SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM_________________________ TO___________________________
Commission File Number 1-9761
ARTHUR J. GALLAGHER & CO.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO PIERCE PLACE, ITASCA, ILLINOIS 60143-3141
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(Address of principal executive offices)
(Zip Code)
(630) 773-3800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of September 30, 1996 was 16,226,860.
ARTHUR J. GALLAGHER & CO.
INDEX
PAGE NO.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statement of Earnings for the three-month and
nine-month periods ended September 30, 1996 and 1995......... 3
Consolidated Balance Sheet at September 30, 1996 and
December 31, 1995............................................ 4
Consolidated Statement of Cash Flows for the nine-month
periods ended September 30, 1996 and 1995.................... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 7-9
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.............................. 10
Exhibit 11.0 - Computation of Net Earnings Per
Common and Common Equivalent Share (Unaudited)
Exhibit 27.0 - Financial Data Schedule (Unaudited)
Signatures............................................................ 11
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Commissions $ 70,091 $ 70,926 $193,263 $190,409
Fees 45,914 42,716 126,006 118,314
Investment income and other 5,691 4,720 17,866 13,738
-------- -------- -------- --------
Total revenues 121,696 118,362 337,135 322,461
Expenses:
Salaries and employee benefits 59,972 57,502 177,700 171,191
Other operating expenses 36,204 34,681 107,029 102,704
-------- -------- -------- --------
Total expenses 96,176 92,183 284,729 273,895
-------- -------- -------- --------
Earnings before income taxes 25,520 26,179 52,406 48,566
Provision for income taxes 7,463 9,807 17,872 18,775
-------- -------- -------- --------
Net earnings $ 18,057 $ 16,372 $ 34,534 $ 29,791
======== ======== ======== ========
Net earnings per common and
common equivalent share $ 1.03 $ .94 $ 1.98 $ 1.73
Dividends declared per common share $ .29 $ .25 $ .87 $ .75
Weighted average number of common and
common equivalent shares outstanding 17,807 17,389 17,731 17,230
See accompanying notes.
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 61,314 $ 58,849
Restricted cash 102,086 95,388
Premiums and fees receivable 198,682 226,675
Investment strategies - trading 51,715 46,123
Other 25,703 22,448
-------- --------
Total current assets 439,500 449,483
Marketable securities - available for sale 41,515 41,712
Other noncurrent assets 47,596 42,360
Fixed assets 78,021 72,352
Accumulated depreciation and amortization (52,344) (47,657)
-------- --------
Net fixed assets 25,677 24,695
Intangible assets - net 7,196 7,581
-------- --------
$561,484 $565,831
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $314,113 $321,060
Accrued salaries and bonuses 8,012 13,648
Accounts payable and other accrued liabilities 66,860 60,174
Unearned fees 13,551 13,586
Income taxes payable 10,386 10,619
Other 11,776 7,225
-------- --------
Total current liabilities 424,698 426,312
Deferred income taxes and other noncurrent accounts 10,275 14,010
Stockholders' equity:
Common stock - issued and outstanding 16,227 shares
in 1996 and 16,365 shares in 1995 16,227 16,365
Capital in excess of par value 1,336 -
Retained earnings 108,696 109,110
Unrealized holding gain on available for sale
securities - net of income taxes 252 34
-------- --------
Total stockholders' equity 126,511 125,509
-------- --------
$561,484 $565,831
======== ========
See accompanying notes.
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
1996 1995
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings $ 34,534 $ 29,791
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net gain on investments (2,748) (878)
Depreciation and amortization 7,342 7,602
Increase in restricted cash (6,698) (13,437)
Decrease (increase) in premiums receivable 31,738 (1,499)
(Decrease) increase in premiums payable (6,947) 24,581
Increase in trading investments - net (3,258) (3,608)
(Increase) decrease in other current assets (3,255) 2,278
Decrease in accrued salaries and bonuses (5,636) (1,107)
Increase in accounts payable and other accrued liabilities 5,836 2,726
(Decrease) increase in income taxes payable (233) 947
(Decrease) increase in deferred income taxes (1,198) 413
Other (6,395) (273)
-------- --------
Net cash provided by operating activities 43,082 47,536
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (18,353) (14,992)
Proceeds from the sale of marketable securities 17,520 13,324
Proceeds from maturities of marketable securities 1,767 1,462
Additions to fixed assets (7,521) (8,894)
Other 142 296
Net cash used by investing activities ------- -------
(6,445) (8,804)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 7,275 6,178
Tax benefit from issuance of common stock 1,809 1,596
Repurchase of common stock (21,290) (6,663)
Dividends paid (12,824) (10,778)
Retirement of long-term debt (1,130) (1,130)
Equity transactions of pooled companies prior to dates of acquisition (8,012) (1,684)
------- -------
Net cash used by financing activities (34,172) (12,481)
------- -------
Net increase in cash and cash equivalents 2,465 26,251
Cash and cash equivalents at beginning of period 58,849 50,037
-------- --------
Cash and cash equivalents at end of period $ 61,314 $ 76,288
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 477 $ 379
Income taxes paid $ 12,789 $ 12,680
See accompanying notes.
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ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been
omitted pursuant to such rules and regulations. The Company believes the
disclosures are adequate to make the information presented not misleading.
The unaudited consolidated financial statements included herein are, in the
opinion of management, prepared on a basis consistent with the audited
consolidated financial statements for the year ended December 31, 1995 and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information set forth. Certain
reclassifications have been made to the prior year financial statements in
order to conform to the current year presentation.
The quarterly results of operations are not necessarily indicative of
results of operations for subsequent quarters or the full year.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's 1995 Annual Report to Stockholders.
2. ACQUISITIONS - POOLINGS OF INTERESTS
On February 29, 1996, the Company acquired substantially all of the net
assets of Levitt/Kristan Company. On May 31, 1996, the Company acquired
substantially all of the net assets of Alliance Insurance Group, Inc.
During the three month period ended September 30, 1996, the Company
acquired substantially all of the net assets of Lamberson Koster & Company,
Beymer & Bond Investigations, Inc., Morgan, Read & Coleman Limited and
Morgan Insurance Services Limited. These acquisitions were made in exchange
for 1,081,000 shares of the Company's Common Stock and were accounted for
as poolings of interests. The consolidated financial statements for all
periods prior to the acquisition dates have been restated to include the
operations of these companies except for Alliance Insurance Group, Inc. and
Beymer & Bond Investigations, Inc. which were not material to the Company.
The following summarizes the restatement to reflect these acquisitions (in
thousands):
ATTRIBUTABLE
THREE-MONTH PERIOD ARTHUR J. TO POOLED
ENDED SEPTEMBER 30, 1995 GALLAGHER & CO. COMPANIES AS RESTATED
------------------------ --------------- ------------ -----------
Revenues $111,643 $ 6,719 $118,362
Net earnings $ 15,432 $ 940 $ 16,372
======== ======= ========
NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1995
------------------------
Revenues $304,145 $18,316 $322,461
Net earnings $ 27,943 $ 1,848 $ 29,791
======== ======= ========
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable with a positive cash flow from operations and has
consequently been able to finance its operations and capital expenditures from
internally generated funds. Funds restricted as to the Company's use (primarily
premiums held as fiduciary funds) have not been included in determining the
Company's liquidity.
During 1996, cash flow from operations and funds available under various loan
agreements have been sufficient to fund the operating and capital expenditures
of the Company. Cash generated from operating activities was $43.1 million and
$47.5 million for the nine months ended September 30, 1996 and 1995,
respectively. Because of the variability related to the timing of fees
receivable and premiums receivable and payable, cash from operations for the
Company can vary substantially from quarter to quarter.
The Company maintains a $20 million revolving credit agreement (the "Credit
Agreement") requiring repayment of any loans under the agreement no later than
June 30, 2001. As of September 30, 1996, there were no borrowings existing under
this agreement. The Company also entered into two term loan agreements (the
"Term Loan Agreements") that have outstanding balances of $1.3 million and $1.0
million at September 30, 1996. Loans under the Term Loan Agreements are
repayable in equal annual installments no later than January 11, 1998 and June
15, 1998, respectively.
The Credit Agreement and Term Loan Agreements require the maintenance of certain
financial requirements. The Company is currently in compliance with these
requirements.
The Company also has line of credit facilities of $17.5 million and $10.0
million. Since the Company filed its 1995 Form 10-K Annual Report, it extended
its line of credit facility of $17.5 million to April 30, 1997. As of September
30, 1996, there were no borrowings existing under these line of credit
facilities.
Through the first nine months of 1996, the Company paid $12.8 million in cash
dividends on its common stock. On September 17, 1996, the Company declared a
regular quarterly cash dividend of $.29 per share payable on October 15, 1996 to
Shareholders of Record as of September 30, 1996.
Net capital expenditures were $7.5 million and $8.9 million for the nine months
ended September 30, 1996 and 1995, respectively. This decrease is primarily a
timing difference. In 1996, the Company expects to make expenditures for
capital improvements at least equal to the $9.4 million spent in 1995. Capital
expenditures by the Company are related primarily to expanded offices and
updating computer systems and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
1997, to repurchase its common stock. Through the first nine months of 1996 and
1995, the Company repurchased 645,000 shares at a cost of $21.3 million and
187,000 shares at a cost of $6.7 million, respectively. The repurchases were
funded entirely by internally generated funds and are held for reissuance in
connection with exercises of options under its stock option plans. Under the
provisions of the plan, the Company is authorized to repurchase approximately
290,000 additional shares through June 30, 1997. The Company is under no
commitment or obligation to repurchase any particular amount of common stock and
at its discretion may suspend the repurchase plan at any time.
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Insurance premiums and risk management income continue to come under extreme
pressure throughout the United States and abroad causing shortfalls in expected
commissions and fee growth. Although these conditions are partially offset by
the increases in investment and other income and a reduction in the Company's
overall tax rate related to that income, the Company does not anticipate any
change in the short term insurance markets, and does not expect 1996 fourth
quarter results to reach the levels attained during the fourth quarter of 1995.
Commission revenues decreased by 1% to $70.1 million in the third quarter of
1996. This decrease is due principally to renewal decreases and lost business
partially offset by new business production. Commissions revenues increased by
1% to $193.3 million in the first nine months of 1996. This increase is due
principally to new business production partially offset by lost business and
renewal decreases.
Fee revenues increased by 7% to $45.9 million in the third quarter of 1996 and
by 7% to $126.0 million in the first nine months of 1996 over the respective
periods in 1995. These increases reflect new business production and to a lesser
extent renewal fee increases of self-insurance products generated primarily by
Gallagher Bassett Services, Inc., partially offset by lost business.
Investment income and other increased 21% to $5.7 million in the third quarter
of 1996 and by 30% to $17.9 million in the first nine months of 1996 over the
respective periods in 1995. These increases were due primarily to significantly
higher returns on funds invested with outside fund managers.
Total expenses increased by 4% or $4.0 million in the third quarter of 1996 over
the same period in 1995 and increased by 4% or $10.8 million in the first nine
months of 1996 over the same period in 1995.
Salaries and employee benefits increased by $2.5 million or 4%, to $60.0 million
in the third quarter of 1996 and by $6.5 million or 4% to $177.7 million in the
first nine months of 1996 over the respective periods in 1995. These increases
are due principally to increased employee head count combined with salary
increases and higher employee fringe benefit costs partially offset by a
reduction in the Company's Incentive Compensation Plans due to commission
revenues which were lower than planned.
Other operating expenses increased by $1.5 million or 4% to $36.2 million in the
third quarter of 1996 and by 4% to $107.0 million in the first nine months of
1996 over the respective periods in 1995. These increases are due primarily to
increases in rent and general office expenses related to new and expanded
offices. Travel and other direct employee expenses were up due to the growth in
revenues and employee head count.
The effective income tax rate of 29% for the third quarter and 34% for the first
nine months of 1996 is less than the statutory federal rate of 35% and is less
than the Company's effective tax rate of 37% for the third quarter and 39% for
the first nine months of 1995 due primarily to the effect of the tax benefits of
certain investments.
Earnings per share for the third quarter of 1996 were $1.03 compared to $.94 in
1995, a 10% increase. In the first nine months, earnings per share increased 14%
from $1.73 in 1995 to $1.98 in 1996. These earnings per share increases reflect
the growth in revenues and a smaller growth in expenses noted above.
-8-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains forward looking statements. Forward looking
statements made by or on behalf of the Company are subject to risks and
uncertainties, including but not limited to the following: the Company's
commission revenues are highly dependent on premiums charged by insurers, which
are subject to fluctuation; the property and casualty insurance industry
continues to experience a prolonged soft market despite high losses; continued
low interest rates will reduce income earned on invested funds; the insurance
brokerage and service businesses are extremely competitive with a number of
competitors being substantially larger than the Company; the alternative
insurance market continues to grow; the Company's revenues vary significantly
from quarter to quarter as a result of the timing of policy renewals and the net
effect of new and lost business production; the general level of economic
activity can have a substantial impact on the Company's renewal business. The
Company's ability to grow has been enhanced through acquisitions, which may or
may not be available on acceptable terms in the future and which, if
consummated, may or may not be advantageous to the Company. Accordingly, actual
results may differ materially from those set forth in the forward looking
statements. Attention is also directed to other risk factors set forth in
documents filed by the Company with the Securities and Exchange Commission.
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ARTHUR J. GALLAGHER & CO.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 11.0 - Computation of Net Earnings Per Common and Common
Equivalent Share. (Unaudited)
Exhibit 27.0 - Financial Data Schedule. (Unaudited)
b. Reports on Form 8-K. No Reports on Form 8-K were filed during the
three-month period ended September 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARTHUR J. GALLAGHER & CO.
Date: November 8, 1996
/s/ Michael J. Cloherty
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Michael J. Cloherty
Executive Vice President - Finance
Chief Financial Officer
/s/ David B. Hoch
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David B. Hoch
Controller
Chief Accounting Officer
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