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Arthur J. Gallagher & Co. Announces First Quarter 2007 Financial Results
ITASCA, Ill., April 24, 2007 /PRNewswire-FirstCall via COMTEX News Network/ -- Gallagher today reported
its financial results for the quarter ended March 31, 2007. A printer-
friendly format is available at http://www.ajg.com .
Quarter Ended March 31
Diluted
Net Earnings
Segment Revenues Pretax Earnings (Loss) (Loss) Per Share
1st Q 1st Q 1st Q 1st Q 1st Q 1st Q
07 06 Chg 07 06 07 06
($ in millions) ($ in millions)
Brokerage $246.0 $225.2 9% $15.5 $17.9 $0.09 $0.11
Risk Management 106.8 98.0 9% 16.7 15.2 0.10 0.09
Total Brokerage
& Risk Management 352.8 323.2 32.2 33.1 0.19 0.20
Financial Services 35.4 4.3 (10.7) (4.1) 0.01 (0.03)
Total Company $388.2 $327.5 $21.5 $29.0 $0.20 $0.17
Other Information 1st Q 07 1st Q 06
(dollars in millions except for per
share data)
Shares repurchased 557,000 -
Number of acquisitions closed 7 1
Annualized revenue acquired $39.5 $5.0
Book value per share $8.78 $8.05
Corporate related borrowings $117.0 $-
Percentages used hereinafter are computed excluding retail contingent commission revenues. See notes to first quarter 2007 earnings release and non-GAAP financial measures on page 7 for information and reconciliations relating to certain non-GAAP information presented herein.
"Overall, I'm encouraged by 9% growth in both of our core segments, closing seven new brokerage acquisitions and posting a 16% margin in our Risk Management Segment," said J. Patrick Gallagher, Jr., Chairman, President and Chief Executive Officer. "However, I'm not pleased with a 1.5% slippage in our Brokerage Segment's margins. Domestic P&C brokerage revenues and margins saw pressure from the ever-softening market and we continue to experience margin dilution from building out our global reinsurance brokerage unit. On the other hand, our employee benefits brokerage unit saw both excellent revenue growth and expanding margins. As we continue to build our global franchise, our sales and service teams are putting behind the distractions of 2005 and 2006. Every day, they are working hard to give our clients the highly valued advice and service they have come to expect from Gallagher for the last 80 years."
Brokerage Segment Highlights
-- Revenue growth of 9%, excluding one time gains of $1.2 million and
$2.4 million related to sales of small books of business in 2007 and
2006, respectively, 1% of which is organic.
-- First quarter compensation expense ratio was 0.8% lower than 2006.
The ratio was impacted by decreased employee benefit plan costs of
0.4% and reduced stock compensation expense of 0.4%, partially offset
by unfavorable foreign currency translation of 0.5%.
-- First quarter operating expense ratio was 1.6% higher than 2006,
mostly reflecting increased insurance costs of 0.5%, increased
employee selling expenses of 0.5% and increased costs associated with
operational improvement initiatives of 0.7%.
-- Pretax margin of 6%. The 1.5% margin decrease from 2006 resulted
primarily from the operating expense factors discussed above.
-- First quarter effective tax rate was 41.0% in 2007 and 2006.
Risk Management Segment Highlights
-- Revenue growth of 9%, all of which is organic. Domestic revenues were
up 7%, reflecting strong new business production, primarily from one
large new client, and stabilizing claim count activity from existing
clients. International revenues were up 22%, reflecting strength in
new business and growth from existing clients.
-- First quarter compensation expense ratio was 1.0% higher than 2006.
The ratio was primarily impacted by increased domestic and
international headcount.
-- First quarter operating expense ratio was 1.6% lower than 2006 due to
decreased insurance costs of 1.0% and favorable foreign currency
translation of 0.4%.
-- Pretax margin of 16%, which was flat as compared to 2006.
-- First quarter effective tax rate was 41.0% in 2007 and 2006.
Financial Services Segment Highlights
Information regarding IRC Section 29-related Syn/Coal facilities follows:
-- Tax credits and tax credit-related revenues associated with
Gallagher's IRC Section 29-related Syn/Coal investments will phase-out
if the calendar year 2007 average of the commonly reported crude oil
price (NYMEX Price) per barrel reaches certain levels. The following
table provides information about NYMEX oil prices and the phase-out.
Information related to 2007 is estimated and actual information will
not be known until the IRS publishes actual information in April 2008.
Calendar Year
2005 2006 2007
Phase-out information: Actual Actual Estimated
Beginning phase-out NYMEX price $59.53 $60.91 $62.00
Complete phase-out NYMEX price $74.75 $76.46 $78.00
Calendar year average NYMEX price $56.49 $66.01 $59.18 (1)
Full year phase-out percentage 0% 33% 13%
(1) Through April 23, 2007.
-- It is not possible for Gallagher to predict with certainty what oil
prices will average for all of calendar year 2007. When establishing
its estimates for first quarter 2007 revenues, expenses and income tax
provisions, Gallagher estimated an average 2007 calendar year NYMEX
Price of approximately $64.00. This average would produce an IRC
Section 29 phase-out of approximately 13% and was determined by using
actual daily closing prices from January 1, 2007 to March 30, 2007 and
with the assumption that oil prices would average $65.87 per barrel,
which was the closing NYMEX Price on March 30, 2007, for the remainder
of 2007.
-- Gallagher produced at or above anticipated production levels at all
five Syn/Coal facilities through first quarter 2007 and intends to
operate those plants throughout 2007 provided oil prices remain at
levels where these facilities can continue to generate positive
returns. When determining the effective income tax rate for first
quarter 2007, Gallagher assumed similar production levels throughout
2007.
-- At March 31, 2007, the remaining carrying value of the five facilities
and other related assets totaled $6.2 million. Gallagher has
historically depreciated/amortized these assets at approximately $2.1
million per quarter and expects to continue to do so through December
31, 2007, the expiration of IRC Section 29. If oil prices rise to a
level of significant phase-out, all or part of this remaining carrying
value could become impaired and require a non-cash charge against
earnings.
-- To partially mitigate the financial risk of a phase-out, which reduces
the value of tax credits and tax credit related revenues associated
with Gallagher's IRC Section 29-related Syn/Coal investments,
Gallagher has entered into an arrangement with an unaffiliated third
party which constitutes a call spread on oil futures to create a
financial hedge that is designed to generate gains to Gallagher in the
event of certain levels of increased oil prices. This hedge is not
intended to be a "perfect hedge" for accounting purposes, but is
intended to mitigate a substantial portion of the negative impact to
Gallagher of increased oil prices. The hedging gains are designed to
offset a portion of the expenses associated with operating Gallagher's
IRC Section 29-Syn/Coal facilities in the event of a phase-out of
Section 29 tax credits. Gallagher made an up-front payment of $2.7
million on January 17, 2007 to enter into this financial hedge, which
will be marked to market value each quarter as part of the Financial
Services Segment operating results, through December 31, 2007, the
date the contract expires or the date the contract is sold, whichever
is earlier. The contract had a market value of $6.7 million as of
March 31, 2007.
-- Actual first quarter 2007 and estimated second, third and fourth
quarter 2007 diluted net earnings per share for the Financial Services
Segment assuming an approximate 13% phase-out are as follows:
Diluted Net Earnings Per
Period Share Range
1Q 07 $0.01 to $0.01
2Q 07 0.04 to 0.07
3Q 07 0.17 to 0.21
4Q 07 0.06 to 0.10
Total 2007 $0.28 to $0.39
-- The information provided above is highly dependent on future events
and actual results may differ materially. Significant uncertainty
with respect to future events includes continued cost saving
agreements with its business associates and partners, available coal
stocks and prices, weather, plant operating capacities, oil prices and
the actual levels of production by quarter. Gallagher cannot at this
time predict whether or to what extent it will ultimately be able to
benefit from its IRC Section 29-related Syn/Coal facilities nor can
Gallagher definitively estimate the revenues, income and/or tax
credits that these facilities will provide.
Corporate Debt
-- Historically, Gallagher's first quarter cash flows have been
seasonally lower than in subsequent quarters. Accordingly, Gallagher
maintains a line of credit which it has drawn upon in the past for
various purposes. Currently, Gallagher has a $450.0 million unsecured
line of credit, of which $315.4 million was unused at March 31, 2007.
Principal uses of the line of credit in first quarter 2007 were as
follows:
-- $79.5 million for new acquisitions and earn-out payments related
to acquisitions completed prior to 2007.
-- $15.5 million for stock repurchases.
-- $9.5 million to pay operating expenses to generate IRC Section 29
Syn/Coal tax credits.
-- $17.6 million to support outstanding letters of credit, consisting
of $6.5 million of self insurance collateral, $5.7 million of
foreign entity capital requirements and $5.4 million related to
Financial Services Segment investments.
Effective Tax Rate
-- Gallagher allocates the provision for income taxes to the Brokerage
and Risk Management segments as if those segments were preparing
income tax provisions on a separate company basis. As a result, the
provision for income taxes for the Financial Services Segment reflects
the entire benefit to Gallagher of the IRC Section 29-related credits
because that is the segment which produces the credits. Gallagher
historically reported, and anticipates reporting for the foreseeable
future, an effective tax rate of approximately 40.0% to 42.0% in both
its Brokerage Segment and its Risk Management Segment, regardless of
historical or future oil prices.
-- Gallagher's consolidated effective tax rate for first quarter 2007 was
8.0%, which is below the first quarter 2006 consolidated effective tax
rate of 41.0%. The decrease results because Gallagher produced IRC
Section 29-related tax credits in first quarter 2007, but not in first
quarter 2006. Assuming Gallagher continues to produce IRC Section 29-
related tax credits, and such credits are subject to a 13% phase-out,
Gallagher projects that its consolidated effective tax rate for all of
2007 will be approximately 14.0%, which is below its 2006 consolidated
effective tax rate of 16.1%. IRC Section 29-related tax credit rules
expire on December 31, 2007. Accordingly, Gallagher anticipates
reporting in 2008 and thereafter, an annual consolidated effective tax
rate of approximately 40.0% to 42.0%.
The company will host a webcast conference call on Wednesday, April 25, 2007 at 9:00 a.m. ET to further discuss these quarterly results. To listen, please go to http://www.ajg.com .
Arthur J. Gallagher & Co. (NYSE: AJG), an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois, has operations in seven countries and does business in 100 countries around the world through a network of correspondent brokers and consultants. Gallagher is traded on the New York Stock Exchange under the symbol AJG.
This press release may contain certain forward-looking statements relating to future results. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expected, depending on a variety of factors such as changes in worldwide and national economic conditions, changes in premium rates and in insurance markets generally and changes in securities and fixed income markets as well as developments in the areas of tax legislation and crude oil prices. Please refer to our filings with the Securities and Exchange Commission, including Item 1, "Business - Information Concerning Forward-Looking Statements" and Item 1A, "Risk Factors", of our Annual Report on Form 10-K, for a more detailed discussion of these factors.
Arthur J. Gallagher & Co.
Segment Statement of Earnings
(Unaudited - in millions except per share data)
3 Months Ended 3 Months Ended
BROKERAGE SEGMENT Mar 31, 2007 Mar 31, 2006
Commissions $198.4 $182.2
Retail contingent commissions 0.8 1.0
Fees 40.2 34.7
Investment income and other 6.6 7.3
Revenues 246.0 225.2
Compensation 161.4 149.4
Operating 57.6 49.1
Depreciation 3.8 3.4
Amortization 7.7 5.4
Expenses 230.5 207.3
Earnings before income taxes 15.5 17.9
Provision for income taxes 6.3 7.4
Net earnings $9.2 $10.5
Diluted net earnings per share $0.09 $0.11
Growth - revenues excluding retail
contingent commissions 9% 7%
Organic growth in commissions and
fees (1) 1% 4%
Compensation expense ratio (2) 66% 67%
Operating expense ratio (3) 23% 22%
Pretax profit margin excluding retail
contingent commissions (4) 6% 8%
Effective tax rate 41% 41%
RISK MANAGEMENT SEGMENT
Fees $105.9 $97.0
Investment income 0.9 1.0
Revenues 106.8 98.0
Compensation 62.2 56.1
Operating 25.0 24.5
Depreciation 2.8 2.1
Amortization 0.1 0.1
Expenses 90.1 82.8
Earnings before income taxes 16.7 15.2
Provision for income taxes 6.8 6.2
Net earnings $9.9 $9.0
Diluted net earnings per share $0.10 $0.09
Growth - revenues 9% 7%
Organic growth in fees (1) 9% 7%
Compensation expense ratio 58% 57%
Operating expense ratio 23% 25%
Pretax profit margin (4) 16% 16%
Effective tax rate 41% 41%
FINANCIAL SERVICES SEGMENT
Investment income (loss):
Asset Alliance Corporation $(2.1) $0.9
IRC Section 29 Syn/Coal facilities:
Three unconsolidated facilities 14.6 2.1
Two consolidated facilities 18.3 -
Other alternative energy
investments - (0.7)
Real estate, venture capital and
other investments 0.5 2.0
31.3 4.3
Investment gains (losses) 4.1 -
Revenues 35.4 4.3
Investment expenses:
IRC Section 29 Syn/Coal facilities:
Three unconsolidated facilities 7.2 3.5
Two consolidated facilities 33.2 0.3
Compensation, professional fees and
other 4.0 0.6
44.4 4.4
Interest 0.6 2.1
Depreciation 1.1 1.9
Expenses 46.1 8.4
Earnings (loss) before income taxes (10.7) (4.1)
Provision (benefit) for income taxes (11.4) (1.7)
Net earnings (loss) $0.7 $(2.4)
Diluted net earnings (loss) per share $0.01 $(0.03)
See notes to first quarter 2007 earnings release and non-GAAP financial
measures on page 7.
Consolidated Statement of Earnings
(Unaudited - in millions except per share data)
3 Months Ended 3 Months Ended
TOTAL COMPANY Mar 31, 2007 Mar 31, 2006
Commissions $198.4 $182.2
Retail contingent commissions 0.8 1.0
Fees 146.1 131.7
Investment income - Brokerage and Risk
Management 7.5 8.3
Investment income - Financial Services 31.3 4.3
Investment gains (losses) 4.1 -
Revenues 388.2 327.5
Compensation 223.6 205.5
Operating 82.6 73.6
Investment expenses 44.4 4.4
Interest 0.6 2.1
Depreciation 7.7 7.4
Amortization 7.8 5.5
Expenses 366.7 298.5
Earnings before income taxes 21.5 29.0
Provision for income taxes 1.7 11.9
Net earnings 19.8 17.1
Diluted net earnings per share $0.20 $0.17
Dividends declared per share $0.31 $0.30
Other Information
Basic weighted average shares
outstanding (000s) 98,861 96,131
Diluted weighted average shares
outstanding (000s) 100,128 97,779
Common shares repurchased (000s) 557 18
Annualized return on beginning
stockholders' equity (5) 9% 9%
Number of acquisitions closed 7 1
Workforce at end of period (includes
acquisitions) 8,902 8,248
Net Earnings Before Investment
(Gains) Losses, Depreciation,
Amortization and Stock
Compensation Expense (6)
Net earnings $19.8 $17.1
Investment (gains) losses (4.1) -
Depreciation 7.7 7.4
Amortization 7.8 5.5
Amortization of deferred comp and
restricted stock 1.4 1.8
Stock compensation expense 2.8 4.3
Tax effect (6.2) (7.6)
Net earnings before investment
(gains) losses, depreciation,
amortization and stock compensation
expense $29.2 $28.5
On a diluted per share basis $0.29 $0.29
See notes to first quarter 2007 earnings release and non-GAAP financial
measures on page 7.
Arthur J. Gallagher & Co.
Consolidated Balance Sheet
(Unaudited - in millions except per share data)
Mar 31, 2007 Dec 31, 2006
Cash and cash equivalents $158.8 $208.0
Restricted cash 616.0 588.9
Unconsolidated investments - current 70.4 49.2
Premiums and fees receivable 1,306.5 1,422.3
Other current assets 117.2 107.8
Total current assets 2,268.9 2,376.2
Unconsolidated investments - noncurrent 29.5 32.5
Fixed assets related to consolidated
investments - net 3.8 32.5
Other fixed assets - net 75.4 70.6
Deferred income taxes 290.0 286.8
Other noncurrent assets 97.7 91.8
Goodwill - net 358.8 316.6
Amortizable intangible assets - net 267.6 213.1
Total assets $3,391.7 $3,420.1
Premiums payable to insurance and
reinsurance companies $1,877.8 $1,958.8
Accrued compensation and other
accrued liabilities 268.3 316.4
Unearned fees 32.6 39.7
Income taxes payable - 51.0
Other current liabilities 10.0 26.5
Corporate related borrowings 117.0 -
Investment related borrowings - current 6.8 8.9
Total current liabilities 2,312.5 2,401.3
Investment related borrowings - noncurrent - 25.9
Other noncurrent liabilities 211.3 128.8
Total liabilities 2,523.8 2,556.0
Stockholders' equity:
Common stock - issued and outstanding 98.9 98.4
Capital in excess of par value 299.7 285.7
Retained earnings 464.1 475.0
Accumulated other comprehensive earnings 5.2 5.0
Total stockholders' equity 867.9 864.1
Total liabilities and
stockholders' equity $3,391.7 $3,420.1
Other Information
Book value per share $8.78 $8.78
Notes to First Quarter 2007 Earnings Release and Non-GAAP Financial
Measures
Non-GAAP Financial Measures
This exhibit contains supplemental non-GAAP financial information within the meaning of Regulation G of the SEC's rules. Consistent with Regulation G, a description of such information is provided below and a reconciliation of certain of such items to U.S. generally accepted accounting principles (GAAP) is provided elsewhere in this press release. Gallagher believes the items described below provide meaningful additional information, which may be helpful to investors in assessing certain aspects of Gallagher's operating performance and financial condition that may not be otherwise apparent from GAAP. Industry peers provide similar supplemental information, although they may not use the same or comparable terminology and may not make identical adjustments. This non-GAAP information should be used in addition to, but not as a substitute for, the GAAP information.
Non-GAAP Measures Defined
(1) Organic growth excludes the first twelve months of net commission
and fee revenues generated from the 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 determine
the revenue growth that is associated with the operations that were
a part of Gallagher in both the current and prior year. In addition,
organic growth excludes contingent commission revenues.
(2) Represents compensation expense divided by total revenues, excluding
retail contingent commissions.
(3) Represents operating expenses divided by total revenues, excluding
retail contingent commissions.
(4) Represents pretax earnings divided by total revenues, excluding
retail contingent commissions.
(5) Represents year-to-date net earnings divided by total stockholders'
equity as of the beginning of the year.
(6) Represents net earnings before the after-tax effect of the impact
investment gains (losses), depreciation, amortization, amortization
of deferred compensation and restricted stock expense and stock
compensation expense.
Arthur J. Gallagher & Co.
Unconsolidated Investment Summary
(Unaudited - in millions)
March 31, 2007
March 31, December 31, LOCs &
2007 2006 Financial Funding
Non- Non- Guar- Commit-
Current current Current current antees ments
Direct and indirect
investments in Asset
Alliance Corporation
(AAC):
Common stock $- $11.5 $- $13.7 $- $-
Preferred stock 13.4 - 13.4 - - -
Indirectly held - 1.1 - 1.1 - -
Total AAC 13.4 12.6 13.4 14.8 - -
Alternative energy
investments:
IRC Section 29
Syn/Coal production
net receivables (2) 42.6 - 25.7 - - -
IRC Section 29 Syn/
Coal unamortized
assets 4.9 - 6.6 - - -
Equity interest in
biomass projects
and pipeline 0.2 9.0 0.1 9.5 - -
Clean energy related
ventures - 0.7 - 0.6 - 0.7
Oil price derivative 6.7 - - - - -
Total alternative
energy investments 54.4 9.7 32.4 10.1 - 0.7
Real estate, venture
capital and other
investments 2.6 7.2 3.4 7.6 5.4(1) 1.0
Total unconsolidated
investments $70.4 $29.5 $49.2 $32.5 $5.4 $1.7
(1) Consists of a $4.4 million letter of credit (LOC) related to the
reclamation of a former coal production site and a $1.0 million letter
of credit to support the escrow requirements related to the sale of
Gallagher's home office real estate.
(2) Due to uncertainties related to the phase-out level for 2006 and 2007,
Gallagher has agreed to delay collection of a portion of the
receivables until May 2007 related to 2006 production and May 2008
related to 2007 production.
SOURCE Arthur J. Gallagher & Co.
Marsha J. Akin, Investor Relations, Arthur J. Gallagher & Co., +1-630-773-3800
http://www.ajg.com