Arthur J. Gallagher & Co. Announces Second Quarter 2013 Financial Results

ITASCA, Ill., July 30, 2013 /PRNewswire/ -- Arthur J. Gallagher & Co. (NYSE: AJG) today reported its financial results for the quarter and six-month period ended June 30, 2013.  A printer-friendly format and supplemental quarterly data is available at www.ajg.com.  For a description of the non-GAAP measures used to report financial results in this earnings release, please see "Information Regarding Non-GAAP Measures" beginning on page 7.

"We had another strong quarter of organic growth and margin expansion across our global operations," said J. Patrick Gallagher, Jr., Chairman, President and CEO.  "In the second quarter, our combined Brokerage and Risk Management segments posted 15% growth in adjusted total revenues, 7.0% organic growth in commission and fee revenues, 19% growth in adjusted EBITDAC and adjusted EBITDAC margin improved by 92 basis points."

• Our Brokerage segment had an outstanding quarter.  Adjusted total revenues were up 16%, base organic commission and fee revenues grew 5.9%, adjusted EBITDAC was up 20% and adjusted EBITDAC margin was up 90 basis points.  We also completed another five acquisitions with annualized revenues of $36 million.
• Our Risk Management segment had an excellent quarter.  Adjusted total revenues were up 10%, organic fees were up 10.4%, adjusted EBITDAC was up 14% and our adjusted EBITDAC margin improved by 50 basis points.
• Second quarter earnings from our clean energy investments were nearly double those from the same quarter in 2012.

"We are seeing carriers ask for rate increases on most lines of coverage and in most geographies of the US, the UK and in Australia, and our clients are indicating steady, but small, incremental improvements in their business prospects.  Around the world, we are successfully executing our strategies and our sales culture is thriving."

The following provides non-GAAP information that management believes is helpful when comparing 2013 revenues, EBITDAC and diluted net earnings per share with the same period in 2012: 

Brokerage Segment Second Quarter Highlights - The following tables provide non-GAAP information that management believes is helpful when comparing certain 2013 financial information with the same periods in 2012 (in millions):

Brokerage Segment Second Quarter Highlights (continued)

The following is a summary of brokerage acquisition activity for 2013 and 2012:

Risk Management Segment Second Quarter Highlights - The following tables provide non-GAAP information that management believes is helpful when comparing certain 2013 financial information with the same periods in 2012 (in millions):

Corporate Segment Second Quarter Highlights - The following table provides non-GAAP information that management believes is helpful when comparing 2013 operating results for the Corporate Segment with the same periods in 2012 (in millions):

Debt, interest and banking- At June 30, 2013, Gallagher had $925.0 million of long-term borrowings outstanding under six private placement agreements, which are due and payable in various amounts in 2014 through 2023.  On June 14, 2013, Gallagher completed a private placement of $200.0 million of senior unsecured Series G notes bearing interest at 3.69% due in 2022.  Gallagher intends to use the net proceeds of the debt transaction to fund acquisitions and for general corporate purposes.  Gallagher also maintains an unsecured line of credit of $500.0 million that expires July 14, 2014.  There were no borrowings outstanding under Gallagher's line of credit facility at June 30, 2013. 

Clean energy investments - The following provides certain information related to Gallagher's investments in limited liability companies that own 29 refined coal production plants which produce refined coalusingproprietary technologies owned by Chem-Mod.  We believe these plants are qualified to receive refined coal tax credits under IRC Section 45 through 2019 for the 2009 Era Plants and through 2021 for the 2011 Era Plants.  For investments where Gallagher has a controlling ownership interest, the investment's underlying operations are consolidated.

Gallagher's investment in Chem-Mod generates royalty income from clean energy plants owned by those limited liability companies in which it invests as well as refined coal production plants owned by other unrelated parties.  Based on current production estimates provided by licensees, Chem-Mod could generate for Gallagher approximately $3.6 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, 2012, 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.  Second quarter 2013 expense is more than 2012 expense primarily due to increased incentive compensation and increased pension costs.

Income Taxes

Gallagher allocates the provision for income taxes to its Brokerage and Risk Management segments as if those segments were computing income tax provisions on a separate company basis.  Gallagher historically has reported, and anticipates reporting for the foreseeable future, an effective tax rate of approximately 37% to 39% in both its Brokerage and Risk Management segments.  Gallagher's consolidated effective tax rate for the quarters ended June 30, 2013 and 2012 was 4.0% and 21.3%, respectively.  Gallagher's tax rate for second quarter 2013 was lower than the statutory rate and was lower than the same period in 2012 due to the amount of IRC Section 45 tax credits earned in 2013 compared to 2012.

Webcast Conference Call

Gallagher will host a webcast conference call on Wednesday, July 31, 2013 at 9:00 a.m. ET/8:00 a.m. CT.  To listen to this call, please go to www.ajg.com.  The call will be available for replay at such website for not less than 90 days. 

About Arthur J. Gallagher & Co.

Arthur J. Gallagher & Co., an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois, has operations in 20 countries and offers client-service capabilities in more than 140 countries around the world through a network of correspondent brokers and consultants.

Information Regarding Forward-Looking Statements

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," "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, (i) statements regarding the amount of, and potential uses for, investment returns generated by Gallagher's clean energy investments, (ii) our corporate income tax rate, (iii) the insurance premium rate environment, (iv) the strength of our clients' businesses, (v) drivers of organic growth in the Brokerage and Risk Management segments and (vi) anticipated future results or performance of any segment or the Company as a whole. 

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 risks; and environmental risks - all could impact (i) and (ii) above; and
• Changes in worldwide and national economic conditions (including an economic downturn and uncertainty regarding the European debt crisis), changes in premium rates and in insurance markets generally and changes in the insurance brokerage industry's competitive landscape, could impact (iii) - (vi) 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, 2012, 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 2013 and 2012 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 gains realized from sales of books of business, Heath Lambert integration costs, New Zealand earthquake claims administration, South Australia ramp up fees/costs, workforce related charges, lease termination related charges, acquisition related adjustments, the impact of foreign currency translation and effective income tax rate impact, 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 gains realized from sales of books of business, Heath Lambert integration costs, earnout related compensation charges, workforce related charges, lease termination related charges, New Zealand earthquake claims administration costs, South Australia 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 gains realized from sales of books of business, Heath Lambert integration costs, New Zealand earthquake claims administration, South Australia ramp up fees/costs, the impact of foreign currency translation, workforce related charges, lease termination related charges, acquisition related adjustments, adjustments to the change in estimated acquisition earnout payables and effective income tax rate impact divided by diluted weighted average shares outstanding.  The effective income tax rate impact represents the difference in income tax expense for tax amounts derived using the actual effective tax rate compared to tax amounts derived using a normalized effective tax rate.

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 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 2013 foreign exchange rates to the same periods in 2012.  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 South Australia ramp up fees, New Zealand earthquake claims administration 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 2013 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 pages 1 and 2), 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.