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Actionable news in AJG: ARTHUR J. GALLAGHER & CO.,

Arthur J. Gallagher & Co. Announces Second Quarter 2017 Financial Results

ROLLING MEADOWS, Ill., July 27, 2017 /PRNewswire/ -- Arthur J. Gallagher & Co. (NYSE: AJG) today reported its financial results for the quarter ended June 30, 2017. Management will host a webcast conference call to discuss these results on Friday, July 28, 2017 at 9:00 a.m. ET/8:00 a.m. CT. To listen to the call, and for printer-friendly formats of this release and the "Supplemental Quarterly Data" and "CFO Commentary," which may also be referenced during the call, please visit ajg.com/IR. These documents contain both GAAP and non-GAAP measures. Investors and other users of this information should read carefully the section entitled "Information Regarding Non-GAAP Measures" beginning on page 9.

Summary of Financial Results – Second Quarter
Reconciliations of non-GAAP measures begin on page 2


(Dollars in millions, except per share data)

2nd Q 2017


2nd Q 2016


Change



Reported

Adjusted


Reported

Adjusted


Reported

Adjusted

Brokerage Segment

GAAP

Non-GAAP


GAAP

Non-GAAP


GAAP

Non-GAAP












Revenues

$ 998.1

$ 997.0


$ 939.1

$ 916.6


6%

9%


Organic revenues


$ 941.6



$ 903.8



4.2%


Net earnings

$ 139.5



$ 114.9



21%



Net earnings margin

14.0%



12.2%



+174 bpts



Adjusted EBITDAC


$ 309.2



$ 279.6



11%


Adjusted EBITDAC margin


31.0%



30.5%



+51 bpts


Diluted net earnings per share

$ 0.76

$ 0.81


$ 0.64

$ 0.74


19%

9%











Risk Management Segment










Revenues

$ 188.7

$ 188.7


$ 176.5

$ 175.8


7%

7%


Organic revenues


$ 185.4



$ 175.6



5.6%


Net earnings

$ 14.4



$ 13.9



4%



Net earnings margin

7.6%



7.9%



-25 bpts



Adjusted EBITDAC


$ 32.1



$ 29.7



8%


Adjusted EBITDAC margin


17.0%



16.9%



+12 bpts


Diluted net earnings per share

$ 0.08

$ 0.08


$ 0.08

$ 0.08


0%

0%











Corporate Segment










Diluted net earnings per share

$ 0.11

$ 0.14


$ 0.12

$ 0.14


-8%

0%











Total Company










Diluted net earnings per share

$ 0.95

$ 1.03


$ 0.84

$ 0.96


13%

7%

"We delivered another excellent quarter of operating performance and are optimistic about the remainder of the year. During the second quarter, we posted outstanding organic revenue growth, completed 9 tuck-in brokerage mergers, expanded margins and grew earnings per share," said J. Patrick Gallagher, Jr., Chairman, President and CEO. "Our first half renewals, as well as our mid-year internal insurance rate survey, suggest P&C pricing is mostly stable. Almost two thirds of our survey respondents expect no significant change in the 2017 pricing environment. This continues to be an environment in which our talented production team will outperform."

(1 of 14)

Summary of Financial Results – Six Months Ended June 30, 2017
Reconciliations of non-GAAP measures begin on page 3


(Dollars in millions, except per share data)

6 Mths 2017


6 Mths 2016


Change



Reported

Adjusted


Reported

Adjusted


Reported

Adjusted

Brokerage Segment

GAAP

Non-GAAP


GAAP

Non-GAAP


GAAP

Non-GAAP












Revenues

$ 1,876.6

$ 1,874.1


$ 1,764.6

$ 1,725.7


6%

9%


Organic revenues


$ 1,757.3



$ 1,697.8



3.5%


Net earnings

$ 217.6



$ 180.8



20%



Net earnings margin

11.6%



10.3%



+135 bpts



Adjusted EBITDAC


$ 524.9



$ 468.8



12%


Adjusted EBITDAC margin


28.0%



27.2%



+84 bpts


Diluted net earnings per share

$ 1.16

$ 1.26


$ 0.99

$ 1.14


17%

11%











Risk Management Segment










Revenues

$ 371.3

$ 371.3


$ 355.8

$ 355.6


4%

4%


Organic revenues


$ 367.9



$ 355.2



3.6%


Net earnings

$ 28.7



$ 28.9



-1%



Net earnings margin

7.7%



8.1%



-39 bpts



Adjusted EBITDAC


$ 63.3



$ 61.7



3%


Adjusted EBITDAC margin


17.1%



17.4%



-30 bpts


Diluted net earnings per share

$ 0.16

$ 0.16


$ 0.16

$ 0.17


0%

-6%











Corporate Segment










Diluted net loss per share

$ (0.06)

$ 0.01


$ (0.05)

$ (0.01)


-20%

200%











Total Company










Diluted net earnings per share

$ 1.26

$ 1.43


$ 1.10

$ 1.30


15%

10%

Quarter Ended June 30 Reported GAAP to Adjusted Non-GAAP Reconciliation:














Diluted Net





Revenues


Net Earnings


EBITDAC


Earnings Per Share

Segment


2nd Q 17

2nd Q 16


2nd Q 17

2nd Q 16


2nd Q 17

2nd Q 16


2nd Q 17

2nd Q 16




















(in millions)


(in millions)


(in millions)



















Brokerage, as reported


$ 998.1

$ 939.1


$ 139.5

$ 114.9


$ 297.9

$ 267.7


$ 0.76

$ 0.64


Gains on book sales


(1.1)

(1.4)


(0.8)

(1.0)


(1.1)

(1.4)


-

-


Acquisition integration


-

-


2.3

8.4


3.3

11.9


0.01

0.05


Workforce & lease termination


-

-


3.7

3.2


5.4

4.5


0.02

0.02


Acquisition related adjustments


-

-


3.7

8.0


3.7

1.8


0.02

0.04


Levelized foreign currency translation

-

(21.1)


-

(2.2)


-

(4.9)


-

(0.01)
















Brokerage, as adjusted *


997.0

916.6


148.4

131.3


309.2

279.6


0.81

0.74
















Risk Management, as reported


188.7

176.5


14.4

13.9


31.8

29.7


0.08

0.08


Workforce & lease termination


-

-


0.2

0.3


0.3

0.4


-

-


Levelized foreign currency translation

-

(0.7)


-

(0.3)


-

(0.4)


-

-
















Risk Management, as adjusted *


188.7

175.8


14.6

13.9


32.1

29.7


0.08

0.08
















Corporate, as reported


376.6

311.5


26.5

26.9


(50.7)

(30.9)


0.11

0.12


Litigation settlement


-

-


4.4

4.4


5.6

5.5


0.02

0.02


Home office lease termination/move


-

-


1.8

-


3.0

-


0.01

-
















Corporate, as adjusted *


376.6

311.5


32.7

31.3


(42.1)

(25.4)


0.14

0.14
















Total Company, as reported


$ 1,563.4

$ 1,427.1


$ 180.4

$ 155.7


$ 279.0

$ 266.5


$ 0.95

$ 0.84
















Total Company, as adjusted *


$ 1,562.3

$ 1,403.9


$ 195.7

$ 176.5


$ 299.2

$ 283.9


$ 1.03

$ 0.96

Total Brokerage & Risk














Management, as reported


$ 1,186.8

$ 1,115.6


$ 153.9

$ 128.8


$ 329.7

$ 297.4


$ 0.84

$ 0.72
















Total Brokerage & Risk














Management, as adjusted *


$ 1,185.7

$ 1,092.4


$ 163.0

$ 145.2


$ 341.3

$ 309.3


$ 0.89

$ 0.82

(2 of 14)

*

For 2017, the pretax impact of the Brokerage Segment adjustments totals $12.9 million, with a corresponding adjustment to the provision for income taxes of $4.0 million relating to these items. The pretax impact of the Risk Management Segment adjustments totals $0.3 million, with a corresponding adjustment to the provision for income taxes of $0.1 million relating to these items. The pretax impact of the Corporate Segment adjustments totals $8.6 million, with a corresponding adjustment to the provision for income taxes of $2.4 million relating to these items. A detailed reconciliation of the 2017 and 2016 provision for income taxes is shown on page 13.

Six Months Ended June 30 Reported GAAP to Adjusted Non-GAAP Reconciliation:














Diluted Net






Revenues


Net Earnings


EBITDAC


Earnings Per Share


Segment


6 Mths 17

6 Mths 16


6 Mths 17

6 Mths 16


6 Mths 17

6 Mths 16


6 Mths 17

6 Mths 16






















(in millions)


(in millions)


(in millions)





















Brokerage, as reported


$ 1,876.6

$ 1,764.6


$ 217.6

$ 180.8


$ 505.9

$ 444.5


$ 1.16

$ 0.99



Gains on book sales


(2.5)

(3.6)


(1.8)

(2.5)


(2.5)

(3.6)


(0.01)

(0.01)



Acquisition integration


-

-


4.3

18.4


6.2

26.1


0.02

0.10



Workforce & lease termination


-

-


6.4

4.3


9.3

6.1


0.04

0.02



Acquisition related adjustments


-

-


9.9

8.3


6.0

2.6


0.05

0.05



Levelized foreign currency translation

-

(35.3)


-

(2.8)


-

(6.9)


-

(0.01)


















Brokerage, as adjusted *


1,874.1

1,725.7


236.4

206.5


524.9

468.8


1.26

1.14


















Risk Management, as reported


371.3

355.8


28.7

28.9


62.8

60.7


0.16

0.16



Workforce & lease termination


-

-


0.3

0.6


0.5

0.9


-

0.01



Levelized foreign currency translation

-

(0.2)


-

-


-

0.1


-

-


















Risk Management, as adjusted *


371.3

355.6


29.0

29.5


63.3

61.7


0.16

0.17


















Corporate, as reported


728.2

607.1


1.9

3.9


(101.9)

(69.3)


(0.06)

(0.05)



Litigation settlement


-

-


8.8

8.1


11.1

10.2


0.05

0.04



Home office lease termination/move


-

-


4.2

-


7.0

-


0.02

-


















Corporate, as adjusted *


728.2

607.1


14.9

12.0


(83.8)

(59.1)


0.01

(0.01)


















Total Company, as reported


$ 2,976.1

$ 2,727.5


$ 248.2

$ 213.6


$ 466.8

$ 435.9


$ 1.26

$ 1.10


















Total Company, as adjusted *


$ 2,973.6

$ 2,688.4


$ 280.3

$ 248.0


$ 504.4

$ 471.4


$ 1.43

$ 1.30


Total Brokerage & Risk















Management, as reported


$ 2,247.9

$ 2,120.4


$ 246.3

$ 209.7


$ 568.7

$ 505.2


$ 1.32

$ 1.15


















Total Brokerage & Risk















Management, as adjusted *


$ 2,245.4

$ 2,081.3


$ 265.4

$ 236.0


$ 588.2

$ 530.5


$ 1.42

$ 1.31




*

For 2017, the pretax impact of the Brokerage Segment adjustments totals $27.3 million, with a corresponding adjustment to the provision for income taxes of $8.5 million relating to these items. The pretax impact of the Risk Management Segment adjustments totals $0.5 million, with a corresponding adjustment to the provision for income taxes of $0.2 million relating to these items. The pretax impact of the Corporate Segment adjustments totals $18.1 million, with a corresponding adjustment to the provision for income taxes of $5.1 million relating to these items. A detailed reconciliation of the 2017 and 2016 provision for income taxes is shown on page 14.

(3 of 14)

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

Organic Revenues (Non-GAAP)


2nd Q 17


2nd Q 16


Change


6 Mths 17


6 Mths 16


Change
















Base Commissions and Fees













Commissions and fees, as reported


$ 912.6


$ 861.7


5.9%


$ 1,691.1


$ 1,586.8


6.6%

Less commissions and fees from acquisitions


(40.3)


-




(87.3)


-



Less disposed of operations


-


-




-


(1.4)



Levelized foreign currency translation


-


(19.5)




-


(32.4)


















Organic base commissions and fees


$ 872.3


$ 842.2


3.6%


$ 1,603.8


$ 1,553.0


3.3%
















Supplemental Commissions













Supplemental commissions, as reported


$ 41.5


$ 38.6


7.5%


$ 76.0


$ 71.5


6.3%

Less supplemental commissions from acquisitions


-


-




(1.2)


-



Less disposed of operations


-


(0.3)




-


(0.4)



Levelized foreign currency translation


-


(1.5)




-


(2.9)


















Organic supplemental commissions


$ 41.5


$ 36.8


12.8%


$ 74.8


$ 68.2


9.7%
















Contingent Commissions













Contingent commissions, as reported


$ 29.5


$ 25.1


17.5%


$ 82.9


$ 80.3


3.2%

Less contingent commissions from acquisitions


(1.7)


-




(4.2)


-



Less disposed of operations


-


(0.1)




-


(2.9)



Levelized foreign currency translation


-


(0.2)




-


(0.8)


















Organic contingent commissions


$ 27.8


$ 24.8


12.1%


$ 78.7


$ 76.6


2.7%
















Total reported commissions, fees, supplemental
commissions and contingent commissions


$ 983.6


$ 925.4


6.3%


$ 1,850.0


$ 1,738.6


6.4%

Less commissions and fees from acquisitions


(42.0)


-




(92.7)


-



Less disposed of operations


-


(0.4)




-


(4.7)



Levelized foreign currency translation


-


(21.2)




-


(36.1)


















Total organic commissions, fees, supplemental
commissions and contingent commissions


$ 941.6


$ 903.8


4.2%


$ 1,757.3


$ 1,697.8


3.5%
















Of the 4.2% growth in total organic revenues for second quarter 2017, our domestic operations posted approximately 3.5% growth and international operations posted approximately 5.5% growth.

Acquisition Activity


2nd Q 17


2nd Q 16


6 Mths 17


6 Mths 16












Number of acquisitions closed


9


13


21


21

Estimated annualized revenues acquired (in millions)


$ 30.3


$ 40.4


$ 92.8


$ 70.4

(4 of 14)

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

Compensation Expense and Ratios


2nd Q 17


2nd Q 16


6 Mths 17


6 Mths 16












Compensation expense, as reported


$ 547.8


$ 518.2


$ 1,073.3


$ 1,011.1












Acquisition integration (1)


(2.6)


(4.5)


(3.7)


(9.1)

Workforce and lease termination related charges


(4.3)


(2.5)


(7.8)


(3.8)

Acquisition related adjustments


(3.7)


(1.8)


(6.0)


(2.6)

Levelized foreign currency translation


-


(11.5)


-


(21.5)












Compensation expense, as adjusted


$ 537.2


$ 497.9


$ 1,055.8


$ 974.1












Reported compensation expense ratios using reported

revenues on page 2 and 3

*

54.9%


55.2%


57.2%


57.3%












Adjusted compensation expense ratios using adjusted

revenues on page 2 and 3

*

53.9%


54.3%


56.3%


56.5%














*

Reported second quarter compensation ratio was 0.3 pts lower than the same period in 2016. Adjusted second quarter compensation ratio was 0.4 pts lower than the same period in 2016. Both ratios were primarily impacted by savings in compensation related to headcount controls.

Operating Expense and Ratios


2nd Q 17


2nd Q 16


6 Mths 17


6 Mths 16










Operating expense, as reported


$ 152.4


$ 153.2


$ 297.4


$ 309.0










Acquisition integration (1)


(0.7)


(7.4)


(2.5)


(17.0)

Workforce and lease termination related charges


(1.1)


(2.0)


(1.5)


(2.3)

Levelized foreign currency translation


-


(4.7)


-


(6.9)










Operating expense, as adjusted


$ 150.6


$ 139.1


$ 293.4


$ 282.8










Reported operating expense ratios using reported
revenues on page 2 and 3










*

15.3%


16.3%


15.9%


17.5%










Adjusted operating expense ratios using adjusted
revenues on page 2 and 3










**

15.1%


15.2%


15.7%


16.4%












*

Reported second quarter operating expense ratio was 1.0 pts lower than the same period in 2016. This ratio was primarily impacted by lower integration costs such as technology and lease termination charges.

**

Adjusted second quarter operating expense ratio was 0.1 pts lower than the same period in 2016. All items were essentially consistent with the prior period.

Net Earnings to Adjusted EBITDAC (Non-GAAP)


2nd Q 17


2nd Q 16


Change


6 Mths 17


6 Mths 16


Change
















Net earnings, as reported


$ 139.5


$ 114.9


21.4%


$ 217.6


$ 180.8


20.4%

Provision for income taxes


73.0


63.3




112.6


97.4



Depreciation


16.1


14.4




31.0


28.4



Amortization


64.4


61.9




128.0


120.8



Change in estimated acquisition earnout payables


4.9


13.2




16.7


17.1


















EBITDAC


297.9


267.7


11.3%


505.9


444.5


13.8%
















Gains from books of business sales


(1.1)


(1.4)




(2.5)


(3.6)



Acquisition integration (1)


3.3


11.9




6.2


26.1



Acquisition related adjustments


3.7


1.8




6.0


2.6



Workforce and lease termination related charges


5.4


4.5




9.3


6.1



Levelized foreign currency translation


-


(4.9)




-


(6.9)


















EBITDAC, as adjusted


$ 309.2


$ 279.6


10.6%


$ 524.9


$ 468.8


12.0%
















Net earnings margin, as reported using reported
revenues on page 2 and 3


14.0%


12.2%


+174 bpts


11.6%


10.3%


+135 bpts
















EBITDAC margin, as adjusted using adjusted
revenues on page 2 and 3


31.0%


30.5%


+51 bpts


28.0%


27.2%


+84 bpts


















(1)

Acquisition integration costs consist mostly of IT system conversion...


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