Arthur J. Gallagher & Co. |
CFO Commentary |
January 26, 2017 |
Arthur J. Gallagher & Co. |
Non-GAAP Measures and Forward-Looking Statements |
Information Regarding Non-GAAP Measures |
In this CFO Commentary, we have provided information regarding Adjusted EBITDAC Margin (for the brokerage and risk management segments) and Adjusted Net Earnings Attributable to Controlling Interests (for the corporate segment) presented on a forward-looking and historical basis. Adjusted EBITDAC margin is Adjusted EBITDAC divided by Adjusted Revenue (EBITDAC and Revenue, respectively, adjusted to exclude the impact of 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; acquisition integration costs are related to certain of our large acquisitions outside the scope of our usual tuck-in strategy, not expected to occur on an ongoing basis in the future once we fully assimilate the applicable acquisition). EBITDAC is net earnings before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables. Adjusted Net Earnings Attributable to Controlling Interests is net earnings attributable to controlling interests adjusted to exclude the impact of a litigation settlement and our home office move. Management believes that both Adjusted EBITDAC Margin and Adjusted Net Earnings Attributable to Controlling Interests are meaningful indicators of our operating performance. The adjustments made to each measure are intended to improve the comparability of our results between periods by eliminating the impact of items that have a high degree of variability and, in the case of the litigation settlement, are unlikely to recur during the next two years. We have not reconciled the forward-looking Adjusted EBITDAC Margin information to the most directly comparable GAAP measure because certain material items that impact this measure, including the timing and exact amount of highly variable elements of revenue (such as acquired revenue), gains from the sales of books of business and acquisition related adjustments, have not yet occurred or are out of management's control or cannot be reasonably predicted. Accordingly, a reconciliation of forward-looking Adjusted EBITDAC Margin to the corresponding GAAP measure is not available without unreasonable effort. The non-GAAP information provided in this CFO Commentary should be used in addition to, but not as a substitute for, GAAP information. Cautionary Statement Regarding Forward-Looking Statements |
This CFO Commentary contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, for our brokerage and risk management segments, 2017 estimates of the impact of foreign currency on EPS and revenues, integration costs, workforce and lease termination costs, adjusted EBITDAC margin, amortization, depreciation, change in estimated earnout payables, acquisition rollover revenues, the adjusted effective tax rate, earnings from continuing operations attributable to non-controlling interests, run-off revenues in Australia and the UK and the weighted average multiple paid for acquisitions. These forward-looking statements also include, for our corporate segment, estimates of the net earnings attributable to controlling interests impact of various items, including interest and banking costs, Gallagher's clean energy investments, acquisition costs, corporate expenses, the impact of a litigation settlement and our home office move. We also make forward-looking statements relating to our clean energy investments, including the low and high ranges of potential 2017 annual after-tax earnings of the various clean energy plants.
Actual results may differ materially from the estimates set forth herein. 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. The statements regarding our clean energy investments and future effective tax rates could be materially impacted by various risk and uncertainties, including uncertainties related to political and regulatory risks, such as potential actions by Congress or challenges by the IRS eliminating or reducing the availability of tax credits under IRC Section 45 retroactively and/or going forward; the ability to maintain and find co-investors; the potential for divergent business objectives by co-investors and other stakeholders; plant operational risks, including supply-chain risks; utilities' future use of, or demand for, coal; the market price of coal; the costs of moving a clean coal plant; intellectual property litigation risks; and environmental risks. The value of our tax credits could be impacted by changes in the tax code as a result of the recent election in the United States. The other forward-looking statements referred to above could be materially impacted by various risks and uncertainties including changes in the economy (including due to the recent Brexit vote or in the wake of the recent U.S. election) or premium rates; changes in our acquisition pipeline; changes in our competitive position; and fluctuations in global exchange rates. Please refer to Gallagher's filings with the SEC, including Item 1A, "Risk Factors," of its most recently filed Annual Report on Form
10-K and subsequent Quarterly Reports on Form 10-Q, for a 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.
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ARTHUR J. GALLAGHER & CO. - CFO COMMENTARY - JANUARY 26, 2017 | ||||||||
This communication is intended to be used in conjunction with, and should be read and understood in combination with, the commentary provided on the January 27, 2017 earnings call. | ||||||||
Other commentary is likely to be made during the earnings call. This communication is subject to, and you are urged to carefully read, the cautions set forth at the beginning of this communication. | ||||||||
ACTUAL | ESTIMATES ON DECEMBER 13, 2016 | ESTIMATES ON JANUARY 26, 2017 | ||||||
BROKERAGE SEGMENT | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | Q4 2016 | Full Year 2017 | 2017 Quarterly | Full Year 2017 |
Foreign Currency Impact on Earnings Per Share (will be shown as an adjustment to 2015 & 2016 numbers) | $0.01 | very little impact | very little impact | Q1 & Q2: $0.01 to $0.02 Q3 & Q4: very little impact | Approx. $0.04 | |||
Foreign Currency Impact on Revenues (will be shown as an adjustment to 2015 & 2016 numbers) | $18 million | $15 million | $22 million | $31 million | $29 million | $50 million | Q1: $15 million Q2: $25 million Q3 & Q4: very little impact | $50 million |
Integration Costs Per Share | $0.06 | $0.05 | $0.04 | $0.04 | Approx. $0.04 | very little impact | Q1 & Q2: $0.01 to $0.02 Q3 & Q4: $0.01 | Approx. $0.05 |
Workforce & Lease Termination Costs Per Share | $0.02 | $0.02 | $0.04 | Approx. $0.02 | ncp | ncp | ncp | |
Adjusted EBITDAC Margin | Expanded 79 bpts over Q1 2015 | Expanded 57 bpts over Q2 2015 | Expanded 20 bpts over Q3 2015 | Expanded 31 bpts over Q4 2015 | difficult to expand margins if organic is below 3% | difficult to expand margins if organic is below 3% | ||
Amortization - Recurring | $59 million pretax | $62 million pretax | $61 million pretax | $61 million pretax | $61 million pretax | $244 million pretax (1) | $63 million pretax | $252 million pretax (1) |
Depreciation - Recurring | $14 million pretax | $14 million pretax | $14 million pretax | $15 million pretax | $14 million pretax | $56 million pretax | $15 million pretax | $60 million pretax |
Change in Estimated Earnout Payable - Recurring | $4 million pretax | $4 million pretax | $4 million pretax | $4 million pretax | $4 million pretax | $16 million pretax | $5 million pretax | $20 million pretax |
Rollover Revenues from Acquisitions | --------------------------------------------------------------------------------------------------------------------------------- See table on page 5 ------------------------------------------------------------------------------------------------------------------------------- | |||||||
Adjusted Effective Tax Rate | 34% | 35% | 34% | 35% | 34% to 36% | 34% to 36% (2) | 34% to 36% (2) | 34% to 36% (2) |
Earnings from continuing operations attributable to noncontrolling interests | $4.5 million | very little impact | very little impact | very little impact | very little impact | ncp | Q1: $3 million to $5 million Q2 to Q4: very little impact | Approx. $5 million |
RISK MANAGEMENT SEGMENT | ||||||||
Foreign Currency Impact on Earnings Per Share (will be shown as an adjustment to 2015 & 2016 numbers) | very little impact | very little impact | very little impact | very little impact | ||||
Foreign Currency Impact on Revenues (will be shown as an adjustment to 2015 & 2016 numbers) | $3 million | $2 million | very little impact | very little impact | very little impact | very little impact | ||
Adjusted EBITDAC Margin | 17.6% | 17.1% | 16.8% | 17.9% | ------------- Approx. 17.2% margin target ----------- | ------------------ Between 17.0% and 17.5% ---------------- | ||
Run-off Revenues in Australia & UK (will be shown as an adjustment to 2015 numbers) | $5 million (Q1 2015) | $7 million (Q2 2015) | $4 million (Q3 2015) | very little impact | very little impact | none | none | none |
Amortization - Recurring | $1 million pretax | $1 million pretax | $1 million pretax | $1 million pretax | $4 million pretax | $1 million pretax | $4 million pretax | |
Depreciation - Recurring | $7 million pretax | $7 million pretax | $7 million pretax | $7 million pretax | $7 million pretax | $28 million pretax | $7 million pretax | $28 million pretax |
Adjusted Effective Tax Rate | 37.6% | 37.7% | 38.4% | 38.4% | 38% | 36% to 38% (2) | 36% to 38% (2) | 36% to 38% (2) |
OTHER | ||||||||
Weighted Average Multiple of EBITDAC for Acquisition Pricing | 7.0x | 6.7x (Q2 2016) 6.8x (YTD) | 7.6x (Q3 2016) 7.0x (YTD) | 7.1x (Q4 2016) 7.0x (YTD) | Between 7.0x and 7.5x | similar to 2016 | --------------------------- 7.0x to 8.0x ---------------------------- | |
Notes | ||||||||
Yellow highlighted rows will be presented as adjustments to GAAP earnings | ||||||||
All commentary related to foreign currency is based on January 25, 2017 exchange rates. All information on this page assumes no future proposed or contemplated income tax laws in any tax jurisdiction. | ||||||||
(1) As we do more acquisitions, for every dollar we spend, increase amortization by about 1% of the purchase price per quarter. | ||||||||
(2) Assuming no U.S. federal corporate tax rate change. If the U.S. federal corporate tax rate dropped to 20% on January 1, 2017, both the Brokerage and Risk Management Segment effective tax rates would drop to a range of 24% to 26%. | ||||||||
ncp = no commentary provided |
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ARTHUR J. GALLAGHER & CO. - CFO COMMENTARY - JANUARY 26, 2017This communication is intended to be used in conjunction with, and should be read and understood in combination with, the commentary provided on the January 27, 2017 earnings call.
Other commentary is likely to be made during the earnings call. This communication is subject to, and you are urged to carefully read, the cautions set forth at the beginning of this communication.
CORPORATE SEGMENT | 2016 Actual | ||||
Net Earnings | |||||
Pretax | Taxes | (Loss) Attributable | |||
Earnings | Benefit | to Controlling | |||
(Loss) | (Expense) | Interests | |||
1st Quarter | |||||
Interest and banking costs | $ (26.3) | $ 10.5 | $ (15.8) | (2) | |
Clean-energy related (3) | (33.9) | 31.2 | (2.7) | ||
Acquisition costs | (1.7) | 0.3 | (1.4) | ||
Corporate | (8.6) | 2.3 | (6.3) | ||
Litigation settlement (4) | (4.7) | 1.0 | (3.7) | ||
Home office early lease term and move (5) | - | ||||
Reported 1st quarter | (75.2) | 45.3 | (29.9) | ||
Litigation settlement (4) | 4.7 | (1.0) | 3.7 | ||
Home office early lease term and move (5) | - | - | - | ||
Adjusted 1st quarter | $ (70.5) | $ 44.3 | $ (26.2) | ||
2nd Quarter | |||||
Interest and banking costs | $ (28.0) | $ 11.2 | $ (16.8) | (2) | |
Clean-energy related (3) | (24.4) | 73.6 | 49.2 | ||
Acquisition costs | (1.1) | 0.2 | (0.9) | ||
Corporate | (10.0) | 3.9 | (6.1) | ||
Litigation settlement (4) | (5.5) | 1.1 | (4.4) | ||
Home office early lease term and move (5) | - | ||||
Reported 2nd quarter | (69.0) | 90.0 | 21.0 | ||
Litigation settlement (4) | 5.5 | (1.1) | 4.4 | ||
Home office early lease term and move (5) | - | - | - | ||
Adjusted 2nd quarter | $ (63.5) | $ 88.9 | $ 25.4 | ||
3rd Quarter | |||||
Interest and banking costs | $ (29.3) | $ 11.7 | $ (17.6) | (2) | |
Clean-energy related (3) | (39.8) | 79.1 | 39.3 | Notes: | |
Acquisition costs | (0.9) | 0.1 | (0.8) | ||
Corporate | (9.1) | 3.4 | (5.7) | (1) See important cautionary information on | |
Litigation settlement (4) Home office early lease term and move (5) | (4.4) | 0.9 | (3.5) - | page 1 of these exhibits regarding our use of | |
these forward-looking statements. | |||||
Reported 3rd quarter | (83.5) | 95.2 | 11.7 | ||
Litigation settlement (4) | 4.4 | (0.9) | 3.5 | (2) On December 1, 2016, Gallagher entered into | |
Home office early lease term and move (5) | - | - | - | a note purchase agreement for a private | |
Adjusted 3rd quarter | $ (79.1) | $ 94.3 | $ 15.2 | placement of $100.0 million of senior unsecured |
2017 Estimates (1) | ||
Net Earnings (Loss) | ||
Attributable to | ||
Controlling Interests | ||
Range | ||
$ (19.0) | $ (18.0) | |
(3.0) | 1.0 | |
(2.0) | (1.0) | |
(7.0) | (6.0) | |
(4.5) | (4.5) | |
(3.0) | (2.0) | |
(38.5) | (30.5) | |
4.5 | 4.5 | |
3.0 | 2.0 | |
$ (31.0) | $ (24.0) | |
$ (19.0) | $ (18.0) | |
54.0 | 58.0 | |
(2.0) | (1.0) | |
(6.0) | (5.0) | |
(4.5) | (4.5) | |
(4.5) | (3.5) | |
18.0 | 26.0 | |
4.5 | 4.5 | |
4.5 | 3.5 | |
$ 27.0 | $ 34.0 | |
$ (19.0) | $ (18.0) | |
33.0 | 37.0 | |
(2.0) | (1.0) | |
(6.0) | (5.0) | |
- | - | |
(1.5) | (1.0) | |
4.5 | 12.0 | |
- | - | |
1.5 | 1.0 | |
$ 6.0 | $ 13.0 | |
$ (19.0) | $ (18.0) | |
33.0 | 37.0 | |
(2.0) | (1.0) | |
(6.0) | (5.0) | |
- | - | |
- | - | |
6.0 | 13.0 | |
- | - | |
- | - | |
$ 6.0 | $ 13.0 | |
$ (76.0) | $ (72.0) | |
117.0 | 133.0 | |
(8.0) | (4.0) | |
(25.0) | (21.0) | |
(9.0) | (9.0) | |
(9.0) | (6.5) | |
(10.0) | 20.5 | |
9.0 | 9.0 | |
9.0 | 6.5 | |
$ 8.0 | $ 36.0 | |
4th Quarter | notes. | ||||
Interest and banking costs | $ (29.2) | $ 11.7 | $ (17.5) | (2) | |
Clean-energy related (3) Acquisition costs | (35.1) (0.9) | 63.7 0.1 | 28.6 (0.8) | (3) Pretax earnings are presented net of | |
Corporate | (15.3) | 10.4 | (4.9) | ||
Litigation settlement (4) | (5.6) | 1.1 | (4.5) | ||
Home office early lease term and move (5) | - | - | - | (4) During the third quarter of 2015, Gallagher | |
Reported 4th quarter | (86.1) | 87.0 | 0.9 | settled litigation against certain former U.K. |
amounts attributable to noncontrolling interests.
Litigation settlement (4) 5.6 (1.1) 4.5
Home office early lease term and move (5) - - -
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
Adjusted 4th quarter $ (80.5)$ 85.9 $
5.4connection with this matter will result in after-
YTD | tax charges of up to $4.5 million per quarter | ||||
Interest and banking costs | $ (112.8) | $ 45.1 | $ (67.7) | (2) | through June 30, 2017. |
Clean-energy related (3) | (133.2) | 247.6 | 114.4 | ||
Acquisition costs | (4.6) | 0.7 | (3.9) | ||
Corporate | (43.0) | 20.0 | (23.0) | (5) During 2017, we will be relocating our | |
Litigation settlement (4) | (20.2) | 4.1 | (16.1) | corporate office headquarters to a nearby | |
Home office early lease term and move (5) | - | - | - | suburb of Chicago. One-time move and lease | |
Reported YTD | (313.8) | 317.5 | 3.7 | abandonment charges are expected in first, | |
Litigation settlement (4) | 20.2 | (4.1) | 16.1 | second and third quarters of 2017. | |
Home office early lease term and move (5) | - | - | - | ||
Adjusted YTD | $ (293.6) | $ 313.4 | $ 19.8 |
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Arthur J.Gallagher & Co. published this content on 26 January 2017 and is solely responsible for the information contained herein.
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