Arthur J. Gallagher & Co. Announces Fourth Quarter and Full Year 2011 Financial Results

ITASCA, Ill., Jan. 31, 2012 /PRNewswire/ -- Arthur J. Gallagher & Co. (NYSE: AJG) today reported its financial results for the quarter and year ended December 31, 2011.  A printer-friendly format and supplemental quarterly data is available at www.ajg.com.  For a description of the measures used to report financial results in this earnings release, please see "Information Regarding Non-GAAP Measures" beginning on page 7.

"We finished 2011 with strong momentum.  During the fourth quarter, both operating segments posted strong organic growth, improved adjusted EBITDAC margins and improved adjusted diluted net earnings per share," said J. Patrick Gallagher, Jr., Chairman, President and CEO.  "Our combined Brokerage and Risk Management segments posted 20% growth in adjusted total revenues, 7.2% organic growth in commission, fee and supplemental commission revenues, 26% growth in adjusted EBITDAC and 19% growth in adjusted diluted net earnings per share."

• Our Brokerage segment had a great quarter.  Adjusted total revenues were up 22%, organic commission, fee and supplemental commission revenues grew 5.2%, adjusted EBITDAC was up 27% and adjusted diluted earnings per share was up 19%.  Also during the quarter, we completed 11 acquisitions with annualized revenues of $42 million. During 2011, we added $277 million of annualized revenues.
• Our Risk Management segment had an outstanding quarter.  Adjusted total revenues were up 13%, organic fees were up 12.6%, adjusted EBITDAC was up 23% and adjusted diluted earnings per share was up 22%.  

"During the fourth quarter, we continued to see evidence of market firming and our customers' businesses seem to be stabilizing, even in these times of economic uncertainty.  As we move into 2012, our global team continues to execute on our plans and are delivering outstanding service to our clients in this changing environment."

The following provides non-GAAP information that management believes is helpful when comparing 2011 revenues, EBITDAC and diluted net earnings (loss) per share with the same periods in 2010:  

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Brokerage Segment Fourth Quarter Highlights

• The following provides non-GAAP information that management believes is helpful when comparing certain components of 2011 organic revenues with the same periods in 2010 (in millions):  

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Brokerage Segment Fourth Quarter Highlights (continued)

• The following is a summary of brokerage acquisition activity for 2011 and 2010:

• Adjusted fourth quarter compensation ratio shown on page 9 was 0.5 pts higher than the same period in 2010.  This ratio was primarily impacted by increased incentive compensation of 2.4 pts, partially offset by salary savings of 1.4 pts due to headcount control.
• Adjusted fourth quarter operating expense ratio shown on page 9 was 1.3 pts lower than the same period in 2010.  This ratio was primarily impacted by reductions in travel and entertainment costs of 0.7 pts and business insurance of 0.6 pts.
• Acquisition related adjustments is comprised of (a) $2.3 million of income, reported in the change in estimated earnout payables line, relating to net downward adjustments for prior year acquisitions as a result of revised earnout projections, (b) $0.6 million of expense reported in the compensation expense line relating to an acquisition where the sellers reallocated a portion of the earnout to current employees and (c) $4.6 million of expense reported in the amortization expense line relating to intangible asset impairments for two acquisitions made in prior years.
• The following provides non-GAAP information that management believes is helpful when comparing 2011 EBITDAC and 2011 Adjusted EBITDAC to the same periods in 2010 (in millions):

* As expected, until the integration process is completed in 2013, the Heath Lambert operations will reduce the overall Brokerage Segment adjusted EBITDAC margins.  

Risk Management Segment Fourth Quarter Highlights

• The following provides non-GAAP information that management believes is helpful when comparing 2011 organic fee revenues with the same periods in 2010 (in millions):

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Risk Management Segment Fourth Quarter Highlights (continued)

• Adjusted fourth quarter compensation ratio shown on page 9 was 0.5 pts lower than the same period in 2010.  This ratio was primarily impacted by reductions in salary from headcount control of 1.0 pts and employee benefits of 0.6 pts, partially offset by increased incentive compensation of 1.3 pts.  
• Adjusted fourth quarter operating expense ratio shown on page 9 was 0.8 pts lower than the same period in 2010.  This ratio was impacted by reductions in rent expense of 1.0 pts and travel and entertainment costs of 0.5 pts, partially offset by increased outsourcing service and other outside fees of 1.0 pts.
• The following provides non-GAAP information that management believes is helpful when comparing 2011 EBITDAC and 2011 Adjusted EBITDAC to the same periods in 2010 (in millions):

Corporate Segment Fourth Quarter Highlights

The following provides non-GAAP information that management believes is helpful when comparing 2011 operating results for the Corporate Segment with the same periods in 2010 (in millions):

• Debt, interest and banking - Gallagher has $675.0 million of long-term borrowings outstanding under three private placement agreements, which are due and payable in various amounts in 2014 through 2023.  Gallagher also maintains an unsecured line of credit of $500.0 million that expires July 14, 2014.  There were $10.0 million of borrowings outstanding under Gallagher's line of credit facility at December 31, 2011.  

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Corporate Segment Fourth Quarter Highlights (continued)

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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 38% to 41% in both its Brokerage and Risk Management segments.  Gallagher's consolidated effective tax rate for the year ended December 31, 2011 and 2010 was 30.7% and 19.6%, respectively.  The following provides a reconciliation of the expected federal and state statutory tax amounts to the provision (benefit) for income taxes as reported in continuing operations for 2011 and 2010:

Webcast Conference Call

Gallagher will host a webcast conference call on Wednesday, February 1, 2012 at 9:15 a.m. ET/8:15 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 17 countries and offers client-service capabilities in more than 110 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," "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, statements regarding future income and tax credits generated by Gallagher's clean energy investments, our corporate income tax rate, the future revenue and earnings impact of recent acquisitions, drivers of organic growth in the Brokerage and Risk Management segments and 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:

• 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 the difficulties inherent in combining the cultures and systems of different companies could impact the future revenue and earnings impact of recent acquisitions, drivers of organic growth in the Brokerage and Risk Management segments and anticipated future results or performance of any segment or the Company as a whole; and
• Uncertainties related to Gallagher's IRC Section 45 investments, including uncertainties related to (i) maintenance of long-term permits to operate the facilities by Gallagher's utility partners, (ii) Gallagher's ability to find operating sites and co-investors for its non-operating clean energy investments, (iii) potential IRS challenges to Gallagher's ability to claim tax credits under IRC Section 45, (iv) utilities' future use of coal to generate electricity, (v) operational risks at the IRC Section 45 operations (including Gallagher's lack of control over such operations), (vi) business risks relating to Gallagher's co-investors and partners, (vii) intellectual property risks, (viii) political and regulatory developments, including the risk that tax incentives for coal could be eliminated retroactively, and (ix) environmental risks, could impact Gallagher's future income and tax credits generated from its clean energy investments and its future corporate tax rate.

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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, 2010, 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, Adjusted EBITDAC margin excluding Heath Lambert, Diluted Net Earnings Per Share (As Adjusted) for the Brokerage and Risk Management segments, organic change in commission, fee and supplemental commission revenues, adjusted revenues, expenses and net earnings, adjusted compensation expense ratio and adjusted operating expense ratio.  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, 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 presentation of 2011 and 2010 statements of earnings, presented on the following pages, 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, expenses and net earnings - Gallagher defines these measures as revenues, expenses (including compensation expense and operating expense) and earnings from continuing operations, respectively, each adjusted to exclude gains realized from sales of books of business, supplemental commission timing amounts, workforce related charges, lease termination related charges, acquisition related integration costs, litigation settlements and adjustments to the change in estimated acquisition earnout payables, as applicable.  Acquisition related 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 on to 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, Adjusted EBITDAC margin excluding Heath Lambert, 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, Adjusted EBITDAC margin excluding Heath Lambert, 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 earnings from continuing operations 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, supplemental commission timing amounts, earnout related compensation charges, workforce related charges, lease termination related charges, acquisition related integration costs, litigation settlements and the period-over-period impact of foreign currency translation.
• Adjusted EBITDAC margin - Gallagher defines this measure as Adjusted EBITDAC divided by total revenues, as adjusted to exclude gains realized from sales of books of business and supplemental commission timing amounts.
• Adjusted EBITDAC margin excluding Heath Lambert - Gallagher defines this measure as Adjusted EBITDAC further adjusted to exclude the EBITDAC associated with the acquired Heath Lambert operations divided by total revenues, as adjusted to exclude gains realized from sales of books of business, supplemental commission timing amounts and the revenues associated with the acquired Heath Lambert operations.

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Information Regarding Non-GAAP Measures (continued)

• 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, supplemental commission timing amounts, workforce related charges, lease termination related charges, acquisition related integration costs litigation settlements and the change in estimated acquisition earnout payables divided by diluted weighted average shares outstanding.

Organic Revenues - Organic change in commission, fee and supplemental commission revenues excludes the first twelve months of net commission, fee and supplemental commission 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 determine the revenue growth associated with the operations that were a part of Gallagher in both the current and prior year.  In addition, organic growth excludes the impact of 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 2011 foreign exchange rates to the same periods in 2010.  

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 will be continuing in 2011 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 financial statement users 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 for adjusted revenues, expenses and net earnings, EBITDAC (on pages 9 through 12), for Adjusted EBITDAC, Adjusted EBITDAC margin, Adjusted EBITDAC margin excluding Heath Lambert (on pages 3 and 4, respectively, for the Brokerage and Risk Management segments), for Diluted Net Earnings Per Share (As Adjusted) for the Brokerage and Risk Management segments (on pages 1 and 2), and for organic change in commission, fee and supplemental commission revenues (on pages 2 and 3, respectively, for the Brokerage and Risk Management segments).

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SOURCE Arthur J. Gallagher & Co.