ITASCA, Ill., Jan. 30 /PRNewswire-FirstCall/ -- Gallagher today reported its financial results for the quarter and full year ended December 31, 2006. A printer-friendly format is available at http://www.ajg.com/ .
Quarter Ended December 31 Diluted Net
Pretax Earnings
Earnings (Loss) Per
Revenues (Loss) Share
4th Q 4th Q 4th Q 4th Q
Segment 4th Q 06 4th Q 05 Chg 06 05 06 05
$ in millions $ in millions
Brokerage $288.1 $263.9 9% $44.9 $39.7 $0.26 $0.21
Contingent
Commission Matters 0.4 0.7 (8.6) (37.9) (0.05) (0.23)
Medical and Pension
Plan Changes - - (4.6) - (0.03) -
Claims Handling
Obligations - - - (15.0) - (0.10)
Total Brokerage 288.5 264.6 31.7 (13.2) 0.18 (0.12)
Risk Management 99.3 95.1 4% 8.9 16.2 0.05 0.10
Medical and Pension
Plan Changes - - (2.9) - (0.01) -
Total Risk Management 99.3 95.1 6.0 16.2 0.04 0.10
Financial Services 26.9 16.4 (22.1) (4.1) 0.03 0.10
Total Company $414.7 $376.1 $15.6 $(1.1) $0.25 $0.08
Diluted Net
Year Ended December 31 Earnings
Pretax Earnings (Loss) Per
Revenues (Loss) Share
Segment Year 06 Year 05 Chg Year 06 Year 05 Year 06 Year 05
$ in millions $ in millions
Brokerage $1,068.2 $972.0 10% $168.2 $128.1 $1.01 $0.68
Contingent
Commission
Matters 2.5 28.8 (6.5) (44.8) (0.04) (0.28)
Pension and
Medical Plan
Changes - - (4.6) 6.9 (0.03) 0.04
Claims Handling
Obligations - - - (15.0) - (0.10)
Total Brokerage 1,070.7 1,000.8 157.1 75.2 0.94 0.34
Risk Management 401.3 370.6 8% 56.2 65.3 0.35 0.40
Pension and
Medical Plan
Changes - - (2.9) 3.1 (0.02) 0.02
Total Risk
Management 401.3 370.6 53.3 68.4 0.33 0.42
Financial Services 62.0 112.5 (57.5) (15.4) 0.04 0.42
Litigation
Matters - - - (131.0) - (0.88)
Discontinued
Operations - - - - - 0.02
Total Company $1,534.0 $1,483.9 $152.9 $(2.8) $1.31 $0.32
Percentages used hereinafter are computed excluding retail contingent commission revenues, expenses related to settling contingent commission matters, expense impacts related to medical and pension plan changes and expenses related to claims handling obligations. See notes to fourth quarter 2006 earnings release and non-GAAP financial measures on page 7.
"I'm extremely pleased with the meaningful progress our Brokerage Services Segment made during 2006," said J. Patrick Gallagher, Jr., Chairman, President and Chief Executive Officer. "For the year, revenues were up 10%, organic growth was 6% and pretax earnings for the segment were up 31%. We improved our pretax margin by 2.5%, our merger and acquisition activity has returned to historical levels and our brokerage teams are thriving in the new transparent world. This is an outstanding effort in light of the turmoil that has been facing the insurance brokerage industry for over two years.
"Our Risk Management Segment posted revenue growth of 8% during 2006, all of which was organic, but fell slightly short of our margin expectations. We announced last year that we were targeting a 2006 margin of 15% to 16%, but posted a respectable 14% margin for the year. Pretax margin decreased because we maintained our staffing levels in anticipation of higher reported claims - which did not occur. This lower than expected frequency seems to be a trend throughout the insurance industry. We are off to a good start in 2007 and believe we are well positioned to grow into our excess capacity in 2007.
"Our Financial Services Segment had a busy year as we increased the pace of disposing of our non-core investments and reducing related off-balance sheet commitments. We eliminated most of the debt on our balance sheet and only a few investments remain.
"2005 and 2006 were the most difficult years in Gallagher's 79 year history. I am optimistic with so many distractions behind us, particularly the recent settlement of our portion of the class action litigation that is still facing the insurance industry. Despite these challenges, Gallagher is now nearly debt free, our current dividend yield of 4.3% is the best of all the public brokers, and most importantly, our teams have hung together and continue to deliver high quality professional services to our clients. Gallagher has a deep and undying culture that served us well in tough times and positions us well for the future."
Brokerage Segment Fourth Quarter Highlights
-- Revenue growth of 9%, excluding contingent commissions, of which 4% is
organic.
-- Effective January 1, 2005, Gallagher stopped accepting contingent
commissions on retail business (except for retail contingent
commissions associated with acquired entities for a period of up to
three years after the acquisition date). The following is a summary
of revenues recognized related to retail contingent commission
contracts in 2005 and 2006 (in millions):
Contingent Commission
Income 1st Q 2nd Q 3rd Q 4th Q
2005 $16.7 $9.4 $2.0 $0.7
2006 1.0 0.9 0.2 0.4
-- As previously announced, on December 29, 2006, Gallagher reached an
agreement to resolve all claims in the Federal Multi-District class
action litigation (MDL) pending in the New Jersey Federal District
Court against commercial insurers and brokers relating to industry-
wide contingent commission matters. Gallagher admitted no wrongdoing,
but chose to conclude its involvement, rather than prolong what could
have been a costly and burdensome lawsuit. Gallagher established a
provision for this matter in 2005, and as a result, substantially all
of the costs associated with the MDL settlement have been previously
reserved. In fourth quarter 2006, Gallagher recorded a pretax charge
of $9.0 million to increase its reserve for the costs to be incurred
to administratively conclude the MDL settlement and to resolve other
regulatory and civil litigation matters.
-- As previously announced, Gallagher changed its medical plan
administrator during fourth quarter 2006 and recorded a one-time
termination pretax charge of $4.6 million.
-- Fourth quarter 2006 compensation expense ratio was 0.6% higher than
2005. The ratio was impacted by increased employee benefit expenses
of 0.8%, additional stock compensation expense of 0.3%, and the
adverse impact of foreign currency of 0.4%, partially offset by
productivity gains.
-- Fourth quarter 2006 operating expense ratio was 2.0% lower than 2005,
mostly reflecting improvements in bad debts of 0.8% and the impact of
productivity improvements and expense savings initiatives put in place
in 2005. In addition, there was increased rent expense in fourth
quarter 2006 related to $1.9 million of lease termination costs due to
the previously announced lease rationalization initiative.
-- Fourth quarter 2006 pretax margin of 16%. The 0.5% margin improvement
over 2005 resulted primarily from the operating expense factors
discussed above. In addition, there was increased amortization
expense in fourth quarter 2006 related to a $1.0 million intangible
asset impairment.
-- Beginning January 1, 2006, Gallagher adopted a new accounting
standard, which resulted in additional stock compensation expense of
approximately $1.2 million in fourth quarter 2006 related to stock
options granted prior to 2003. Gallagher had previously been
expensing only those stock options granted subsequent to 2002.
-- Fourth quarter effective tax rate was 42% in 2006 and 13% in 2005.
The effective tax rate in 2005 was impacted by the income tax effects
associated with the retail contingent commission matter and claims
handling obligation charges incurred in 2005. See effective tax rate
discussion below.
Risk Management Segment Fourth Quarter Highlights
-- Revenue growth of 4%, all of which is organic. International revenues
were up 40%, reflecting the previously announced large new Australian
client.
-- As previously announced, Gallagher changed its medical plan
administrator during fourth quarter 2006 and recorded a one-time
termination pretax charge of $2.9 million.
-- Fourth quarter 2006 compensation expense ratio was 5.0% higher than
2005. The ratio was impacted by increased staffing levels, additional
stock compensation expense of 0.6% and increased employee benefit
expenses of 1.8%.
-- Fourth quarter 2006 operating expense ratio was 2.4% higher than 2005
due to increased real estate lease costs of 0.8%, business insurance
costs of 0.4% and outside fees of 1.1%.
-- Fourth quarter 2006 pretax margin of 9%. The 8.1% margin decrease
from 2005 resulted primarily from the compensation and operating
expense factors discussed above.
-- Beginning January 1, 2006, Gallagher adopted a new accounting
standard, which resulted in additional stock compensation expense of
approximately $0.2 million in fourth quarter 2006 related to stock
options granted prior to 2003. Gallagher had previously been
expensing only those stock options granted subsequent to 2002.
-- Fourth quarter effective tax rate was 42% in 2006 and 41% in 2005.
See effective tax rate discussion below.
Financial Services Segment Fourth Quarter Highlights
During fourth quarter 2006, significant progress was made in reducing Financial Services' assets and related financial commitments as follows:
-- On December 1, 2006, Gallagher was released from its remaining $12.6
million letter of credit related to a Florida real estate development,
which was sold in 2005.
-- On December 7, 2006, the real estate partnership that Gallagher has a
60% ownership interest in, sold Gallagher's home office building. As
a result of the sale, Gallagher received cash proceeds of $7.9 million
extinguished related debt of $75.2 million and recognized a $4.2
million pretax loss.
-- On December 22, 2006, Gallagher received cash of $13.2 million in full
repayment of certain debentures and accrued interest from Asset
Alliance Corporation.
-- On December 22, 2006, Gallagher agreed to sell its 90% interest in an
airplane leasing company and recognized a $2.7 million pretax loss.
On January 25, 2007, the transaction closed and Gallagher received
cash of $0.7 million and extinguished related debt of $27.9 million.
-- On December 28, 2006, Gallagher sold its 27% ownership interest in a
low income housing developer, received cash of $4.0 million and
recognized a $3.0 million pretax loss.
-- On December 31, 2006, Gallagher recognized a $2.4 million loss on the
write-down of Biomass partnerships.
-- During fourth quarter 2006, Gallagher resolved a number of income tax
matters related to prior years and revised estimates of its tax
reserves. As a result, the Financial Services Segment recognized a
$2.7 million net tax benefit in fourth quarter.
Financial Services Segment - IRC Section 29-related Syn/Coal Investments
-- For the full year 2006, Gallagher operated its three unconsolidated
IRC Section 29-related Syn/Coal facilities that generate installment
sale gains, but relatively few tax credits for Gallagher. Beginning
June 12, 2006, Gallagher operated its two consolidated IRC Section 29-
related Syn/Coal facilities that have historically generated pretax
losses yet produce substantially all of Gallagher's IRC Section 29-
related tax credits. Installment sale gains and IRC Section 29-
related tax credits are subject to phase-out if oil prices reach
certain levels (see table below).
-- As of this date, Gallagher continues to operate all five of its coal
facilities and intends to operate those plants throughout 2007
provided oil prices remain at levels where these facilities can
generate positive returns (see table below for forecasted phase-out
prices). If there is no phase-out in 2007, Gallagher estimates that
its Financial Services Segment will report earnings per diluted share
of $0.30 to $0.40 for full year 2007. If there is a complete phase-
out in 2007, Gallagher estimates that its Financial Services Segment
will report earnings (loss) per diluted share of ($0.10) to $0.00 for
full year 2007.
-- To partially mitigate the financial risk of a phase-out, which reduces
the value of the tax credits earned and reduces the installment sale
gains from Gallagher's IRC Section 29-Syn/Coal investments, Gallagher
has entered into an arrangement with an unaffiliated third party which
constitutes a call spread on oil futures to create a financial hedge
that is designed to generate gains to Gallagher in the event of
certain levels of increased oil prices. This hedge is not intended to
be a "perfect hedge" for accounting purposes, but is intended to
mitigate a substantial portion of the negative impact to Gallagher of
increased oil prices. The hedging gains are designed to offset a
portion of the expenses associated with operating Gallagher's IRC
Section 29-Syn/Coal facilities in the event of a phase-out of Section
29 tax credits, which phase-outs are based on oil prices averaging
certain levels for calendar year 2007. Gallagher made an up-front
payment of $2.7 million on January 17, 2007 to enter into this
financial hedge, which will be marked to market value each quarter as
part of the Financial Services Segment operating results, through
December 31, 2007, the date the contract expires or the date the
contract is sold.
-- The following table provides information about NYMEX oil prices and
the phase-out. Information related to 2006 and 2007 are estimates and
actual information will not be known until the IRS publishes actual
information in April 2007 and 2008, respectively.
Calendar Year
2005 2006 2007
Phase-out information: Actual Estimated Forecasted
Beginning phase-out NYMEX price $59.53 $60.60 $62.00
Complete phase-out NYMEX price $74.75 $76.10 $78.00
Calendar year average NYMEX price $56.49 $66.12 $54.23 (1)
Resulting full year phase-out
percentage 0% 36% TBD
(1) Through January 25, 2007.
-- The information provided above is highly dependent on future events
and actual results may differ materially. Significant uncertainty
with respect to future events includes, among others, the availability
of coal stocks and corresponding coal prices, weather, plant operating
capacities, the actual levels of Syn/Coal facility production and
whether Gallagher elects in the future to pursue additional
operational and/or financial hedging strategies. Gallagher cannot at
this time predict whether or to what extent it will ultimately be able
to benefit from its IRC Section 29-related Syn/Coal facilities nor can
Gallagher definitively estimate the revenues, income and/or tax
credits that these facilities will provide. In addition, the
information presented above may differ materially due to the potential
variability in the operating results of the Financial Services
Segment's other investments.
Effective Tax Rate
-- Gallagher's projected annual effective tax rate for 2006 was 16.1%,
which decreased from a projected rate of 24.0% used in third quarter
2006. This decrease results from a smaller than expected phase-out of
IRC Section 29-related tax credits than was previously estimated as of
September 30, 2006 and the benefit recognized as a result of resolving
a number of income tax matters related to prior years and revised
estimates of its tax reserves.
-- In second quarter 2006, Gallagher changed its segment allocation
method for income taxes. Previously, Gallagher had applied its
overall effective tax rate for the consolidated group to each
reporting segment. Beginning in second quarter 2006, Gallagher is
allocating the provision for income taxes to the Brokerage and Risk
Management segments as if those segments were preparing income tax
provisions on a separate company basis. As a result, the provision
for income taxes for the Financial Services Segment now reflects the
entire benefit to Gallagher of the IRC Section 29-related credits
because that is the segment which produces the credits. Historical
results have been reclassified to conform to the current presentation.
Gallagher anticipates reporting an effective tax rate of approximately
40% to 42% in both its Brokerage Segment and its Risk Management
Segment for the foreseeable future, regardless of historical or future
oil prices.
The company will host a webcast conference call on Wednesday, January 31, 2007 at 9:00 a.m. ET to further discuss these quarterly results. To listen, please go to http://www.ajg.com/ .
Arthur J. Gallagher & Co. , an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois, has operations in seven countries and does business in 120 countries around the world through a network of correspondent brokers and consultants. Gallagher is traded on the New York Stock Exchange under the symbol AJG.
This press release may contain certain forward-looking statements relating to future results. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expected, depending on a variety of factors such as changes in worldwide and national economic conditions, changes in premium rates and in insurance markets generally and changes in securities and fixed income markets as well as developments in the areas of tax legislation and crude oil prices. Please refer to our filings with the Securities and Exchange Commission, including Item 1, "Business - Information Concerning Forward-Looking Statements" and Item 1A, "Risk Factors", of our Annual Report on Form 10-K, for a more detailed discussion of these factors.
Arthur J. Gallagher & Co.
Segment Statement of Earnings
(Unaudited - in millions except per share data)
4th Q 4th Q Year Year
Ended Ended Ended Ended
Dec 31, Dec 31, Dec 31, Dec 31,
BROKERAGE SEGMENT 2006 2005 2006 2005
Commissions $223.1 $203.0 $849.5 $784.3
Retail contingent commissions 0.4 0.7 2.5 28.8
Fees 57.0 55.8 188.5 169.8
Investment income and other 8.0 5.1 30.2 17.9
Revenues 288.5 264.6 1,070.7 1,000.8
Compensation 168.1 152.5 640.4 590.9
Medical and pension plan changes 4.6 - 4.6 (6.9)
Operating 64.1 64.1 220.3 219.1
Depreciation 3.4 2.7 15.0 13.6
Amortization 7.6 4.9 24.1 20.3
Retail contingent commission related
matters 9.0 38.6 9.0 73.6
Claims handling obligations - 15.0 - 15.0
Expenses 256.8 277.8 913.4 925.6
Earnings from continuing operations
before income taxes 31.7 (13.2) 157.3 75.2
Provision for income taxes 13.4 (1.7) 64.5 42.3
Earnings from continuing operations $18.3 $(11.5) $92.8 $32.9
Diluted earnings from continuing
operations per share $0.18 $(0.12) $0.94 $0.34
Growth - revenues excluding retail
contingent commissions 9% 7% 10% 10%
Organic growth in commissions and
fees (1) 4% 4% 6% 2%
Compensation expense ratio (2) 58% 58% 60% 61%
Operating expense ratio (3) 22% 24% 21% 23%
Pretax profit margin excluding retail
contingent commission and
claims handling matters, and
medical and pension plan changes
(4) 16% 15% 16% 13%
Effective tax rate 42% 13% 41% 56%
RISK MANAGEMENT SEGMENT
Fees $98.2 $94.2 $397.3 $367.7
Investment income 1.1 0.9 4.0 2.9
Revenues 99.3 95.1 401.3 370.6
Compensation 60.4 53.1 233.0 209.0
Medical and pension plan changes 2.9 - 2.9 (3.1)
Operating 27.3 23.9 102.1 88.2
Depreciation 2.6 1.8 9.5 7.7
Amortization 0.1 0.1 0.5 0.4
Expenses 93.3 78.9 348.0 302.2
Earnings from continuing operations
before income taxes 6.0 16.2 53.3 68.4
Provision for income taxes 2.5 6.6 21.3 28.1
Earnings from continuing operations $3.5 $9.6 $32.0 $40.3
Diluted earnings from continuing
operations per share $0.04 $0.10 $0.33 $0.42
Growth - revenues 4% 6% 8% 7%
Organic growth in fees (1) 4% 5% 8% 7%
Compensation expense ratio 61% 56% 58% 56%
Operating expense ratio 27% 25% 25% 24%
Pretax profit margin excluding
medical and pension plan changes (4) 9% 17% 14% 18%
Effective tax rate 42% 41% 40% 41%
FINANCIAL SERVICES SEGMENT
Investment income:
Asset Alliance Corporation $0.4 $(3.7) $(0.9) $(2.7)
Low income housing developments (0.3) 0.2 (1.7) 0.2
IRC Section 29 Syn/Coal facilities:
Three unconsolidated facilities 12.0 13.5 32.2 55.5
Two consolidated facilities 24.0 4.1 49.3 42.8
Other alternative energy
investments 0.5 (0.5) (1.3) 0.8
Home office land and building 1.8 1.2 4.9 6.5
Airplane leasing company 0.9 1.1 3.5 4.1
Real estate, venture capital and
other investments 0.1 1.1 1.1 1.7
39.4 17.0 87.1 108.9
Investment gains (losses) (12.5) (0.6) (25.1) 3.6
Revenues 26.9 16.4 62.0 112.5
Investment expenses:
IRC Section 29 Syn/Coal facilities:
Three unconsolidated facilities 5.1 3.1 18.4 15.8
Two consolidated facilities 34.7 6.5 74.1 73.4
Compensation, professional fees and
other 5.0 5.2 11.2 15.7
44.8 14.8 103.7 104.9
Interest 2.2 3.1 8.5 11.6
Depreciation 2.0 2.6 7.3 11.4
Litigation related matters - - - 131.0
Expenses 49.0 20.5 119.5 258.9
Earnings (loss) from continuing
operations before income taxes (22.1) (4.1) (57.5) (146.4)
Benefit for income taxes (24.9) (13.6) (61.2) (101.7)
Earnings (loss) from continuing
operations $2.8 $9.5 $3.7 $(44.7)
Diluted earnings (loss) from
continuing operations per share $0.03 $0.10 $0.04 $(0.46)
See notes to fourth quarter 2006 earnings release and non-GAAP
financial measures on page 7.
Consolidated Statement of Earnings
(Unaudited - in millions except per share data)
4th Q 4th Q Year Year
Ended Ended Ended Ended
Dec 31, Dec 31, Dec 31, Dec 31,
TOTAL COMPANY 2006 2005 2006 2005
Commissions $223.1 $203.0 $849.5 $784.3
Retail contingent commissions 0.4 0.7 2.5 28.8
Fees 155.2 150.0 585.8 537.5
Investment income - Brokerage and
Risk Management 9.1 6.0 34.2 20.8
Investment income - Financial
Services 39.4 17.0 87.1 108.9
Investment gains (losses) (12.5) (0.6) (25.1) 3.6
Revenues 414.7 376.1 1,534.0 1,483.9
Compensation 228.5 205.6 873.4 799.9
Medical and pension plan changes 7.5 - 7.5 (10.0)
Operating 91.4 88.0 322.4 307.3
Investment expenses 44.8 14.8 103.7 104.9
Interest 2.2 3.1 8.5 11.6
Depreciation 8.0 7.1 31.8 32.7
Amortization 7.7 5.0 24.6 20.7
Litigation related matters - - - 131.0
Retail contingent commission related
matters 9.0 38.6 9.0 73.6
Claims handling obligations - 15.0 - 15.0
Expenses 399.1 377.2 1,380.9 1,486.7
Earnings (loss) from continuing
operations before income taxes 15.6 (1.1) 153.1 (2.8)
Provision (benefit) for income taxes (9.0) (8.6) 24.6 (31.4)
Earnings from continuing operations 24.6 7.5 128.5 28.6
Earnings on discontinued operations,
net of income taxes - - - 2.2
Net earnings $24.6 $7.5 $128.5 $30.8
Diluted earnings from continuing
operations per share $0.25 $0.08 $1.31 $0.30
Diluted earnings on discontinued
operations per share - - - 0.02
Diluted net earnings per share $0.25 $0.08 $1.31 $0.32
Dividends declared per share $0.30 $0.28 $1.20 $1.12
Other Information
Basic weighted average shares
outstanding (000s) 98,091 95,382 97,123 94,141
Diluted weighted average shares
outstanding (000s) 99,382 97,260 98,401 96,051
Common shares repurchased (000s) 706 6 1,165 76
Annualized return on beginning
tangible net worth (5) 37% 8%
Number of acquisitions closed 3 2 11 10
Workforce at end of period (includes
acquisitions) 8,757 8,135
Earnings From Continuing Operations
Before
Litigation and Contingent Commission
Related Matters, Investment (Gains)
Losses, Medical and Pension
Plan Changes, Depreciation,
Amortization and Stock
Compensation Expense (6)
Earnings from continuing operations $24.6 $7.5 $128.5 $28.6
Litigation and contingent commission
related matters 9.0 38.6 9.0 204.6
Claims handling obligations - 15.0 - 15.0
Investment (gains) losses 12.5 0.6 25.1 (3.6)
Medical and pension plan changes 7.5 - 7.5 (10.0)
Depreciation 8.0 7.1 31.8 32.7
Amortization 7.7 5.0 24.6 20.7
Amortization of deferred comp and
restricted stock 1.5 1.6 8.6 7.2
Stock compensation expense 3.8 2.4 16.0 8.9
Tax effect (20.0) (28.1) (49.0) (110.2)
Earnings from continuing operations
before,
litigation and contingent
commission related matters,
investment (gains) losses, medical
and pension plan changes,
depreciation, amortization and
stock compensation expense $54.6 $49.7 $202.1 $193.9
On a diluted per share basis $0.55 $0.51 $2.05 $2.02
See notes to fourth quarter 2006 earnings release and non-GAAP
financial measures on page 7.
Arthur J. Gallagher & Co.
Consolidated Balance Sheet
(Unaudited - in millions except per share data)
Dec 31, 2006 Dec 31, 2005
Cash and cash equivalents $208.0 $317.8
Restricted cash 588.9 518.3
Unconsolidated investments - current 49.2 43.2
Premiums and fees receivable 1,422.3 1,396.8
Other current assets 107.8 125.7
Total current assets 2,376.2 2,401.8
Unconsolidated investments -
noncurrent 32.5 68.2
Fixed assets related to consolidated
investments - net 32.5 126.0
Other fixed assets - net 70.6 59.1
Deferred income taxes 286.8 236.1
Other noncurrent assets 91.8 80.1
Goodwill - net 316.6 245.7
Amortizable intangible assets - net 213.1 172.5
Total assets $3,420.1 $3,389.5
Premiums payable to insurance and
reinsurance companies $1,958.8 $1,917.4
Accrued compensation and other
accrued liabilities 316.4 378.3
Unearned fees 39.7 35.7
Income taxes payable 51.0 24.6
Other current liabilities 26.5 25.0
Corporate related borrowings - -
Investment related borrowings -
current 8.9 5.3
Total current liabilities 2,401.3 2,386.3
Investment related borrowings -
noncurrent 25.9 107.6
Other noncurrent liabilities 128.8 126.5
Total liabilities 2,556.0 2,620.4
Stockholders' equity:
Common stock - issued and outstanding 98.4 95.7
Capital in excess of par value 285.7 216.3
Retained earnings 475.0 463.7
Accumulated other comprehensive
earnings (loss) 5.0 (6.6)
Total stockholders' equity 864.1 769.1
Total liabilities and
stockholders' equity $3,420.1 $3,389.5
Other Information
Tangible net worth (7) $334.4 $350.9
Book value per share $8.78 $8.04
Tangible book value per share (8) $3.40 $3.67
Notes to Fourth Quarter 2006 Earnings Release and Non-GAAP Financial
Measures
Non-GAAP Financial Measures
This exhibit contains supplemental non-GAAP financial information within
the meaning of Regulation G of the SEC's rules. Consistent with
Regulation G, a description of such information is provided below and a
reconciliation of certain of such items to U.S. generally accepted
accounting principles (GAAP) is provided elsewhere in this press release.
Gallagher believes the items described below provide meaningful
additional information, which may be helpful to investors in assessing
certain aspects of Gallagher's operating performance and
financial condition that may not be otherwise apparent from GAAP.
Industry peers provide similar supplemental information, although
they may not use the same or comparable terminology and may not make
identical adjustments. This non-GAAP information should be
used in addition to, but not as a substitute for, the GAAP information.
Non-GAAP Measures Defined
(1) Organic growth excludes the first twelve months of net commission
and fee revenues generated from the acquisitions accounted for as
purchases and the net commission and fee revenues related to
operations disposed of in each year presented. These commissions
and fees are excluded from organic revenues in order to determine
the revenue growth that is associated with the operations that were
a part of Gallagher in both the current and prior year. In
addition, organic growth excludes contingent commission revenues.
(2) Represents compensation expense, which excludes the impact of
medical and pension plan changes, divided by total revenues,
excluding retail contingent commissions.
(3) Represents operating expenses, which excludes the impact of retail
contingent commission related matters and claims handling
obligations, divided by total revenues, excluding retail contingent
commissions.
(4) Represents pretax earnings (loss) from continuing operations before
the impact of pretax retail contingent commission related matters
medical and pension plan changes and claims handling obligations,
divided by total revenues, excluding retail contingent commissions.
(5) Represents year-to-date net earnings divided by total stockholders'
equity, less net balance of goodwill and amortizable intangible
assets, as of the beginning of the year.
(6) Represents earnings from continuing operations before the after-tax
effect of the impact of litigation and contingent commission related
matters, claims handling obligations, investment gains (losses),
medical and pension plan changes, depreciation, amortization,
amortization of deferred compensation and restricted stock expense
and stock compensation expense.
(7) Represents total stockholders' equity less net balance of goodwill
and amortizable intangible assets.
(8) Represents tangible net worth divided by the common shares
outstanding at the end of the period.
Arthur J. Gallagher & Co.
Unconsolidated Investment Summary
(Unaudited - in millions)
December 31, 2006
December 31, 2006 December 31, 2005 LOCs & Funding
Financial Commit-
Current Noncurrent Current Noncurrent Guarantees ments
Unconsolidated
Investments:
Direct and indirect
investments in
Asset Alliance
Corporation (AAC):
Common stock $- $13.7 $- $15.5 $- $-
Preferred stock 13.4 - 0.1 13.3 - -
Debentures - - 13.2 - - -
Indirectly held - 1.1 - 1.4 - -
Total AAC 13.4 14.8 13.3 30.2 - -
Low income housing
(LIH) investments:
Bridge loans 1.8 - 5.4 - - -
Partnership
interests - 0.8 - 1.1 - -
LIH Developer - - - 8.9 - -
Total LIH
developments 1.8 0.8 5.4 10.0 - -
Alternative energy
investments:
IRC Section 29
Syn/Coal
production
net
receivables 25.7 - 14.9 - - -
IRC Section 29
Syn/Coal
unamortized
assets 6.6 - 6.5 6.7 - -
Equity interest
in biomass
projects and
pipeline 0.1 9.5 0.1 13.9 - -
Clean energy
related
ventures - 0.6 - 0.7 - 0.8
Total
alternative
energy
investments 32.4 10.1 21.5 21.3 - 0.8
Real estate,
venture capital
and other
investments 1.6 6.8 3.0 6.7 5.4* 1.0
Total
unconsolidated
investments $49.2 $32.5 $43.2 $68.2 $5.4 $1.8
*Consists of a $4.4 million letter of credit (LOC) related to the
reclamation of a former IRC Section 29-related Syn/Coal site and a $1.0
million letter of credit to support the escrow requirements related to
the sale of Gallagher's home office real estate.
Consolidated Investment Summary
(Unaudited - in millions)
December 31,
2006
December December LOCs & Funding
31, 31, Financial Commit-
2006 2005 Guarantees ments
Home office land and building:
Fixed assets $- $101.9 $- $-
Accumulated depreciation - (18.3) - -
Non-recourse borrowings - current - (0.9) - -
Non-recourse borrowings -
noncurrent - (72.2) - -
Recourse borrowings - noncurrent - (3.0) - -
Net other consolidated assets and
liabilities - 4.0 - -
Net investment - 11.5 - -
Airplane leasing company:
Fixed assets 49.1 51.8 - -
Accumulated depreciation (21.3) (17.7) - -
Non-recourse borrowings - current (2.1) (1.9) - -
Non-recourse borrowings -
noncurrent (25.9) (28.0) - -
Recourse borrowings - noncurrent - - - -
Net other consolidated assets and
liabilities 0.2 (0.4) - -
Net investment - 3.8 - -
IRC Section 29 Syn/Coal partnerships:
Fixed assets 15.7 15.6 - -
Accumulated depreciation (11.0) (7.3) - -
Non-recourse borrowings - current (6.8) (2.5) - -
Non-recourse borrowings -
noncurrent - (4.4) - -
Recourse borrowings - noncurrent - - - -
Net other consolidated assets and
liabilities 2.1 (1.3) - -
Net investment - 0.1 - -
Total consolidated investments:
Fixed assets 64.8 169.3 - -
Accumulated depreciation (32.3) (43.3) - -
Non-recourse borrowings - current (8.9) (5.3) - -
Non-recourse borrowings -
noncurrent (25.9) (104.6) - -
Recourse borrowings - noncurrent - (3.0) - -
Net other consolidated assets and
liabilities 2.3 2.3 - -
Net investment $- $15.4 $- $-
