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, 1998 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Pierce Place, Itasca, Illinois 60143-3141
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(630) 773-3800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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, 1998 was 16,994,047.
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, 1998 and 1997.................. 3
Consolidated Balance Sheet at March 31, 1998 and
December 31, 1997..................................... 4
Consolidated Statement of Cash Flows for the three-month
period ended March 31, 1998 and 1997.................. 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 27.0 - Financial Data Schedule (Unaudited)
Signatures........................................................... 12
-2-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three-month period ended
March 31,
1998 1997
-------- --------
(in thousands, except per share data)
Operating Results
Revenues:
Commissions $ 66,374 $ 63,279
Fees 46,827 41,773
Investment income and other 7,078 6,425
-------- --------
Total revenues 120,279 111,477
Expenses:
Salaries and employee benefits 65,912 61,210
Other operating expenses 37,743 36,269
-------- --------
Total expenses 103,655 97,479
-------- --------
Earnings before income taxes 16,624 13,998
Provision for income taxes 5,652 4,760
-------- --------
Net earnings $ 10,972 $ 9,238
======== ========
Net earnings per common share $ .66 $ .56
Net earnings per common and
common equivalent share .63 .54
Dividends declared per common share .35 .31
See notes to consolidated financial statements.
-3-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1998 1997
--------- ------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 48,004 $ 67,178
Restricted cash 100,053 81,160
Premiums and fees receivable 191,625 217,555
Investment strategies - trading 64,968 62,681
Other 39,520 40,267
-------- --------
Total current assets 444,170 468,841
Marketable securities - available for sale 39,330 39,203
Deferred income taxes and other noncurrent assets 109,950 95,528
Fixed assets 88,292 86,758
Accumulated depreciation and amortization (61,360) (58,948)
-------- --------
Net fixed assets 26,932 27,810
Intangible assets - net 10,246 10,370
-------- --------
$630,628 $641,752
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $310,950 $312,349
Accrued salaries and bonuses 10,197 18,385
Accounts payable and other accrued liabilities 89,369 89,846
Unearned fees 17,433 11,608
Income taxes payable 6,232 10,783
Other 4,012 23,067
-------- --------
Total current liabilities 438,193 466,038
Other noncurrent liabilities 14,644 11,807
Stockholders' equity:
Common stock - issued and outstanding 16,994 shares
in 1998 and 16,591 shares in 1997 16,994 16,591
Capital in excess of par value 12,530 4,349
Retained earnings 146,465 141,309
Accumulated other comprehensive earnings 1,802 1,658
-------- --------
Total stockholders' equity 177,791 163,907
-------- --------
$630,628 $641,752
======== ========
See notes to consolidated financial statements.
-4-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three-month period ended
March 31,
1998 1997
---- ----
(in thousands)
Cash flows from operating activities:
Net earnings $ 10,972 $ 9,238
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net gain on investments and other (1,780) (877)
Depreciation and amortization 2,884 2,601
(Increase) decrease in restricted cash (18,893) 4,174
Decrease in premiums receivable 29,536 46,397
Decrease in premiums payable (1,399) (48,553)
Increase in trading investments - net (894) (893)
Decrease in other current assets 747 909
Decrease in accrued salaries and bonuses (8,188) (4,157)
(Decrease) increase in accounts payable and
other accrued liabilities (1,282) 3,996
(Decrease) increase in income taxes payable (4,551) 1,204
Net change in deferred income taxes 786 (244)
Other 1,615 (3,001)
-------- --------
Net cash provided by operating activities 9,553 10,794
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (8,819) (4,416)
Proceeds from sales of marketable securities 9,081 4,841
Proceeds from maturities of marketable securities 237 57
Net additions to fixed assets (1,780) (1,806)
Other (15,263) (6,089)
-------- --------
Net cash used by investing activities (16,544) (7,413)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 6,800 1,981
Tax benefit from issuance of common stock 1,793 303
Repurchases of common stock (15) (6,757)
Dividends paid (5,143) (4,725)
Retirement of long-term debt (630) (630)
Borrowings on line of credit facilities - 7,500
Repayments on line of credit facilities (15,000) (10,000)
Equity transactions of pooled companies
prior to dates of acquisition 12 159
-------- --------
Net cash used by financing activities (12,183) (12,169)
-------- --------
Net decrease in cash and cash equivalents (19,174) (8,788)
Cash and cash equivalents at beginning of period 67,178 57,017
-------- --------
Cash and cash equivalents at end of period $ 48,004 $ 48,229
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 236 $ 201
Income taxes paid 5,482 2,575
See notes to consolidated financial statements.
-5-
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, 1997 and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information set forth.
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 1997 Annual Report to Stockholders.
2. Acquisitions - Poolings of Interests
During the three-month period ended March 31, 1998, the Company acquired
substantially all of the net assets of EBC, Inc., d/b/a Employee Benefits
of The Carolinas; Martin, Gordon & Jones, Inc. and three other less
significant companies in exchange for 126,000 shares of its Common Stock.
These acquisitions, accounted for as poolings of interests, were not
significant to the Company and accordingly, prior period financial
statements were not restated.
3. Earnings Per Share
The following table sets forth the computation of net earnings per common
share and net earnings per common and common equivalent share (in
thousands, except per share data):
Three-month period ended
March 31,
1998 1997
------- -------
Net earnings $10,972 $ 9,238
======= =======
Weighted average number of common shares outstanding 16,724 16,485
Dilutive effect of stock options using the treasury stock method 750 504
------- -------
Weighted average number of common and common equivalent shares
outstanding 17,474 16,989
======= =======
Net earnings per common share $ .66 $ .56
Net earnings per common and common equivalent share .63 54
Options to purchase 4,000 and 2,160,000 shares of common stock were
outstanding during the first quarter ended March 31, 1998, and 1997,
respectively, but were not included in the computation of the dilutive
effect of stock options. These options were excluded from the computation
because the options' exercise prices were greater than the average market
price of the common shares and, therefore, would be antidilutive.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
4. Comprehensive Earnings
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS 130
had no impact on the Company's net earnings or stockholders' equity. SFAS
130 requires unrealized gains or losses on the Company's available for sale
securities, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive earnings. Prior
year consolidated financial statements have been reclassified to conform to
the requirements of SFAS 130.
The components of comprehensive earnings and accumulated other
comprehensive earnings are as follows (in thousands):
Three-month period ended
March 31,
1998 1997
------- ------
Net earnings $10,972 $9,238
Net change in unrealized gain on available for
sale securities, net of income taxes
of $96 and ($11), respectively 144 (16)
------- ------
Comprehensive earnings $11,116 $9,222
======= ======
Accumulated other comprehensive earnings
at beginning of period $ 1,658 $ 889
Net change in unrealized gain on available for
sale securities, net of income taxes 144 (16)
------- ------
Accumulated other comprehensive earnings
at end of period $ 1,802 $ 873
======= ======
5. Effect of New Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131) "Disclosure about
Segments of an Enterprise and Related Information," which is effective for
years beginning after December 15, 1997. SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. However, segment information is not
required to be reported in interim financial statements in the initial year
of adoption. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
Company has not completed all of the analyses required to determine the
full impact of SFAS 131.
-7-
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,
the Company does not anticipate any change in the near future in this extremely
competitive environment.
Commission revenues increased by 5% to $66.4 million in the first quarter of
1998. This increase is due principally to new business production partially
offset by lost business.
Fee revenues increased by 12% to $46.8 million in the first quarter of 1998 over
the same period in 1997. This increase reflects strong new business production
of approximately $7.4 million of self-insurance products generated primarily by
Gallagher Bassett Services, Inc., partially offset by lost business.
Investment income and other increased 10% to $7.1 million in the first quarter
of 1998 over the same period in 1997. This increase is due primarily to
increased returns on several investment strategies which are invested with
outside fund managers that were partially offset by a non-recurring gain of $1.6
million recognized on the sale of a line of business and on another investment
recorded in the first quarter of 1997.
Total expenses increased by 6% or $6.2 million in the first quarter of 1998 over
the same period in 1997.
Salaries and employee benefits increased by $4.7 million or 8%, to $65.9 million
in the first quarter of 1998 over the same period in 1997. This increase is due
principally to salary increases and higher employee fringe benefit costs.
Other operating expenses increased by $1.5 million or 4% to $37.7 million in the
first quarter of 1998 over the same period in 1997. This increase is due
primarily to increases in rent and general office expenses related to new and
expanded offices, professional fees and outside brokerage expense.
The effective income tax rate of 34% for the first quarter of 1998 and 1997 is
less than the statutory federal rate due primarily to the effect of tax benefits
generated by certain investments which are substantially offset by state and
foreign taxes.
Net earnings per common and common equivalent share for the first quarter of
1998 were $.63 compared to $.54 for the same period in 1997, a 17% increase.
This increase primarily reflects the growth in revenues, partially offset by a
smaller growth in expenses noted above.
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 $9.6 million and $10.8 million for the three months
ended March 31, 1998 and 1997, respectively. Because of the variability related
to the timing of fees receivable and premiums receivable and payable, net cash
flows 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.
-8-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company maintains a $20.0 million unsecured revolving credit agreement (the
"Credit Agreement") requiring repayment of any loans under the agreement no
later than June 30, 2001. As of March 31, 1998, there were no borrowings
existing under this agreement. The Company also has a term loan agreement (the
"Term Loan Agreement") that has an outstanding balance of $500,000 at March 31,
1998. The loan under the Term Loan Agreement is due in 1998. These funds were
used to finance some of the Company's alternative investments.
The Credit Agreement and Term Loan Agreement 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, 1999. Periodically, the Company will make short-term borrowings under these
credit facilities to meet short-term cash flow needs. During the three months
ended March 31, 1998, the Company repaid $15.0 million of short-term borrowings
and at March 31, 1998, no borrowings existed under these facilities. At March
31, 1997, $7.5 million was outstanding under these facilities, which was used to
finance expanded investment activity.
The Company has made commitments to invest additional funds in several of its
equity and tax advantaged investments. At December 31, 1997, the Company had
commitments to invest $26.0 million in these investments in 1998. In addition,
the Company contingently committed to invest an additional $3.0 million in 1998
related to a line of credit arrangement with one of its equity investments. As
of March 31, 1998, approximately $15.0 million had been invested under these
commitments. At March 31, 1998, the Company has agreed to unconditionally
guarantee $30.0 million of debt that was incurred by two of the Company's equity
investments in 1998. As of March 31, 1998, no funds have been expended related
to these guarantees.
Through the first three months of 1998, the Company paid $5.1 million in cash
dividends on its common stock. On January 22, 1998, the Company declared a
regular quarterly cash dividend of $.35 per share payable on April 15, 1998 to
Shareholders of Record as of March 31, 1998. This is a 13% increase over the
quarterly dividend per share in 1997.
Net capital expenditures were $1.8 million for each of the three month periods
ended March 31, 1998 and 1997. In 1998, the Company expects to make
expenditures for capital improvements at least equal to the $11.3 million spent
in the year ended December 31, 1997. 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 1998,
the Company repurchased a nominal amount of common stock for $15,000. Through
the first three months of 1997, the Company repurchased 227,000 shares at a cost
of $6.8 million. The repurchased shares 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 300,000
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.
-9-
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/casualty insurance industry continues
to experience a prolonged soft market, despite high losses which reduces
premiums thereby reducing commissions; continued low interest rates will reduce
the Company's 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 which could unfavorably impact commission and favorably impact
fee revenue; 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.
-10-
ARTHUR J. GALLAGHER & CO.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. 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, 1998.
-11-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 on the 29th day of April,
1998.
ARTHUR J. GALLAGHER & CO.
/s/ Michael J. Cloherty
---------------------------------------
Michael J. Cloherty
Executive Vice President
Chief Financial Officer
/s/ Jack H. Lazzaro
---------------------------------------
Jack H. Lazzaro
Vice President - Finance
Chief Accounting Officer
-12-