-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GvF49V3dZ1d7ykYjVm3WZdrBNBGXMXZNBJ7kdVrn9afaJCrrIh7pYhPH3Rsw1FuM jTllDqUyMPFiJS0X023yng== 0000950131-97-003059.txt : 19970506 0000950131-97-003059.hdr.sgml : 19970506 ACCESSION NUMBER: 0000950131-97-003059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970505 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALLAGHER ARTHUR J & CO CENTRAL INDEX KEY: 0000354190 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 362151613 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09761 FILM NUMBER: 97595030 BUSINESS ADDRESS: STREET 1: TWO PIERCE PL CITY: ITASCA STATE: IL ZIP: 60143 BUSINESS PHONE: 7087733800 10-Q 1 FORM 10-Q 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. - -------------------------------------------------------------------------------- (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, 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 -2- 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 -------- -------- Total revenues 111,477 108,177 Expenses: Salaries and employee benefits 61,210 59,073 Other operating expenses 36,269 35,075 -------- -------- Total expenses 97,479 94,148 -------- -------- Earnings before income taxes 13,998 14,029 Provision for income taxes 4,760 5,495 -------- -------- Net earnings $ 9,238 $ 8,534 ======== ======== 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. -3- 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 -------- -------- 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) -------- -------- Net fixed assets 25,682 26,238 Intangible assets - net 10,854 11,093 -------- -------- $536,535 $592,288 ======== ======== 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 -------- -------- 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 -------- -------- Total stockholders' equity 133,324 133,901 -------- -------- $536,535 $592,288 ======== ========
See accompanying notes. -4- ARTHUR J. GALLAGHER & CO. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three-month period ended March 31, 1997 1996 ---- ---- (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 -------- -------- 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) -------- -------- Net cash used by investing activities (7,413) (2,566) -------- -------- 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) -------- -------- Net cash used by financing activities (12,169) (4,093) -------- -------- Net (decrease) increase in cash and cash equivalents (8,788) 10,323 Cash and cash equivalents at beginning of period 57,017 58,917 -------- -------- 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. -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, 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 ======== ====== ========
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. -6- 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. -7- 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; -8- 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. -9- 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. -10- 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 ---------------------------------- Michael J. Cloherty Executive Vice President - Finance Chief Financial Officer /s/ David B. Hoch ---------------------------------- David B. Hoch Controller Chief Accounting Officer -11- EX-11 2 COMPUTATIONS OF EARNINGS Exhibit 11.0 ARTHUR J. GALLAGHER & CO. COMPUTATION OF NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (UNAUDITED)
Three-month period ended March 31, 1997 1996 -------- -------- (In thousands, except per share data) Net earnings $ 9,238 $ 8,534 Adjustments to net earnings for computation related to the 20% limitation on the buyback of common shares using the treasury stock method 331 122 ------- ------- Net earnings applicable to computation $ 9,569 $ 8,656 ======= ======= Average common shares outstanding 16,484 16,578 Dilutive effect of stock options using the treasury stock method 1,614 1,338 ------- ------- Weighted average number of common and common equivalent shares outstanding 18,098 17,916 ======= ======= Net earnings per common and common equivalent share $ .53 $ .48
EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Arthur J. Gallagher & Co. Consolidated Financial Statements included in the 1997 first quarter Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS 3-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1996 JAN-01-1997 JAN-01-1996 JAN-01-1996 MAR-31-1997 MAR-31-1996 DEC-31-1996 131,279 170,621 144,241 54,991 48,365 53,409 189,954 197,942 238,529 (1,003) (641) (889) 0 0 0 404,315 439,562 465,293 82,051 73,101 80,794 (56,369) (47,698) (54,556) 536,535 555,141 592,288 391,725 411,998 446,808 0 0 0 0 0 0 0 0 0 16,372 16,628 16,457 116,952 113,905 117,444 536,535 555,141 592,288 105,052 102,372 438,124 111,477 108,177 462,022 61,210 59,073 245,064 61,210 59,073 245,064 36,269 35,075 151,281 0 0 0 0 0 0 13,998 14,029 65,677 4,760 5,495 22,533 9,238 8,534 43,144 0 0 0 0 0 0 0 0 0 9,238 8,534 43,144 .53 .48 2.46 .53 .48 2.46
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