Arthur J. Gallagher & Co. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless stated otherwise. Gallagher provides insurance and reinsurance brokerage, consulting, and third-party claims administration services. Its reportable segments are brokerage, risk management, and corporate.
Financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $3,256.7 million | $2,706.1 million | +20% |
| Revenue before reimbursements | $3,218.1 million | $2,672.9 million | +20% |
| Earnings before income taxes | $772.7 million | $605.8 million | +28% |
| Net earnings | $612.7 million | $486.6 million | +26% |
| Net earnings attributable to controlling interests | $608.4 million | $486.5 million | +25% |
| Diluted EPS | $2.74 | $2.24 | +22% |
| Operating cash flow | $789.3 million | $428.5 million | Higher |
| Interest expense | $92.2 million | $67.9 million | Higher |
- Reported net margin was approximately 18.8%, compared with 18.0% in Q1 2023. Management’s adjusted non-GAAP diluted EPS was $3.49, up 16%; adjusted measures exclude specified items, including intangible amortization.
- Brokerage revenue was $2,864.9 million (+21%); organic commissions and fees grew 8.8%, and total organic commissions, fees, supplemental, and contingent revenues grew 8.9%. Adjusted EBITDAC margin was 39.9%, versus 40.2%.
- Risk management revenue before reimbursements was $352.8 million (+19%); organic fee revenue grew 13.3%. Adjusted EBITDAC margin before reimbursements improved to 20.6% from 19.2%.
- Operating cash flow increased, with management citing core business growth and timing differences in receivables and accrued liabilities. Cash paid for acquisitions, net of cash acquired, was $251.2 million; capital expenditures were $29.7 million.
Balance sheet, debt, and liquidity
- At March 31, cash and cash equivalents were $1,762.6 million, including $191.0 million of restricted cash. Fiduciary assets and matching fiduciary liabilities were each $35,156.1 million; fiduciary balances are client-related and should not be treated as unrestricted company liquidity.
- Net corporate and other debt was $8,282.1 million; total corporate and other debt before unamortized costs and discounts was $8,365.5 million. Corporate borrowings included $4,550.0 million of senior notes, $3,523.0 million of note purchase agreements, and $108.2 million under the credit agreement. Premium financing debt was $184.3 million.
- Gallagher issued $1.0 billion of senior notes in February, in 2034 and 2054 maturities, at stated rates of 5.45% and 5.75%. Proceeds were used for acquisitions, earnout payments, and general corporate purposes. The company reported $1,580.2 million available under its credit agreement and compliance with debt covenants.
- Current assets and current liabilities were $41,479.5 million and $39,636.5 million, respectively, but these totals include large, matched fiduciary balances. Shareholders’ equity was $11,344.2 million.
- Cash provided by financing activities was approximately negative $5 million, compared with positive $958.1 million in Q1 2023, when financing included higher net debt borrowing and swap settlements. Dividends paid were $130.7 million.
Material changes and unusual items
- Revenue growth reflected acquisitions and organic growth. The company completed 12 acquisitions in the quarter, with recorded purchase consideration of $375.9 million and estimated annualized acquired revenue of $69.2 million. Acquisitions contributed $244.2 million to brokerage base commission and fee growth.
- Reported expenses included a $16.1 million reduction in estimated acquisition earnout payables, compared with a $41.8 million expense in Q1 2023. Gallagher recorded $34.9 million of income from revised earnout valuations, partly offset by discount accretion expense. Recorded earnout liabilities were $1,240.5 million; maximum potential obligations were $1,935.9 million.
- Amortization expense increased to $162.3 million from $121.7 million, primarily reflecting acquired intangible assets. No impairment was identified in Q1 2024.
- Foreign currency translation reduced comprehensive earnings by $155.8 million, contributing to a $949.0 million accumulated other comprehensive loss at quarter-end.
- Interest expense rose by $24.3 million in the corporate segment, primarily reflecting recent debt issuance. The consolidated effective tax rate was 20.7%, compared with 19.7%.
Outlook, risks, and contingencies
- No full-year earnings or revenue guidance is provided. Management says it expects continued property/casualty rate increases in 2024, citing loss-cost inflation, firm reinsurance markets, catastrophe frequency, reserve volatility, and social inflation. It expects favorable retention, new business, and insured-exposure trends to support organic growth, while warning that weaker economic conditions or slower rate increases could soften growth.
- Management expects 2024 capital expenditures of approximately $175 million and says it believes cash flows and access to capital will meet short- and long-term needs. The company anticipates approximately $522.7 million of 2024 cash use for common dividends, based on shares outstanding at quarter-end; future dividends are not assured.
- The IRS has audited Gallagher’s IRC 831(b) micro-captive advisory business since 2013 and is investigating possible tax-shelter promoter activity. A related criminal investigation concerns micro-captive underwriting enterprises; Gallagher says it has been advised it is not a target and is cooperating. Gallagher states that current proceedings are not expected to materially harm its financial position, results, or cash flows, while noting adverse outcomes remain possible.
- The company maintains errors-and-omissions self-insurance reserves; its recorded reserve was within the latest actuarial range. Gallagher warns future claims experience could differ from historical assumptions. It also reports $108.0 million of exposure related to previously earned energy tax credits, with no reserve recorded.
- Other disclosed risks include acquisition integration and earnout estimates, debt and interest-rate exposure, foreign currency movements, cybersecurity and data privacy, talent costs and retention, regulatory matters, and economic or geopolitical disruption. SEC climate disclosure rules were stayed pending legal challenges, and the company is monitoring developments.
Important facts for investors to verify
- How much of reported and adjusted growth is organic versus acquisition-driven, and whether the margin trend in brokerage stabilizes.
- Whether operating cash flow remains strong after considering working-capital timing and the distinction between company cash and fiduciary funds.
- Acquisition integration progress, expected costs, and changes in the substantial earnout liability and its valuation assumptions.
- Debt levels, interest expense, refinancing needs, covenant headroom, and the effects of additional acquisition funding.
- Developments in the IRS micro-captive matters, E&O reserves, and other legal, tax, and regulatory contingencies.