.9
----- ----- ----- -----
Earnings before income
taxes 19.6 6.5 92.3 67.4
Provision for income
taxes 8.2 3.0 35.1 25.3
Net earnings 11.4 3.5 57.2 42.1
Net earnings attributable
to noncontrolling
interests - - - -
Net earnings attributable
to controlling interests $11.4 $3.5 $57.2 $42.1
===== ==== ===== =====
EBITDAC
Net earnings $11.4 $3.5 $57.2 $42.1
Provision for income
taxes 8.2 3.0 35.1 25.3
Depreciation 6.7 5.8 24.3 21.2
Amortization 0.8 0.8 3.0 3.2
Change in estimated
acquisition earnout
payables - - (0.5) (0.1)
EBITDAC $27.1 $13.1 $119.1 $91.7
===== ===== ====== =====
4th Q Ended 4th Q Ended Year Ended Year Ended
Corporate Segment Dec 31, 2015 Dec 31, 2014 Dec 31, 2015 Dec 31, 2014
------------ ------------ ------------ ------------
Revenues from
consolidated clean coal
facilities $288.8 $266.2 $1,254.6 $975.5
Royalty income from clean
coal licenses 13.3 13.3 57.5 57.4
Loss from unconsolidated
clean coal facilities (0.3) (0.4) (1.3) (3.4)
Other net revenues - (4.9) 30.5 18.4
Revenues 301.8 274.2 1,341.3 1,047.9
Cost of revenues from
consolidated clean coal
facilities 316.5 291.2 1,351.5 1,058.9
Compensation 18.5 29.2 62.0 50.3
Operating 1.6 7.8 21.8 36.6
Interest 25.8 25.7 103.0 89.0
Depreciation 3.9 1.0 15.2 3.8
Expenses 366.3 354.9 1,553.5 1,238.6
----- ----- ------- -------
Loss before income taxes (64.5) (80.7) (212.2) (190.7)
Benefit for income taxes (69.6) (69.1) (276.0) (212.3)
Net earnings (loss) 5.1 (11.6) 63.8 21.6
Net earnings attributable
to noncontrolling
interests 7.5 3.4 30.6 23.2
Net earnings (loss)
attributable to
controlling interests $(2.4) $(15.0) $33.2 $(1.6)
===== ====== ===== =====
EBITDAC
Net earnings (loss) $5.1 $(11.6) $63.8 $21.6
Benefit for income taxes (69.6) (69.1) (276.0) (212.3)
Interest 25.8 25.7 103.0 89.0
Depreciation 3.9 1.0 15.2 3.8
EBITDAC $(34.8) $(54.0) $(94.0) $(97.9)
====== ====== ====== ======
See "Information Regarding
Non-GAAP Measures" on page 9
of 13 and other information
to fourth quarter 2015
earnings release on page 13
of 13.
(11 of 13)
Arthur J. Gallagher & Co.
Reported Statement of Earnings and EBITDAC - 4th Qtr and Year Ended December 31,
(Unaudited - in millions except share and per share data)
4th Q Ended 4th Q Ended Year Ended Year Ended
Total Company Dec 31, 2015 Dec 31, 2014 Dec 31, 2015 Dec 31, 2014
------------ ------------ ------------ ------------
Commissions $590.1 $559.5 $2,338.7 $2,083.0
Fees 381.1 346.0 1,432.3 1,258.3
Supplemental commissions 34.6 26.5 125.5 104.0
Contingent commissions 11.9 16.3 93.7 84.7
Investment income and gains
realized on books of
business sales 15.4 22.9 60.9 48.6
Revenues from clean coal
activities 301.8 279.1 1,310.8 1,029.5
Other net revenues -
Corporate - (4.9) 30.5 18.4
Revenues 1,334.9 1,245.4 5,392.4 4,626.5
Compensation 633.7 606.7 2,428.9 2,167.6
Operating 222.0 217.0 840.7 743.1
Cost of revenues from clean
coal activities 316.5 291.2 1,351.5 1,058.9
Interest 25.8 25.7 103.0 89.0
Depreciation 25.8 19.4 93.9 69.4
Amortization 68.0 54.2 240.3 189.5
Change in estimated
acquisition earnout
payables 14.7 0.9 40.6 17.5
Expenses 1,306.5 1,215.1 5,098.9 4,335.0
-------
Earnings before income
taxes 28.4 30.3 293.5 291.5
Benefit for income taxes (39.8) (25.2) (95.6) (36.0)
Net earnings 68.2 55.5 389.1 327.5
Net earnings attributable
to noncontrolling
interests 5.9 4.0 32.3 24.1
Net earnings attributable
to controlling interests $62.3 $51.5 $356.8 $303.4
===== ===== ====== ======
Diluted net earnings per
share $0.35 $0.31 $2.06 $1.97
===== ===== ===== =====
Dividends declared per
share $0.37 $0.36 $1.48 $1.44
===== ===== ===== =====
EBITDAC
Net earnings $68.2 $55.5 $389.1 $327.5
Benefit for income taxes (39.8) (25.2) (95.6) (36.0)
Interest 25.8 25.7 103.0 89.0
Depreciation 25.8 19.4 93.9 69.4
Amortization 68.0 54.2 240.3 189.5
Change in estimated
acquisition earnout
payables 14.7 0.9 40.6 17.5
EBITDAC $162.7 $130.5 $771.3 $656.9
====== ====== ====== ======
Arthur J. Gallagher & Co.
Consolidated Balance Sheet
(Unaudited - in millions except per share data)
Dec 31, 2015 Dec 31, 2014
Cash and cash equivalents $480.4 $314.4
Restricted cash 1,412.1 1,367.6
Premiums and fees receivable 1,734.0 1,462.5
Other current assets 709.3 666.7
----- -----
Total current assets 4,335.8 3,811.2
Fixed assets - net 202.7 195.4
Deferred income taxes (includes tax credit carryforwards of
$341.6 in 2015 and $233.4 in 2014) 521.4 392.6
Other noncurrent assets 492.2 385.2
Goodwill - net 3,662.9 3,449.6
Amortizable intangible assets - net 1,698.8 1,776.0
Total assets $10,913.8 $10,010.0
Premiums payable to insurance and reinsurance companies $2,877.1 $2,623.3
Accrued compensation and other accrued liabilities 812.7 623.7
Unearned fees 61.3 66.1
Other current liabilities 58.6 61.7
Premium financing borrowings 137.0 127.9
Corporate related borrowings - current 245.0 140.0
Total current liabilities 4,191.7 3,642.7
Corporate related borrowings - noncurrent 2,075.0 2,125.0
Other noncurrent liabilities 958.9 937.2
Total liabilities 7,225.6 6,704.9
Stockholders' equity:
Common stock - issued and outstanding 176.9 164.6
Capital in excess of par value 3,209.4 2,649.4
Retained earnings 774.5 676.0
Accumulated other comprehensive loss (522.5) (260.6)
Total controlling interests stockholders' equity 3,638.3 3,229.4
Noncontrolling interests 49.9 75.7
---- ----
Total stockholders' equity 3,688.2 3,305.1
Total liabilities and
stockholders' equity $10,913.8 $10,010.0
See "Information Regarding
Non-GAAP Measures" on page 9
of 13 and other information
to fourth quarter 2015
earnings release on page 13
of 13.
(12 of 13)
Arthur J. Gallagher & Co.
Other Information
(Unaudited - data is rounded where indicated)
4th Q Ended 4th Q Ended Year Ended Year Ended
OTHER INFORMATION Dec 31, 2015 Dec 31, 2014 Dec 31, 2015 Dec 31, 2014
------------ ------------ ------------ ------------
Basic weighted average shares
outstanding (000s) 176,810 162,705 172,239 152,854
Diluted weighted average shares
outstanding (000s) 177,551 164,007 173,215 154,259
Common shares issued for acquisitions, earnouts,
secondary offering and the at-the-market
equity program (000s)
117 2,370 10,381 28,913
Number of acquisitions closed 15 15 44 60
Estimated annualized revenues
acquired (in millions) $46.3 $67.6 $230.8 $761.2
Number of common shares outstanding at end of period (000s) 176,947 164,605
Workforce at end of period (includes acquisitions):
Brokerage 15,920 14,880
Risk Management 5,185 4,961
Total Company 21,537 20,240
Contact: Marsha Akin
Director - Investor Relations
630-285-3501 or marsha_akin@ajg.com
(13 of 13)
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SOURCE Arthur J. Gallagher & Co.
