Arthur J. Gallagher & Co. - 10-Q Summary (Period Ended Sep 30, 2009)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, and the nine-month period ended on the same date. Arthur J. Gallagher & Co. is a global insurance brokerage and risk management firm operating in three segments: Brokerage, Risk Management, and Financial Services and Corporate. The company operates in over 100 countries, with approximately 89% of revenues generated domestically.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $439.5 | $1,294.2 |
| Net Earnings | $41.6 | $111.8 |
| Earnings Per Share (Diluted) | $0.41 | $1.12 |
| Operating Cash Flow | N/A | $195.6 |
| Cash and Cash Equivalents | $237.7 | $237.7 |
| Total Debt (Corporate Borrowings) | $531.0 | $531.0 |
| Stockholders' Equity | $869.1 | $869.1 |
Note: Total Debt includes $400.0 million in Senior Notes and $131.0 million in Credit Agreement borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 2.6% for the three-month period and 5.0% for the nine-month period compared to 2008. This growth was driven primarily by acquisitions ($38.0 million and $117.6 million respectively), which offset a decline in organic commission and fee revenues due to a soft insurance market and lower premium rates.
- Profitability: Net earnings increased 10.1% for the quarter and 54.0% for the nine-month period. The significant year-over-year increase in nine-month earnings is largely attributable to a $27.1 million loss from discontinued operations in 2008 (related to the sale of reinsurance and Irish brokerage businesses) versus a $1.9 million loss in 2009.
- Segment Performance:
- Brokerage: Revenues increased 4% (quarter) and 8% (nine-month). Organic commission and fee revenues declined 5.5% and 3.0% respectively.
- Risk Management: Revenues decreased 4% (quarter) and 3% (nine-month) due to lost business and decreased claim counts, though earnings improved due to expense reductions.
- Financial Services: Reported a loss from continuing operations of $4.0 million (quarter) and $14.1 million (nine-month), primarily due to investment expenses and interest costs.
- Acquisitions: The company completed 11 acquisitions in the first nine months of 2009, recording $131.9 million in total purchase price. This contrasts with 28 acquisitions in the same period in 2008.
Guidance, Outlook, and Risks
- Workforce Reduction: Management announced plans to reduce the global workforce by approximately 400 positions (4%) by January 31, 2010. This is expected to result in a nonrecurring pretax charge of $10.0 to $13.0 million in Q4 2009, with estimated annual cost savings of $25.0 to $28.0 million.
- Investment Risks (Clean Energy): The company has committed up to $24.0 million in Q4 2009 to complete eight refined coal facilities to qualify for IRC Section 45 tax credits. There is significant uncertainty regarding IRS guidance, regulatory permits, and the ability to recoup these investments if credits are disallowed.
- Legal Contingencies: A Multi-District Litigation (MDL) settlement regarding contingent commissions requires a payment of $28.0 million to clients. The settlement became final in September 2009, with payment due by January 7, 2010. The company intends to use remaining funds from a prior Assurance of Voluntary Compliance (AVC) fund to satisfy part of this obligation.
- Market Conditions: The company faces risks from a soft insurance market, potential insurer failures, and the broader economic recession, which may lead to reduced insurance coverage purchases by clients.
Key Facts for Investor Verification
- Organic Revenue Decline: Verify the sustainability of revenue growth given the reported decline in organic commission and fee revenues (-3.0% for nine months) amidst a soft market.
- Discontinued Operations Impact: Confirm that the significant year-over-year earnings improvement is driven by the absence of large one-time losses from discontinued operations in 2009 compared to 2008.
- Q4 Restructuring Charge: Monitor the actual cost and timing of the announced $10.0 to $13.0 million severance charge in the fourth quarter.
- Clean Energy Investment Viability: Assess the risk of the $24.0 million capital commitment for refined coal facilities and the likelihood of securing IRC Section 45 tax credits before the December 31, 2009 deadline.
- MDL Settlement Funding: Verify the sufficiency of the AVC fund ($8.6 million remaining) and operating cash flows to meet the $28.0 million MDL settlement obligation due in early 2010.