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 March 31, 1997 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 March 31, 1997 was 16,371,915.
ARTHUR J. GALLAGHER & CO.
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statement of Earnings for the three-month
period ended March 31, 1997 and 1996..................... 3
Consolidated Balance Sheet at March 31, 1997 and
December 31, 1996........................................ 4
Consolidated Statement of Cash Flows for the three-month
period ended March 31, 1997 and 1996..................... 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
March 31,
1997 1996
-------- --------
(In thousands, except per share data)
Revenues:
Commissions $ 63,279 $ 63,799
Fees 41,773 38,573
Investment income and other 6,425 5,805
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Total revenues 111,477 108,177
Expenses:
Salaries and employee benefits 61,210 59,073
Other operating expenses 36,269 35,075
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Total expenses 97,479 94,148
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Earnings before income taxes 13,998 14,029
Provision for income taxes 4,760 5,495
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Net earnings $ 9,238 $ 8,534
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Net earnings per common and
common equivalent share $ .53 $ .48
Dividends declared per common share $ .31 $ .29
Weighted average number of common and
common equivalent shares outstanding 18,098 17,916
See accompanying notes.
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1997 1996
--------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 48,229 $ 57,017
Restricted cash 83,050 87,224
Premiums and fees receivable 188,951 237,640
Investment strategies - trading 54,991 53,409
Other 29,094 30,003
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Total current assets 404,315 465,293
Marketable securities - available for sale 36,512 36,881
Deferred taxes and other noncurrent assets 59,172 52,783
Fixed assets 82,051 80,794
Accumulated depreciation and amortization (56,369) (54,556)
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Net fixed assets 25,682 26,238
Intangible assets - net 10,854 11,093
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$536,535 $592,288
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $275,314 $323,867
Accrued salaries and bonuses 10,765 14,922
Accounts payable and other accrued liabilities 74,503 69,706
Unearned fees 11,970 13,043
Income taxes payable 6,169 4,965
Other 13,004 20,305
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Total current liabilities 391,725 446,808
Other noncurrent liabilities 11,486 11,579
Stockholders' equity:
Common stock - issued and outstanding 16,372 shares
in 1997 and 16,457 shares in 1996 16,372 16,457
Capital in excess of par value - 2,140
Retained earnings 116,079 114,415
Unrealized gain on available for sale
securities - net of income taxes 873 889
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Total stockholders' equity 133,324 133,901
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$536,535 $592,288
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See accompanying notes.
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three-month period ended
March 31,
1997 1996
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(In thousands)
Cash flows from operating activities:
Net earnings $ 9,238 $ 8,534
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net gain on investments (877) (1,138)
Depreciation and amortization 2,601 2,519
Decrease (increase) in restricted cash 4,174 (5,993)
Decrease in premiums receivable 46,397 33,181
Decrease in premiums payable (48,553) (18,095)
Increase in trading investments - net (893) (1,099)
Decrease (increase) in other current assets 909 (750)
Decrease in accrued salaries and bonuses (4,157) (4,874)
Increase in accounts payable and other accrued
liabilities 3,996 3,894
Increase in income taxes payable 1,204 606
Decrease in deferred income taxes (244) (421)
Other (3,001) 618
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Net cash provided by operating activities 10,794 16,982
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (4,416) (5,829)
Proceeds from sales of marketable securities 4,841 5,819
Proceeds from maturities of marketable securities 57 530
Additions to fixed assets (1,806) (2,685)
Other (6,089) (401)
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Net cash used by investing activities (7,413) (2,566)
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Cash flows from financing activities:
Proceeds from issuance of common stock 1,981 3,157
Tax benefit from issuance of common stock 303 695
Repurchases of common stock (6,757) (2,022)
Dividends paid (4,725) (3,856)
Retirement of long-term debt (630) (630)
Borrowings on line of credit facilities 7,500 -
Repayments on line of credit facilities (10,000) -
Equity transactions of pooled companies prior to
dates of acquisition 159 (1,437)
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Net cash used by financing activities (12,169) (4,093)
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Net (decrease) increase in cash and cash equivalents (8,788) 10,323
Cash and cash equivalents at beginning of period 57,017 58,917
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Cash and cash equivalents at end of period $ 48,229 $ 69,240
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 201 $ 172
Income taxes paid 2,575 3,868
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, 1996 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 1996 Annual Report to Stockholders.
2. Acquisitions - Poolings of Interests
During the three-month period ended March 31, 1997, the Company acquired
substantially all of the net assets of Byerly & Company, Inc. and Arnold &
Company, Inc. in exchange for 205,000 shares of its Common Stock. These
acquisitions were accounted for as poolings of interests. The financial
statements for all periods prior to the acquisition date (January 1, 1997)
have been restated to include the operations of Byerly & Company, Inc.
Arnold & Company, Inc. was not material to the Company and as a result,
prior period financial statements were not restated.
The following summarizes the restatement to reflect this acquisition (in
thousands):
Attributable
Three-month period Arthur J. to Pooled
ended March 31, 1996 Gallagher & Co. Company As Restated
- -------------------- --------------- ------------- -----------
Revenues $106,821 $1,356 $108,177
Net earnings (loss) 8,944 (410) 8,534
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3. Effect of New Pronouncements
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings Per Share", which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact is expected to result in an increase in primary
earnings per share for each of the first quarters ended March 31, 1997 and
1996 of $.03 per share. In addition, the impact of SFAS 128 is expected to
result in an increase in fully diluted earnings per share for the quarters
of $.01 per share.
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Insurance premiums and risk management income reflect the overall pricing
pressure throughout the insurance premium marketplace. Although these conditions
are partially offset by the increases in investment and other income (and a
reduction in the Company's overall tax rate), the Company does not anticipate
any change in the near future in this extremely competitive environment.
Commission revenues decreased by 1% to $63.3 million in the first quarter of
1997. This decrease is due principally to renewal decreases and lost business
partially offset by new business production.
Fee revenues increased by 8% to $41.8 million in the first quarter of 1997 over
the same period in 1996. This increase reflects 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 11% to $6.4 million in the first quarter
of 1997 over the same period in 1996 This increase is due primarily to a
combined gain of $1.6 million recognized on the sale of a line of business and
on another investment, partially offset by lower returns on certain funds
invested with outside fund managers.
Total expenses increased by 4% or $3.3 million in the first quarter of 1997 over
the same period in 1996.
Salaries and employee benefits increased by $2.1 million or 4%, to $61.2 million
in the first quarter of 1997 over the same period in 1996. This increase is due
principally to salary increases and higher employee fringe benefit costs.
Other operating expenses increased by $1.2 million or 3% to $36.3 million in the
first quarter of 1997 over the same period in 1996. This increase is due
primarily to increases in rent and general office expenses related to new and
expanded offices and business insurance costs.
The effective income tax rate of 34% for the first quarter of 1997 is less than
the statutory federal rate and less than the Company's effective tax rate of 39%
for the first quarter of 1996 due primarily to the effects of tax benefits
generated by certain investments.
Earnings per share for the first quarter of 1997 were $.53 compared to $.48 for
the same period in 1996, a 10% increase. This increase reflects the reduction in
the Company's effective tax rate.
FINANCIAL CONDITION AND LIQUIDITY
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable and positive 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 $10.8 million and $17.0 million for the three months ended March
31, 1997 and 1996, 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. Funds
restricted as to the Company's use (primarily premiums held as fiduciary funds)
have not been included in determining the Company's liquidity.
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 March 31, 1997, there were no borrowings existing under
this agreement. The Company also has two term loan agreements (the "Term Loan
Agreements") that have outstanding balances of $1.0 million and $630,000 at
March 31, 1997. Loans under the Term Loan Agreements are repayable in equal
annual installments no later than January 11, 1998 and June 15, 1998,
respectively. These borrowings were used to finance some of the Company's
alternative investments.
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 has line of credit facilities of $27.5 million which expire on April
30, 1998. During the three months ended March 31, 1997, the Company repaid $10.0
million of short-term borrowings and borrowed an additional $7.5 million. These
borrowings were used to finance certain portfolios under the Company's strategy
of investment alternatives.
Through the first three months of 1997, the Company paid $4.7 million in cash
dividends on its common stock. On January 22, 1997, the Company declared a
regular quarterly cash dividend of $.31 per share payable on April 15, 1997 to
Shareholders of Record as of March 31, 1997. This is a 7% increase over the
quarterly dividend in 1996.
Net capital expenditures were $1.8 million and $2.7 million for the three months
ended March 31, 1997 and 1996, respectively. This decrease is primarily a timing
difference. In 1997, the Company expects to make expenditures for capital
improvements at least equal to the $10.2 million spent in 1996. 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,
1998, to repurchase its common stock. Through the first three months of 1997 and
1996, the Company repurchased 227,000 shares at a cost of $6.8 million and
53,000 shares at a cost of $2.0 million, respectively. The repurchases 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 590,000 additional shares through June 30, 1998. 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.
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;
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 March 31, 1997.
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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: April 30, 1997
/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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