10-QPeriod: Q1 FY2020

Arthur J. Gallagher & Co. Quarterly Report for Q1 Ended Mar 31, 2020

Filed May 5, 2020For Securities:AJG

Summary

Arthur J. Gallagher & Co. (AJG) reported total revenues of $1.87 billion for the first quarter of 2020, a decrease from $1.99 billion in the same period of 2019. Net earnings attributable to controlling interests increased slightly to $346.3 million ($1.79 per diluted share) compared to $334.1 million ($1.77 per diluted share) in the prior year's quarter. The company's brokerage segment, its largest, saw a revenue increase of 4% year-over-year, driven by organic growth and acquisitions, while the risk management segment also showed revenue growth. However, the corporate segment, primarily comprising clean energy investments, experienced a significant revenue decline due to decreased refined coal production. The company noted the initial impact of COVID-19 on its operations, primarily affecting revenue estimates and leading to a modest reduction in earnings and increased expenses related to bad debts and intangible asset impairments. Despite these challenges, AJG highlighted strong new business generation, solid retention rates, and ongoing premium rate increases in the insurance market as positive factors. Management has implemented cost-saving measures and has significant liquidity to navigate the uncertain economic environment.

Financial Highlights

45 data points
Beta

Revenue

$1.87B

90.1% Gross Margin

Net Income

$346.30M

18.5% Net Margin

EPS (Diluted)

$1.79

Total Assets

$20.84B

Cash & Equivalents

$352.80M

Free Cash Flow

$108.60M

Financial Statements
Beta
Revenue$1.87B
Cost of Revenue$185.40M
Gross Profit$1.68B
Operating Expenses$1.51B
Interest Expense$50.50M
Net Income$346.30M
EPS (Basic)$1.83
EPS (Diluted)$1.79
Shares Outstanding (Basic)188.70M

Key Highlights

  • 1Total revenues for Q1 2020 were $1.87 billion, down from $1.99 billion in Q1 2019, largely due to a significant decrease in the corporate segment's clean coal revenues.
  • 2Net earnings attributable to controlling interests increased to $346.3 million ($1.79 per diluted share) in Q1 2020, up from $334.1 million ($1.77 per diluted share) in Q1 2019.
  • 3The brokerage segment, the largest contributor, saw revenues rise 4% to $1.44 billion, driven by organic growth and acquisitions.
  • 4The risk management segment also reported a revenue increase of 4% to $249.5 million.
  • 5The company reported a $45.8 million write-off of amortizable intangible assets during the quarter, primarily linked to the impact of COVID-19 on future performance expectations.
  • 6AJG's balance sheet shows total assets of $20.8 billion as of March 31, 2020, with significant goodwill and amortizable intangible assets.
  • 7The company's liquidity remains strong, with $1.1 billion in available liquidity as of April 30, 2020, and it has activated cost-saving measures in response to the pandemic.

Frequently Asked Questions

The COVID-19 pandemic had a mixed impact. While it led to a significant decline in revenues from the clean coal operations within the corporate segment and necessitated a $45.8 million write-off of amortizable intangible assets in the brokerage segment, it also prompted cost-saving measures and a slight increase in earnings per share due to a favorable shift in earnout payable estimates. The company's core brokerage and risk management segments showed resilience with revenue growth, although future revenue estimates were adjusted downward. AJG has sufficient liquidity and is actively managing costs.

The primary driver for the decrease in total revenues from $1.99 billion in Q1 2019 to $1.87 billion in Q1 2020 was a significant decline in 'Revenues from clean coal activities' within the corporate segment, which fell from $372.3 million to $181.8 million. This decrease was attributed to reduced production of refined coal.

AJG reported total corporate and other debt of $4.89 billion as of March 31, 2020. The company has significant available liquidity, with $1.1 billion in available liquidity as of April 30, 2020, and actively managing its cash flow through cost reductions and capital expenditure adjustments. It also has access to a revolving credit facility and other borrowing arrangements to support its operations and acquisition strategy.

The company expects its brokerage and risk management segments to benefit from an ongoing positive rate environment in property/casualty insurance. While lower economic activity may reduce exposure units, AJG believes its expertise, new business generation, and client retention should help offset these factors. The company is focused on demonstrating value-added capabilities to clients.