ROLLING MEADOWS, Ill., May 1, 2018 /PRNewswire/ -- Arthur J. Gallagher & Co. AJG today reported its financial results for the quarter ended March 31, 2018.  Management will host a webcast conference call to discuss these results on Tuesday, May 1, 2018 at 5:15 p.m. ET/4:15 p.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 8.  A new revenue recognition accounting standard was adopted as of January 1, 2018, using the full retrospective method to restate each prior reporting period presented.  Accordingly, all 2017 amounts have been restated from previously reported information.

"We had an excellent start to 2018.  During the first quarter we delivered strong total revenue growth, excellent organic revenue growth, steady growth from our tuck-in M&A strategy and continued margin expansion," said J. Patrick Gallagher, Jr., Chairman, President and CEO.  "Most importantly, our unique culture is thriving around the world, demonstrated by being selected as a World's Most Ethical Company for the seventh year in a row, by the Ethisphere Institute. Organic growth in a moderately improving insurance market, M&A growth, margin expansion, and a culture that promotes team work, professionalism and a dedication to delivering the very best service - I believe we are very well positioned for the remainder of 2018 and beyond."

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Interest and banking costs and debt - At March 31, 2018, Gallagher had $2,798.0 million of borrowings from private placements, $360.0 million of short-term borrowings under its line of credit facility and $121.0 million outstanding under a revolving loan facility that provides funding for premium finance receivables, which are fully collateralized by the underlying premiums held by insurance carriers, and as such are excluded from our debt covenant computations.

Clean energy - Consists of the operating results related to our investments in 34 clean coal production plants and royalty income from clean coal licenses related to Chem-Mod LLC.  Additional information regarding these results is available in the "CFO Commentary" at ajg.com/IR.

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 and other corporate level activities. 

Litigation Settlement - 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 resulted in quarterly after-tax charges being incurred through June 30, 2017.  No such charges were incurred in this segment in the first quarter of 2018.

Home Office Lease Termination/Move - During first quarter 2017, Gallagher relocated its corporate office headquarters to a nearby suburb of Chicago.  No such charges were incurred in this segment in the first quarter of 2018.

Impact of U.S. Tax Reform - In the fourth quarter of 2017, new tax legislation was enacted in the U.S., which among other changes lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018.  The ultimate impact of the new tax legislation will likely differ from our estimates made in fourth quarter of 2017, due to, among other things, changes in interpretations and assumptions Gallagher has made or additional regulatory or accounting guidance that may be issued with respect to the new tax legislation. 

Income Taxes
Gallagher allocates the provision for income taxes to its Brokerage and Risk Management segments using the local country statutory rates.  Gallagher's consolidated effective tax rate for the quarters ended March 31, 2018 and 2017 was (18.0)% and (21.2)%, respectively, which was lower than the statutory rate due to the amount of IRC Section 45 tax credits earned and the impact of the income tax benefit of stock compensation in the first quarter of 2018.

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Webcast Conference Call
Gallagher will host a webcast conference call on Tuesday, May 1, 2018 at 5:15 p.m. ET/4:15 p.m. CT.  To listen to this call, please go to ajg.com/IR.  The call will be available for replay at such website for at least 90 days. 

About Arthur J. Gallagher & Co.
Arthur J. Gallagher & Co., an international insurance brokerage and risk management services firm, is headquartered in Rolling Meadows, Illinois, has operations in 33 countries and offers client-service capabilities in more than 150 countries around the world through a network of correspondent brokers and consultants.

Impact of New Revenue Recognition Accounting Standard
A new revenue recognition accounting standard was adopted as of January 1, 2018, using the full retrospective method to restate each prior reporting period presented.  The cumulative effect of the adoption was recognized as an increase to retained earnings of $125.3 million on January 1, 2016.  The impact of the adoption of the new guidance resulted in changes to our accounting policies for revenue recognition, trade and other receivables, deferred contract costs and deferred revenues.  The primary impacts of the new standard to our segments are anticipated to be as follows:

With respect to the Brokerage segment, the adoption of the new standard had a material impact on the presentation of our results of operations in certain quarters due to timing changes in the recognition of certain revenue and expenses.  As a result, we reported a different seasonality with respect to quarterly results after the adoption of the new standard, with a shift in the timing of revenue recognized from the second, third and fourth quarters, to the first quarter. 

With respect to the Risk Management segment, under the new standard, when we have the obligation to adjust claims until closure, and are compensated on a per claim basis, we record the full amount of the claim revenue upon notification of the claim and defer certain revenues to reflect delivery of services over the claim handling period.  When our obligation is to provide claims services throughout a contract period, we recognize revenue ratably across that contract period.  As such, the net impact of the new guidance requires greater initial revenue deferral and recognition over a longer period of time than under our previous accounting policies.

With respect to the Corporate segment, the timing related to recognition of revenue remains substantially unchanged.  While there is no material impact on our annual after tax earnings, there is a material change to our after tax earnings in the interim quarterly periods, as income tax credits are recognized based on our quarterly consolidated pretax earnings patterns.

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 impact of tax reform on our results and clean energy investments; (ii) the impact of a new revenue recognition accounting standard; (iii) anticipated future results or performance of any segment or the Company as a whole; (iv) the premium rate environment and the state of insurance markets; 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 changes in our understanding of, or new IRS guidance relating to, tax reform; changes in worldwide and national economic conditions; changes in premium rates and in insurance markets generally; changes in the insurance brokerage industry's competitive landscape; and our actual experience implementing the new revenue recognition accounting standard.

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, 2017 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.

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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 (adjusted EPS), 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.  See further below for definitions and the reason each of these measures is useful to investors.  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.  As disclosed in its most recent Proxy Statement, beginning in first quarter 2017, Gallagher makes determinations regarding certain elements of executive officer compensation, performance share awards and annual cash incentive awards, partly on the basis of measures related to adjusted EBITDAC.  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 Non-GAAP presentation - Gallagher believes that the adjusted non-GAAP 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.  See page 12 for a reconciliation of the adjustments made to income taxes.

• Adjusted revenues and expenses - Revenues (for the Brokerage segment), revenues before reimbursements (for the Risk Management segment), compensation expense and operating expense, respectively, each adjusted to exclude the following:
• Net gains realized from sales of books of business, which are primarily net proceeds received related to sales of books of business and other divestiture transactions.
• Acquisition integration costs, which include costs related to certain of our large acquisitions, outside the scope of the usual tuck-in strategy, not expected to occur on an ongoing basis in the future once Gallagher fully assimilates 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.
• Workforce related charges, which primarily include severance costs related to employee terminations and other costs associated with redundant workforce.
• Lease termination related charges, which primarily include costs related to terminations of real estate leases and abandonment of leased space.
• Acquisition related adjustments, which include change in estimated acquisition earnout payables adjustments, impacts of acquisition valuation true-ups, impairment charges and acquisition related compensation charges.
• The impact of foreign currency translation, as applicable. 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.
• Adjusted ratios - Adjusted compensation expense and adjusted operating expense, respectively, each divided by adjusted revenues.

Non-GAAP Earnings Measures

• EBITDAC and EBITDAC margin - EBITDAC is net earnings before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables and EBITDAC margin is EBITDAC divided by total revenues. These measures for the Brokerage and Risk Management segments provide a meaningful representation of Gallagher's operating performance and, for the overall business, provide a meaningful way to measure its financial performance on an ongoing basis.
• Adjusted EBITDAC and Adjusted EBITDAC Margin - Adjusted EBITDAC is EBITDAC adjusted to exclude net gains realized from sales of books of business, acquisition integration costs, workforce related charges, lease termination related charges, acquisition related adjustments and the period-over-period impact of foreign currency translation, as applicable and Adjusted EBITDAC margin is Adjusted EBITDAC divided by total adjusted revenues (defined above). These measures for the Brokerage and Risk Management segments provide a meaningful representation of Gallagher's operating performance, and are also presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.

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• Adjusted EPS for the Brokerage and Risk Management segments - Net earnings adjusted to exclude the after-tax impact of net gains realized from sales of books of business, acquisition integration 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. This measure provides a meaningful representation of Gallagher's operating performance (and as such should not be used as a measure of Gallagher's liquidity), and is also presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.

Organic Revenues (a non-GAAP measure) - 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 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 revenue organic growth excludes the period-over-period impact of foreign currency translation.  For the Risk Management segment, organic change in fee revenues excludes the first twelve months of fee revenues generated from acquisitions and the fee revenues related to operations disposed of in each year presented.  In addition, change in organic growth excludes 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, but non-GAAP, 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 non-GAAP 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 pages 10 and 11), for adjusted revenues, adjusted EBITDAC and adjusted diluted net earnings per share (on page 2), for organic revenue measures (on pages 3 and 5, respectively, for the Brokerage and Risk Management segments), for adjusted compensation and operating expenses and adjusted EBITDAC margin (on pages 4 and 5, respectively, for the Brokerage and Risk Management segments).  Reported compensation and operating expense ratios can also be found in the "Supplemental Quarterly Data" available at ajg.com/IR.

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Contact: 
Ray Iardella
Vice President - Investor Relations
630-285-3661 or ray_iardella@ajg.com

 

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SOURCE Arthur J. Gallagher & Co.