10-QPeriod: Q3 FY2014

Arthur J. Gallagher & Co. Quarterly Report for Q3 Ended Sep 30, 2014

Filed October 29, 2014For Securities:AJG

Summary

Arthur J. Gallagher & Co. (AJG) reported strong performance in its third quarter and first nine months of 2014, driven by significant revenue growth and improved earnings across its Brokerage and Risk Management segments. The company completed a substantial number of acquisitions, significantly expanding its global footprint, particularly in the UK and Australia. These acquisitions, along with strong organic growth, contributed to a notable increase in total revenues and adjusted EBITDAC. The company also highlighted positive contributions from its clean energy investments, which are expected to continue generating significant earnings. While facing ongoing integration costs from acquisitions, AJG's financial position remains robust, supported by healthy operating cash flows and available credit facilities. Investors should note the company's aggressive acquisition strategy, which is a key driver of its growth. The integration of these acquisitions is proceeding as expected, with ongoing efforts to realize synergies. Despite increased debt levels due to financing these acquisitions, the company remains compliant with its debt covenants and maintains sufficient liquidity. The company's outlook remains positive, with expectations for continued growth in its core segments and ongoing contributions from its clean energy investments.

Financial Highlights

46 data points
Beta

Revenue

$1.29B

74.7% Gross Margin

Net Income

$93.60M

7.3% Net Margin

EPS (Diluted)

$0.58

Total Assets

$9.99B

Cash & Equivalents

$290.50M

Free Cash Flow

$17.80M

Financial Statements
Beta
Revenue$1.29B
Cost of Revenue$326.20M
Gross Profit$960.60M
Operating Expenses$197.30M
Operating Income-$251.90M
Interest Expense$25.90M
Net Income$93.60M
EPS (Basic)$0.58
EPS (Diluted)$0.58
Shares Outstanding (Basic)160.20M

Key Highlights

  • 1Total revenues increased by 39% to $1.29 billion in Q3 2014 and by 38% to $3.38 billion in the first nine months of 2014, driven by acquisitions and organic growth.
  • 2Brokerage segment revenues grew significantly, up 46% in Q3 and 36% year-to-date, supported by 4.9% organic growth in commissions and fees for the quarter.
  • 3Risk Management segment revenues saw a 12% increase in Q3 and 8% year-to-date, with organic fees growing 11.7% in the quarter.
  • 4The company completed 19 acquisitions in the Brokerage segment during Q3 2014, with annualized revenues of $178.7 million, and 45 acquisitions year-to-date.
  • 5Clean energy investments contributed $25.9 million to net earnings in Q3 2014 and are projected to generate $102-$107 million in net earnings for the full year 2014.
  • 6Diluted net earnings per share for the total company increased to $0.58 in Q3 2014 from $0.57 in Q3 2013, and to $1.67 from $1.61 for the nine-month period.
  • 7The company utilized a significant portion of its capital for acquisitions, with cash paid for acquisitions totaling $1.83 billion in the first nine months of 2014.

Frequently Asked Questions

Arthur J. Gallagher & Co. has pursued an aggressive acquisition strategy, completing numerous acquisitions in the first nine months of 2014, including significant deals like Oval Group of Companies and Crombie/OAMPS. These acquisitions have been a primary driver of substantial revenue growth across its Brokerage and Risk Management segments, contributing significantly to the overall increase in total revenues. The company is actively integrating these acquisitions and expects them to continue contributing positively to future financial performance.

The company's clean energy investments, particularly those related to refined coal production plants qualifying for IRC Section 45 tax credits, are a significant source of earnings. For the third quarter of 2014, these investments contributed $25.9 million to net earnings. Management anticipates these investments to generate between $102.0 million and $107.0 million in net earnings for the full year 2014, which are intended to fund future mergers and acquisition strategies.

The company has financed its extensive acquisition activity through a combination of cash from operations, borrowings under its Credit Agreement, and proceeds from debt issuances, including significant note purchase agreements. As of September 30, 2014, total corporate and other debt stood at $2.42 billion. Despite increased debt, AJG reported compliance with all financial covenants associated with its debt agreements and maintained sufficient liquidity.

The company faces various risks, including volatility in the insurance industry, economic downturns, competitive pressures, and risks associated with its expanding international operations. Specific risks mentioned include integration challenges with acquisitions, potential cybersecurity threats, regulatory compliance issues (including anti-corruption and sanctions laws), and the outcome of ongoing IRS investigations into its micro-captive advisory services. Additionally, risks related to its clean energy investments, such as changes in tax credit legislation and utilities shifting away from coal, are also highlighted.