-----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, MB2vjM6HxcjAFnb0R3eq3GlUPVzqX2GdE3ET+fdi/ETDzeQfJSYEjEMVl27cnSjW tQti/KtRZDT7coTs/uoyow== 0000950131-97-004719.txt : 19970804 0000950131-97-004719.hdr.sgml : 19970804 ACCESSION NUMBER: 0000950131-97-004719 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970801 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: 97650339 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 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. - -------------------------------------------------------------------------------- (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 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
-2- 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. -3- 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. -4- 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. -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 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 ======== ====== ========
-6- 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. -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 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. -8- 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. -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 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. -10- 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. -11- 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 -------------------------------------- Michael J. Cloherty Executive Vice President - Finance Chief Financial Officer /s/ David B. Hoch -------------------------------------- David B. Hoch Controller Chief Accounting Officer -12- EX-11.0 2 COMPUTATION OF NET EARNINGS PER COMMON ARTHUR J. GALLAGHER & CO. COMPUTATION OF NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (UNAUDITED)
Three-month period ended Six-month period ended June 30, June 30, 1997 1996 1997 1996 -------- -------- -------- -------- (In thousands, except per share data) Net earnings $12,792 $ 7,001 $22,030 $15,535 Adjustments to net earnings for computation related to the 20% limitation on the buyback of common shares using the treasury stock method 288 169 614 312 ------- ------- ------- ------- Net earnings applicable to computation $13,080 $ 7,170 $22,644 $15,847 ======= ======= ======= ======= Average common shares outstanding 16,358 16,484 16,421 16,531 Dilutive effect of stock options using the treasury stock method 1,501 1,230 1,559 1,320 ------- ------- ------- ------- Weighted average number of common and common equivalent shares outstanding 17,859 17,714 17,980 17,851 ======= ======= ======= ======= Net earnings per common and common equivalent share $.73 $.40 $1.26 $.89
EX-27.0 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 second quarter Form 10Q and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS 6-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 JUN-30-1997 JUN-30-1996 161,239 138,014 57,142 52,127 218,403 243,250 (853) (720) 0 0 471,013 458,380 82,738 77,132 (56,788) (51,482) 606,837 572,751 457,317 445,289 0 0 0 0 0 0 16,351 16,271 121,452 99,254 606,837 572,751 211,622 205,826 228,055 218,018 119,198 120,184 119,198 120,184 75,478 72,239 0 0 0 0 33,379 25,595 11,349 10,060 22,030 15,535 0 0 0 0 0 0 22,030 15,535 1.26 .89 1.26 .89
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