ITASCA, Ill., July 29 IL-Arthur-Gallagher
ITASCA, Ill., July 29 /PRNewswire-FirstCall/ -- Gallagher today reported
its financial results for the quarter and six-months ended June 30, 2008. A
printer-friendly format is available at http://www.ajg.com.
Quarter Ended June 30 Diluted Net Earnings
Revenues EBITDA (Loss) Per Share
Segment2nd Q 2nd Q Chg 2nd Q 2nd Q Chg 2nd Q 2nd Q Chg
08 07 08 07 08 07
Continuing
Operations $ in millions$ in millions
Brokerage$312.2 $294.6 6% $80.4 $72.5 11% $0.42 $0.38 11%
Risk
Management 115.2107.8 7% 15.616.8 -7% 0.08 0.08 0%
Total
Brokerage
& Risk
Management 427.4402.4 6% 96.089.3 8% 0.50 0.46 9%
Financial
Services &
Corporate1.5 25.2 (1.2) (11.8) (0.05) -
Total
Continuing
Operations$428.9 $427.6 $94.8 $77.50.45 0.46
Discontinued
Operations (0.01)(0.02)
Total
Company$0.44 $0.44
Six Months Ended June 30 Diluted Net Earnings
Revenues EBITDA (Loss) Per Share
Segment6 Mths 6 Mths Chg 6 Mths 6 Mths Chg 6 Mths 6 Mths Chg
08 07 08 07 08 07
Continuing
Operations $ in millions $ in millions
Brokerage$570.2 $527.4 8% $112.6 $101.0 11% $0.55 $0.49 12%
Risk
Management 231.4214.6 8% 32.536.4 -11% 0.17 0.18 -6%
Total
Brokerage
& Risk
Management 801.6742.0 8% 145.1 137.4 6% 0.72 0.677%
Financial
Services &
Corporate3.1 60.6 (1.1) (20.8) (0.10) 0.01
Total
Continuing
Operations$804.7 $802.6 $144.0 $116.60.62 0.68
Discontinued
Operations (0.25) (0.04)
Total
Company$0.37 $0.64
Other Information2nd Q2nd Q 6 Mths 6 Mths
08 07 08 07
Shares repurchased 20,000 4,229,000 46,000 4,786,000
Number of acquisitions
closed 9 4 20 11
Annualized revenue
acquired
(in millions) $26.5 $10.6$57.5 $50.1
Book value per share $7.78 $8.21
Corporate related
borrowings at end
of period (in millions)$505.0 $229.5
Financial information used herein has been reclassified to reflect
discontinued operations as discussed below. In addition, this earnings
release contains certain non-GAAP information. EBITDA, a non-GAAP measure,
represents earnings before interest, income taxes, depreciation and
amortization. A reconciliation of EBITDA to earnings from continuing
operations before income taxes (which were $69.3 million and $60.0 million in
the second quarter 2008 and 2007, respectively and $96.2 million and $83.8
million in the six-month periods ended June 30, 2008 and 2007, respectively)
is included on page 7 of this earnings release, along with additional
information about non-GAAP measures.
"Given the current soft market, our Brokerage Segment posted respectable
second quarter results," said J. Patrick Gallagher Jr., Chairman, President
and CEO. "I was particularly pleased our Brokerage teams closed another 9
deals in the quarter and improved EBITDA margins by over a point. Any margin
improvement in this marketplace is outstanding.
"Our Risk Management Segment is also experiencing the negative effects of
a soft market and a slowing economy. We are seeing fewer customers entering
the alternative market and existing customer claims frequency was lower than
planned. As a result, organic growth of 7% was below our expectations. In
addition, we are seeing a slight increase in the average time it is taking to
settle claims, which decreases productivity during a period when we are also
seeing wage and benefit inflation. All of these factors put substantial
pressure on our Risk Management margins."
Brokerage Segment Second Quarter Highlights - Excluding Discontinued
Operations
-- Revenue growth was 6%, of which -1% was organic. Items excluded from
organic growth computations yet impacting second quarter 2008 to 2007
comparisons include (in millions):
2008 2007
Book of business sales, net $2.5 $0.9
Retail contingent commissions related
to acquisitions 3.3 2.2
MGA/MGU performance income1.7 0.9
-- Second quarter compensation expense ratio was 0.1% lower than 2007.
The ratio was primarily impacted by decreased headcount, substantially
offset by severance expense of 0.2%.
-- Second quarter operating expense ratio was 1.0% lower than 2007.
Savings on office expenses of 0.3%, business insurance of 0.2%, selling
expenses of 0.2% and other cost savings initiatives were partially
offset by increased legal fees of 0.3%.
-- EBITDA margin of 26%. The margin was 1.1% higher than 2007 and resulted
from the factors discussed above.
-- Second quarter effective tax rate was 0.8% higher than 2007 as a result
of resolving certain state tax items in second quarter 2007.
Risk Management Segment Second Quarter Highlights
-- Revenue growth was 7%, of which 1% was from the favorable impact of
foreign exchange rates. Domestic revenues were up 3% reflecting
excellent client retention, fee increases in line with historical
levels, modest new business given the soft market, all of which was
partially offset by reduced claim count frequency from existing
clients. International revenues were up 26% reflecting strength in new
business, growth from existing clients, excellent client retention and
the favorable impact of foreign exchange rates.
-- Second quarter compensation expense ratio was 3.3% higher than 2007.
The ratio was primarily impacted by increased employee benefit costs of
0.2% and increased headcount.
-- Second quarter operating expense ratio was 1.3% lower than 2007. The
ratio was impacted by lower business insurance costs of 1.2% and lower
employee travel expenses of 0.2%.
-- EBITDA margin of 14%. The margin was 2.0% lower than 2007 and resulted
from the factors discussed above.
-- Second quarter effective tax rate was 0.9% lower than 2007, primarily
due to a reduction in foreign statutory tax rates.
Financial Services and Corporate Segment Second Quarter Highlights
The law that provided for Internal Revenue Code (IRC) Section 29-related
tax credits expired on December 31, 2007. However, the amount of revenues,
expenses and tax credits recognized in 2007 were subject to estimation pending
the IRS' final credit computation factors, which were published on April 1,
2008. Final amounts necessary to adjust previous estimates to actual amounts
computed using the published factors have been reflected in Gallagher's first
and second quarter 2008 financial results.
Discontinued Operations
As previously disclosed, in first quarter 2008 Gallagher signed definitive
agreements to sell substantially all of its reinsurance brokerage business.
Under the agreements, Gallagher received initial proceeds of $31.8 million in
cash and a $1.3 million note receivable to be paid by December 31, 2008 and
additional contingent proceeds of up to $14.6 million that are based on
revenues generated in the 12 months subsequent to March 2008. In addition,
Gallagher is continuing its efforts to sell its small Irish wholesale
brokerage operation during 2008.
In the six-month period ended June 30, 2008, Gallagher recorded the
following related to its discontinued operations:
($ in millions)
Gain on Disposal of Operations
Cash proceeds from sale $31.8
Estimated additional sale proceeds to
be received 6.3
Book value of net assets sold,
principally goodwill and other
intangible assets (19.8)
Severance and other compensation
costs(5.9)
Gain on disposal of operations12.4
Loss from Discontinued Operations
Before Income Taxes
Write-off of goodwill related to
Irish wholesale brokerage operation (13.0)
Severance and other compensation
costs (14.3)
Accrual of service obligations costs
for accounts not sold(4.9)
Write-off of fixed assets and lease
costs(3.5)
Other 3.0
Loss from discontinued operations
before income taxes (32.7)
Provision for income taxes 2.9
Loss from discontinued operations $(23.2)
Throughout 2008, Gallagher will adjust its estimate of the sales proceeds
to be received and will also record approximately $15 million in related lease
termination costs in third or fourth quarter 2008 when it winds down the
leased facilities of the reinsurance brokerage operations.
Corporate Related Borrowings
At June 30, 2008, Gallagher had borrowings of $105.0 million outstanding
under its line of credit facility, used primarily to fund 2008 acquisitions.
The weighted average interest rate on these borrowings, which is based on a
spread over short-term LIBOR, was 3.18%.
Income Taxes
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 and Corporate Segment reflects the entire
benefit to Gallagher of the IRC Section 29-related tax credits because that is
the segment which produced the credits. Gallagher historically reported, and
anticipates reporting for the foreseeable future, an annual effective tax rate
of approximately 39% to 41% in both its Brokerage and Risk Management
Segments.
Gallagher's consolidated effective tax rate for second quarter 2008 was
39.8%, which is higher than the second quarter 2007 consolidated effective tax
rate of 23.7%. This increase resulted from Gallagher being able to produce
IRC Section 29-related tax credits in second quarter 2007, but not in second
quarter 2008. The law that provided for IRC Section 29-related tax credits
expired on December 31, 2007. Accordingly, Gallagher anticipates reporting
for the foreseeable future, an annual consolidated effective tax rate of
approximately 39% to 41%.
The company will host a webcast conference call on Wednesday, July 30,
2008 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., an international insurance brokerage and risk
management services firm, is headquartered in Itasca, Illinois, has operations
in 14 countries and does business in more than 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. 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 Gallagher's Annual
Report on Form 10-K for the fiscal year ended December 31, 2007, 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 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
BROKERAGE SEGMENT 2008 2007 2008 2007
Commissions $246.0$228.1$452.3$416.8
Fees 58.4 59.5 103.8 97.5
Investment income and other 7.8 7.0 14.1 13.1
Revenues312.2 294.6 570.2 527.4
Compensation 175.8 166.3 342.9 318.0
Operating 56.0 55.8 114.7 108.4
Depreciation4.7 3.8 8.6 7.5
Amortization 10.1 6.9 18.9 13.9
Expenses246.6 232.8 485.1 447.8
Earnings from continuing operations
before income taxes 65.6 61.8 85.1 79.6
Provision for income taxes 26.4 24.4 34.0 31.5
Earnings from continuing operations $39.2 $37.4 $51.1 $48.1
Diluted earnings from continuing
operations per share $0.42 $0.38 $0.55 $0.49
Growth - revenues 6% 15%8% 14%
Organic growth in commissions and
fees (1) -1%6%0%3%
Compensation expense ratio (2) 56% 56% 60% 60%
Operating expense ratio (3) 18% 19% 20% 21%
Pretax profit margin (4)21% 21% 15% 15%
EBITDA margin (5) 26% 25% 20% 19%
Effective tax rate 40% 39% 40% 40%
Workforce at end of period
(includes acquisitions) 5,440 5,164
RISK MANAGEMENT SEGMENT
Fees $114.1$107.0$229.2$212.9
Investment income 1.1 0.8 2.2 1.7
Revenues115.2 107.8 231.4 214.6
Compensation 70.4 62.3 140.5 124.5
Operating 29.2 28.7 58.4 53.7
Depreciation3.2 2.8 6.2 5.6
Amortization0.2 0.2 0.3 0.3
Expenses103.0 94.0 205.4 184.1
Earnings from continuing operations
before income taxes 12.2 13.8 26.0 30.5
Provision for income taxes 4.8 5.5 10.1 12.3
Earnings from continuing operations$7.4 $8.3 $15.9 $18.2
Diluted earnings from continuing
operations per share $0.08 $0.08 $0.17 $0.18
Growth - revenues 7% 10%8%9%
Organic growth in fees (1) 7% 10%8%9%
Compensation expense ratio (2) 61% 58% 61% 58%
Operating expense ratio (3) 25% 27% 25% 25%
Pretax profit margin (4)11% 13% 11% 14%
EBITDA margin (5) 14% 16% 14% 17%
Effective tax rate 39% 40% 39% 40%
Workforce at end of period
(includes acquisitions) 3,892 3,676
FINANCIAL SERVICES AND CORPORATE SEGMENT
Investment income (loss):
Asset Alliance Corporation $(0.2)$(1.4)$(0.2)$(3.5)
IRC Section 29 Syn/Coal facilities2.0 29.5 3.8 62.4
Real estate and venture capital
investments (0.1) 0.1 (0.3) 0.6
1.7 28.2 3.3 59.5
Investment gains (losses) (0.2) (3.0) (0.2) 1.1
Revenues 1.5 25.2 3.1 60.6
Investment expenses:
IRC Section 29 Syn/Coal facilities (0.5) 33.5 (1.8) 73.9
Compensation, professional fees
and other3.2 3.5 6.0 7.5
2.7 37.0 4.2 81.4
Interest7.3 3.2 13.8 3.8
Depreciation - 0.6 - 1.7
Expenses 10.0 40.8 18.0 86.9
Loss from continuing operations before
income taxes (8.5)(15.6)(14.9)(26.3)
Benefit for income taxes (3.6)(15.7) (5.9)(27.1)
Earnings (loss) from continuing
operations $(4.9) $0.1 $(9.0) $0.8
Diluted earnings (loss) from
continuing operations per share $(0.05) $-$(0.10)$0.01
See notes to second quarter 2008 earnings release and non-GAAP financial
measures on page 7 of 8.
Arthur J. Gallagher & Co.
Consolidated Statement of Earnings
(Unaudited - in millions except per share data)
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
TOTAL COMPANY 2008 2007 2008 2007
Commissions $246.0$228.1$452.3$416.8
Fees 172.5 166.5 333.0 310.4
Investment income - Brokerage
and Risk Management8.9 7.8 16.3 14.8
Investment income - Financial
Services and Corporate 1.7 28.2 3.3 59.5
Investment gains (losses) (0.2) (3.0) (0.2) 1.1
Revenues428.9 427.6 804.7 802.6
Compensation 246.2 228.6 483.4 442.5
Operating 85.2 84.5 173.1 162.1
Investment expenses 2.7 37.0 4.2 81.4
Interest7.3 3.2 13.8 3.8
Depreciation7.9 7.2 14.8 14.8
Amortization 10.3 7.1 19.2 14.2
Expenses359.6 367.6 708.5 718.8
Earnings from continuing operations
before income taxes 69.3 60.0 96.2 83.8
Provision for income taxes 27.6 14.2 38.2 16.7
Earnings from continuing operations41.7 45.8 58.0 67.1
Loss on discontinued operations, net
of income taxes (0.9) (2.0)(23.2) (3.5)
Net earnings $40.8 $43.8 $34.8 $63.6
Diluted earnings from continuing
operations per share $0.45 $0.46 $0.62 $0.68
Diluted loss on discontinued
operations per share (0.01)(0.02)(0.25)(0.04)
Diluted net earnings per share$0.44 $0.44 $0.37 $0.64
Dividends declared per share $0.32 $0.31 $0.64 $0.62
Other Information
Basic weighted average shares
outstanding (000s) 93,05097,39292,67298,127
Diluted weighted average shares
outstanding (000s) 93,54598,65293,15199,394
Common shares repurchased (000s) 20 4,22946 4,786
Annualized return on beginning
stockholders' equity (6) 10% 15%
Number of acquisitions closed 9 42011
Workforce at end of period
(includes acquisitions) 9,534 9,047
Arthur J. Gallagher & Co.
Consolidated Balance Sheet
(Unaudited - in millions except per share data)
June 30, 2008Dec 31, 2007
Cash and cash equivalents$232.9 $255.9
Restricted cash 674.6 601.4
Investments - current 5.7 7.5
Premiums and fees receivable1,104.7 1,303.7
Other current assets 114.9 107.3
Total current assets 2,132.8 2,275.8
Investments - noncurrent 25.126.3
Fixed assets related to consolidated
investments - net- 1.9
Other fixed assets - net 87.586.0
Deferred income taxes 282.2 292.6
Other noncurrent assets 128.7 118.0
Goodwill - net468.5 440.6
Amortizable intangible assets - net 384.7 315.6
Total assets $3,509.5$3,556.8
Premiums payable to insurance and
reinsurance companies $1,756.8$1,874.0
Accrued compensation and other accrued
liabilities 211.8 281.3
Unearned fees 53.444.1
Income taxes payable5.5 -
Other current liabilities 29.932.8
Corporate related borrowings - current105.0 -
Total current liabilities 2,162.4 2,232.2
Corporate related borrowings - noncurrent 400.0 400.0
Other noncurrent liabilities 220.9 209.1
Total liabilities 2,783.3 2,841.3
Stockholders' equity:
Common stock - issued and outstanding 93.392.0
Capital in excess of par value154.1 120.2
Retained earnings 470.9 495.9
Accumulated other comprehensive earnings7.9 7.4
Total stockholders' equity 726.2 715.5
Total liabilities and stockholders' equity $3,509.5$3,556.8
Other Information
Book value per share $7.78 $7.78
See notes to second quarter 2008 earnings release and non-GAAP financial
measures on page 7 of 8.
Notes to Second Quarter 2008 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 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 Financial Measures Defined
(1) Organic growth in commissions and fees 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.
(3) Represents operating expenses divided by total revenues.
(4) Represents pretax earnings divided by total revenues.
(5) Represents earnings from continuing operations before interest, income
taxes, depreciation and amortization (EBITDA) divided by total
revenues.
(6) Represents year-to-date net earnings divided by total stockholders'
equity as of the beginning of the year.
(7) EBITDA represents earnings from continuing operations before interest,
income taxes, depreciation and amortization expense. The computation
of EBITDA is as follows:
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
BROKERAGE SEGMENT 2008 2007 2008 2007
Earnings from continuing operations $39.2 $37.4 $51.1 $48.1
Provision for income taxes 26.4 24.4 34.0 31.5
Depreciation4.7 3.8 8.6 7.5
Amortization 10.1 6.9 18.9 13.9
Brokerage EBITDA $80.4 $72.5$112.6$101.0
RISK MANAGEMENT SEGMENT
Earnings from continuing operations$7.4 $8.3 $15.9 $18.2
Provision for income taxes 4.8 5.5 10.1 12.3
Depreciation3.2 2.8 6.2 5.6
Amortization0.2 0.2 0.3 0.3
Risk Management EBITDA$15.6 $16.8 $32.5 $36.4
FINANCIAL SERVICES AND CORPORATE SEGMENT
Earnings (loss) from continuing
operations $(4.9) $0.1 $(9.0) $0.8
Benefit for income taxes (3.6)(15.7) (5.9)(27.1)
Interest7.3 3.2 13.8 3.8
Depreciation - 0.6 - 1.7
Financial Services and Corporate
EBITDA $(1.2) $(11.8)$(1.1) $(20.8)
TOTAL COMPANY
Net earnings $40.8 $43.8 $34.8 $63.6
Loss on discontinued operations,
net of income taxes0.9 2.0 23.2 3.5
Earnings from continuing operations41.7 45.8 58.0 67.1
Provision for income taxes 27.6 14.2 38.2 16.7
Earnings from continuing operations
before income taxes 69.3 60.0 96.2 83.8
Interest7.3 3.2 13.8 3.8
Depreciation7.9 7.2 14.8 14.8
Amortization 10.3 7.1 19.2 14.2
Total Company EBITDA $94.8 $77.5$144.0$116.6
Arthur J. Gallagher & Co.
Investment Summary
(Unaudited - in millions)
June 30, 2008 December 31, 2007
Funding
Current Noncurrent Commitments Current Noncurrent
Investments in
Asset Alliance
Corporation (AAC) (1):
Common stock $- $8.9 $- $-$9.3
Preferred stock 0.10.2 -5.3 0.3
Distribution
receivable 3.1 - - - -
Total AAC
investments 3.29.1 -5.3 9.6
Alternative energy
investments:
IRC Section 29
Syn/Coal production
net receivables 2.3 - -1.6 -
Equity interest in
biomass projects
and pipeline - 8.8 -0.3 8.8
Clean energy
related ventures 0.1 0.8 0.50.1 0.8
Total alternative
energy
investments2.4 9.6 0.52.0 9.6
Real estate and
venture capital
investments 0.1 6.4 0.50.2 7.1
Total investments $5.7 $25.1$1.0 $7.5 $26.3
(1) On January 8, 2008, AAC entered into a reverse merger agreement with
Tailwind Financial, Inc (AMEX: TNF) (Tailwind). In this proposed
transaction, Tailwind will issue its common stock in exchange for 100%
of the common stock of AAC. At closing, Tailwind will issue
approximately 10.6 million shares to AAC shareholders. In addition to
certain adjustments to be made to the consideration based upon the
earnings of AAC from September 30, 2007 to the closing date, up to an
additional 2.5 million shares will be issued to AAC shareholders if
certain earnout based performance milestones are met during a three
year period. The proposed share amounts issued for consideration
equate to an initial purchase price for AAC of $85.0 million plus an
earnout of up to $20.0 million, assuming an $8.00 price per Tailwind
share. Current Tailwind shareholders will retain approximately 65%
ownership in the surviving entity. The shares owned by AJG may be
subject to trading restrictions. The contemplated transaction is
subject to approvals by AAC and Tailwind shareholders and the SEC.
SOURCE Arthur J. Gallagher & Co.
