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 June 30, 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 June 30, 1997 was 16,350,726.
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 six-month
periods ended June 30, 1997 and 1996.......................... 3
Consolidated Balance Sheet at June 30, 1997 and
December 31, 1996............................................. 4
Consolidated Statement of Cash Flows for the six-month periods ended
June 30, 1997 and 1996........................................ 5
Notes to Consolidated Financial Statements.......................... 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 8-10
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K................................... 11
Exhibit 11.0 - Computation of Net Earnings Per
Common and Common Equivalent Share (Unaudited)
Exhibit 27.0 - Financial Data Schedule (Unaudited)
Signatures................................................................. 12
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three-month period ended Six-month period ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
(In thousands, except per share data)
Revenues:
Commissions $ 63,216 $ 61,634 $126,495 $125,433
Fees 43,354 41,820 85,127 80,393
Investment income and other 10,008 6,387 16,433 12,192
-------- -------- -------- --------
Total revenues 116,578 109,841 228,055 218,018
Expenses:
Salaries and employee benefits 57,988 61,111 119,198 120,184
Other operating expenses 39,209 37,164 75,478 72,239
-------- -------- -------- --------
Total expenses 97,197 98,275 194,676 192,423
-------- -------- -------- --------
Earnings before income taxes 19,381 11,566 33,379 25,595
Provision for income taxes 6,589 4,565 11,349 10,060
-------- -------- -------- --------
Net earnings $ 12,792 7,001 $ 22,030 $ 15,535
======== ======== ======== ========
Net earnings per common and
common equivalent share $ .73 $ .40 $1.26 $ .89
Dividends declared per common share $ .31 $ .29 $.62 $ .58
Weighted average number of common and
common equivalent shares outstanding 17,859 17,714 17,980 17,851
See accompanying notes.
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1997 1996
---------- -----------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 57,639 $ 57,017
Restricted cash 103,600 87,224
Premiums and fees receivable 217,550 237,640
Investment strategies - trading 57,142 53,409
Other 35,082 30,003
-------- --------
Total current assets 471,013 465,293
Marketable securities - available for sale 36,398 36,881
Deferred income taxes and other noncurrent assets 62,887 52,783
Fixed assets 82,738 80,794
Accumulated depreciation and amortization (56,788) (54,556)
-------- --------
Net fixed assets 25,950 26,238
Intangible assets - net 10,589 11,093
-------- --------
$606,837 $592,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $342,500 $323,867
Accrued salaries and bonuses 9,273 14,922
Accounts payable and other accrued liabilities 74,714 69,706
Unearned fees 12,083 13,043
Income taxes payable 560 4,965
Other 18,187 20,305
-------- --------
Total current liabilities 457,317 446,808
Other noncurrent liabilities 11,717 11,579
Stockholders' equity:
Common stock - issued and outstanding 16,351 shares
in 1997 and 16,457 shares in 1996 16,351 16,457
Capital in excess of par value - 2,140
Retained earnings 120,281 114,415
Unrealized gain on available for sale securities
- net of income taxes 1,171 889
-------- --------
Total stockholders' equity 137,803 133,901
-------- --------
$606,837 $592,288
======== ========
See accompanying notes.
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ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six-month period
ended June 30,
1997 1996
-------- --------
(In thousands)
Cash flows from operating activities:
Net earnings $ 22,030 $ 15,535
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Net gain on investments (2,081) (2,054)
Depreciation and amortization 5,334 5,390
(Increase) decrease in restricted cash (16,376) 8,947
Decrease (increase) in premiums receivable 17,458 (10,823)
Increase in premiums payable 18,633 19,746
Increase in trading investments - net (2,059) (4,274)
Increase in other current assets (5,079) (3,184)
Decrease in accrued salaries and bonuses (5,649) (6,966)
Increase in accounts payable and other accrued liabilities 4,664 1,034
Decrease in income taxes payable (4,405) (1,486)
Increase (decrease) in deferred income taxes 1,074 (896)
Other 1,560 3,536
-------- --------
Net cash provided by operating activities 35,104 24,505
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (9,863) (14,009)
Proceeds from sales of marketable securities 11,613 13,999
Proceeds from maturities of marketable securities 662 1,024
Additions to fixed assets (4,542) (5,140)
Other (13,057) (1,937)
-------- --------
Net cash used by investing activities (15,187) (6,063)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,127 5,825
Tax benefit from issuance of common stock 737 1,364
Repurchases of common stock (13,187) (19,887)
Dividends paid (9,804) (8,391)
Retirement of long-term debt (1,130) (630)
Borrowings on line of credit facilities 15,900 -
Repayments on line of credit facilities (15,900) -
Equity transactions of pooled companies prior to dates of acquisition (38) (4,067)
-------- --------
Net cash used by financing activities (19,295) (25,786)
-------- --------
Net increase (decrease) in cash and cash equivalents 622 (7,344)
Cash and cash equivalents at beginning of period 57,017 58,917
-------- --------
Cash and cash equivalents at end of period $ 57,639 $ 51,573
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 442 $ 268
Income taxes paid $ 11,855 $ 9,884
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 six-month period ended June 30, 1997, the Company acquired
substantially all of the net assets of Byerly & Company, Inc., Arnold &
Company, Inc. and Trinder & Norwood, Inc. in exchange for 263,000 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. and Trinder &
Norwood, Inc. were not material to the Company individually or in the
aggregate and accordingly, prior period financial statements were not
restated.
On April 2, 1997, the Company acquired a 50% interest in Wyatt Group Pty
Ltd. and accounted for the acquisition as a purchase. This transaction was
not material to the Company.
The following summarizes the restatement to reflect the acquisition of
Byerly & Company, Inc. (in thousands):
Attributable
Three-month period Arthur J. to Pooled
ended June 30, 1996 Gallagher & Co. Companies As Restated
- ------------------- --------------- ------------ -----------
Revenues $108,618 $1,223 $109,841
Net earnings (loss) 7,533 (532) 7,001
======== ====== ========
Six-month period
ended June 30, 1996
- -------------------
Revenues $215,439 $2,579 $218,018
Net earnings (loss) 16,477 (942) 15,535
======== ====== ========
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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 of $.05 and $.02 per share for the quarters ended June 30, 1997
and 1996, respectively, and $.08 and $.05 per share for each of the six
month periods ended June 30, 1997 and 1996, respectively. In addition, the
impact of SFAS 128 is expected to result in an increase in fully diluted
earnings per share of $.03 and $.01 per share for each of the quarters
ended June 30, 1997 and 1996, respectively, and $.04 and $.01 per share for
each of the six month periods ended June 30, 1997 and 1996, respectively.
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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 effective income tax rate, the Company does not
anticipate any change in the near future in this extremely competitive
environment.
Commission revenues increased by 3% to $63.2 million in the second quarter of
1997 and by 1% to $126.5 million in the first half of 1997 over the respective
periods in 1996. These increases are due principally to new business production
partially offset by lost business.
Fee revenues increased by 4% to $43.4 million in the second quarter of 1997 and
by 6% to $85.1 million in the first six months of 1997 over the respective
periods in 1996. 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. (a Company subsidiary), partially offset by
lost business.
Investment income and other increased 57% to $10.0 million in the second quarter
of 1997 over the same period in 1996 due primarily to a $1.8 million gain
recognized in the second quarter on the restructuring of a long term lease for
facilities in the U.K. and $1.1 million of capital gains recognized on the sale
of assets during the second quarter. Investment income and other increased by
35% to $16.4 million in the first half of 1997 over the first half of 1996 due
primarily to the gains mentioned above and gains of $1.6 million on the sale of
assets and other investments recognized in the first quarter of 1997.
Total expenses decreased by 1% or $1.1 million in the second quarter of 1997
from the same period in 1996 and increased by 1% or $2.3 million in the first
half of 1997 over the same period in 1996.
Salaries and employee benefits decreased by $3.1 million or 5% to $58.0 million
in the second quarter of 1997 and decreased by $1.0 million or 1% to $119.2
million in the first six months of 1997 from the respective periods in 1996.
These decreases are due primarily to a $4.8 million non-recurring gain
recognized in the second quarter of 1997 from a restructuring and settlement of
a defined benefit pension plan at one of the Company's London subsidiaries
partially offset by salary increases and higher employee fringe benefit costs.
Other operating expenses increased by $2.0 million or 6% to $39.2 million in the
second quarter of 1997 and by 4% to $75.5 million in the first six months of
1997 over the respective periods in 1996. These increases are due primarily to
increases in rent and general office expenses related to new leases and office
expansions and increased business insurance costs. In addition, travel and other
direct employee expenses increased in 1997 due to the growth in sales volume.
The effective income tax rate of 34% for the second quarter and first six months
of 1997 is less than the statutory federal rate of 35% and is less than the
Company's effective tax rate of 39% for the second quarter and first six months
of 1996. These differences are due primarily to the effects of tax benefits
generated by certain investments.
Earnings per share for the second quarter of 1997 were $.73 compared to $.40 in
1996, an 83% increase. First half earnings per share increased 42% from $.89 in
1996 to $1.26 in 1997. These earnings per share increases reflect the non-
recurring gains discussed above and the reduction in the Company's effective tax
rate.
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 finance the
operations and capital expenditures of the Company. Cash generated from
operating activities was $35.1 million and $24.5 million for the six months
ended June 30, 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.
The Company maintains a $20 million unsecured revolving credit agreement (the
"Credit Agreement") requiring repayment of any loans under the agreement no
later than June 30, 2001. As of June 30, 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 $630,000 and
$500,000 at June 30, 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 six months ended June 30, 1997, the Company borrowed and
repaid $15.9 million of short-term borrowings. As of June 30, 1997, $10.0
million in short-term borrowings exists under these facilities. These
borrowings were used to finance certain portfolios under the Company's strategy
of investment alternatives.
Through the first six months of 1997, the Company paid $9.8 million in cash
dividends on its common stock. On May 21, 1997, the Company declared a regular
quarterly cash dividend of $.31 per share payable on July 15, 1997 to
Shareholders of Record as of June 30, 1997. This is a 7% increase over the
quarterly dividend in 1996.
Net capital expenditures were $4.5 million and $5.1 million for the six months
ended June 30, 1997 and 1996, respectively. 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 six months of 1997 and
1996, the Company repurchased 414,000 shares at a cost of $13.2 million and
609,000 shares at a cost of $19.9 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 400,000 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.
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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 June 30, 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: July 31, 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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