10-QPeriod: Q1 FY2014

Arthur J. Gallagher & Co. Quarterly Report for Q1 Ended Mar 31, 2014

Filed April 24, 2014For Securities:AJG

Summary

Arthur J. Gallagher & Co. (AJG) reported a solid first quarter in 2014, demonstrating significant revenue growth driven by both organic improvements and strategic acquisitions. Total revenues increased by 20% year-over-year to $915.0 million, with net earnings rising to $49.3 million, or $0.36 per diluted share. The brokerage segment, representing the largest portion of revenue, showed a strong performance with a 25% increase in total revenues and a 33% rise in net earnings, benefiting from a growing market and successful integration of recent acquisitions. The company also highlighted substantial progress in its large-scale international expansion efforts, notably the acquisition of the Oval Group in the UK and the pending acquisition of Wesfarmers Insurance Brokerage operations in Australia and New Zealand. These strategic moves are expected to further diversify AJG's revenue streams and geographic presence. Despite significant investment in these acquisitions and ongoing integration costs, AJG maintained strong operational execution and provided optimistic guidance for its clean energy investments, which are expected to contribute significantly to earnings in 2014.

Financial Highlights

46 data points
Beta

Revenue

$915.00M

81.3% Gross Margin

Net Income

$49.30M

5.4% Net Margin

EPS (Diluted)

$0.36

Total Assets

$7.28B

Cash & Equivalents

$739.20M

Free Cash Flow

$64.30M

Financial Statements
Beta
Revenue$915.00M
Cost of Revenue$171.00M
Gross Profit$744.00M
Operating Expenses$148.80M
Operating Income-$49.30M
Interest Expense$16.20M
Net Income$49.30M
EPS (Basic)$0.37
EPS (Diluted)$0.36
Shares Outstanding (Basic)134.20M

Key Highlights

  • 1Total revenues increased by 20% to $915.0 million compared to the prior year period.
  • 2Net earnings rose to $49.3 million ($0.36 per diluted share), up from $40.5 million ($0.32 per diluted share) in the prior year.
  • 3The brokerage segment saw strong revenue growth of 25%, driven by acquisitions and organic growth.
  • 4The company announced two significant international acquisitions: Oval Group for approximately $331.0 million and Wesfarmers Insurance Brokerage for approximately $933.0 million, signaling a focus on global expansion.
  • 5Clean energy investments are projected to generate between $90.0 million and $100.0 million in net earnings for 2014, including tax credits.
  • 6The company raised approximately $911.9 million in net proceeds from a secondary public offering of common stock to help fund these strategic acquisitions.
  • 7Despite increased debt for acquisitions, AJG maintained compliance with its financial covenants.

Frequently Asked Questions

Revenue growth was primarily driven by a combination of organic growth in the brokerage and risk management segments, which saw increases in commissions and fees, and significant contributions from acquisitions completed in the preceding twelve months. The company also reported strong performance from its clean energy investments.

AJG is funding these large acquisitions through a multi-pronged approach including cash from operations, borrowings under its credit facilities, proceeds from a significant secondary public offering of common stock ($911.9 million), and potentially the issuance of debt. The company also entered into a foreign currency derivative to hedge against potential currency fluctuations related to the Wesfarmers acquisition.

AJG anticipates that its clean energy investments will generate between $90.0 million and $100.0 million in net earnings for the full year 2014, largely due to expected IRC Section 45 tax credits. The company expects these earnings to provide positive cash flow and contribute to funding its ongoing mergers and acquisition strategy.

Yes, the acquisition is subject to regulatory approvals and customary closing conditions, and there's no guarantee it will be completed. Key risks include the successful integration of the business, potential loss of key employees or clients during integration, and risks associated with the premium funding business within Wesfarmers. The company also notes that its secondary stock offering was not contingent on this acquisition closing.