<PAGE>
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, 1995 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
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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)
(708) 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, 1995 was 15,083,560.
<PAGE>
ARTHUR J. GALLAGHER & CO.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statement of Earnings for the three-month and six-month
periods ended June 30, 1995 and 1994 ........................................ 3
Consolidated Balance Sheet at June 30, 1995 and
December 31, 1994 ........................................................... 4
Consolidated Statement of Cash Flows for the
six-month periods ended
June 30, 1995 and 1994 ...................................................... 5
Notes to Consolidated Financial Statements ....................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................... 7-8
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K ................................................. 9
Exhibit 11.0 - Computation of Net Earnings Per
Common and Common Equivalent Share (Unaudited)
Exhibit 13.0 - Liquidity and Capital Resources (from "Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations" from Form 10-K for fiscal year ended
December 31, 1994.)
Exhibit 27.0 - Financial Data Schedule
Signatures ................................................................................ 10
</TABLE>
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<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Commissions $49,688 $47,012 $102,428 $ 94,991
Fees 38,112 33,209 74,211 65,523
Investment income and other 3,364 723 6,120 3,379
------- ------- -------- --------
Total revenues 91,164 80,944 182,759 163,893
Expenses:
Salaries and employee benefits 51,406 46,499 102,614 92,690
Other operating expenses 30,956 27,325 61,632 55,825
------- ------- -------- --------
Total expenses 82,362 73,824 164,246 148,515
------- ------- -------- --------
Earnings before income taxes 8,802 7,120 18,513 15,378
Provision for income taxes 3,081 2,603 6,480 5,627
------- ------- -------- --------
Net earnings $ 5,721 $ 4,517 $ 12,033 $ 9,751
======= ======= ======== ========
Net earnings per common and
common equivalent share $ .36 $ .28 $ .76 $ .61
Dividends declared per common share $ .25 $ .22 $ .50 $ .44
Weighted average number of common and
common equivalent shares outstanding 15,959 15,891 15,863 16,033
</TABLE>
See accompanying notes.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 50,290 $ 39,689
Restricted cash 74,556 69,135
Premiums and fees receivable 193,284 179,823
Investment strategies - trading 45,396 42,637
Other 19,112 19,788
-------- --------
Total current assets 382,638 351,072
Marketable securities - available for sale 41,473 37,836
Other noncurrent assets 33,380 34,294
Fixed assets 65,417 58,930
Accumulated depreciation and amortization (43,606) (38,918)
-------- --------
Net fixed assets 21,811 20,012
Intangible assets - net 7,771 7,896
-------- --------
$487,073 $451,110
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $282,056 $251,508
Accrued salaries and bonuses 7,334 12,060
Accounts payable and other accrued liabilities 47,151 44,862
Unearned fees 13,253 13,859
Income taxes payable 5,868 11,590
Other 15,303 7,847
-------- --------
Total current liabilities 370,965 341,726
Deferred income taxes and other noncurrent accounts 12,178 12,653
Stockholders' equity:
Common stock - issued 15,083 shares at
June 30, 1995 and 14,784 shares at
December 31, 1994 15,083 14,784
Capital in excess of par value 691 -
Retained earnings 89,047 84,840
Unrealized holding loss on available for sale
securities - net of income taxes (891) (2,893)
-------- --------
Total stockholders' equity 103,930 96,731
-------- --------
$487,073 $451,110
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JUNE 30,
1995 1994
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings $ 12,033 $ 9,751
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net (gain) loss on investments (187) 2,937
Depreciation and amortization 3,812 3,742
(Increase) decrease in restricted cash (5,421) 13,418
Increase in premiums receivable (15,845) (35,348)
Increase in premiums payable 30,548 27,797
(Increase) decrease in trading investments - net (2,648) 8,397
Decrease in other current assets 676 1,911
Decrease in accrued salaries and bonuses (4,726) (4,303)
Increase in accounts payable and other accrued liabilities 1,699 2,239
Decrease in income taxes payable (5,722) (4,076)
Decrease in deferred income taxes (33) (476)
Other 9,746 (4,124)
-------- --------
Net cash provided by operating activities 23,932 21,865
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (9,276) (21,690)
Proceeds from the sale of marketable securities 7,680 26,026
Proceeds from maturities of marketable securities 1,127 1,512
Additions to fixed assets (5,486) (2,876)
Other 204 100
-------- --------
Net cash (used) provided by investing activities (5,751) 3,072
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,886 1,182
Tax benefit from issuance of common stock 1,193 303
Repurchase of common stock (5,224) (23,104)
Dividends paid (7,005) (6,056)
Retirement of long-term debt (1,130) (4,276)
Equity transactions of pooled companies prior to dates of acquisition (300) (1,924)
-------- --------
Net cash used by financing activities (7,580) (33,875)
-------- --------
Net increase (decrease) in cash and cash equivalents 10,601 (8,938)
Cash and cash equivalents at beginning of period 39,689 43,525
-------- --------
Cash and cash equivalents at end of period $ 50,290 $ 34,587
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 270 $ 959
Income taxes paid $ 10,746 $ 9,359
</TABLE>
See accompanying notes.
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<PAGE>
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, 1994 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 1994 Annual Report to
Stockholders.
2. ACQUISITIONS - POOLINGS OF INTERESTS
On May 31, 1995, a wholly-owned subsidiary of the Company acquired
substantially all the net assets of BHK&R, Inc., a Minnesota
corporation engaged in the insurance brokerage business. This
acquisition was not material to the Company.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Reference is made to the Liquidity and Capital Resources section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's 1994 Form 10-K Annual Report for a description of the
Company's need for and ability to generate capital, which description is hereby
incorporated by reference. See Exhibit 13.0.
RESULTS OF OPERATIONS
Extremely soft pricing in the insurance marketplace continues, and the Company
remains doubtful that price increases will change significantly in the remainder
of 1995.
Commission revenues increased by 6% to $49.7 million in the second quarter of
1995 and by 8% to $102.4 million in the first half of 1995 over the respective
periods in 1994. These increases are due principally to new business production
partially offset by lost business.
Fee revenues increased by 15% to $38.1 million in the second quarter of 1995
over the same period in 1994. This increase reflects new business production of
approximately $4.6 million 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. Fee revenues increased
by 13% to $74.2 million for the first six months of 1995 over the same period in
1994. This increase again reflects new business production of approximately $9.3
million 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 increased 365% to $3.4 million in the second quarter of 1995
and by 81% to $6.1 million in the first half of 1995 over the respective periods
in 1994. These increases were due primarily to significantly higher returns on
funds invested with outside fund managers, and higher interest income due to
more funds available for investment and higher short-term interest rates
compared to the same periods in 1994.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total expenses increased by 12% or $8.5 million in the second quarter of 1995
from the same period in 1994 and increased by 11% or $15.7 million in the first
half of 1995 over the same period in 1994.
Salaries and employee benefits increased by $4.9 million or 11%, to $51.4
million in the second quarter of 1995 and by $9.9 million or 11% to $102.6
million in the first six months of 1995 over the respective periods in 1994.
These increases are due principally to increased employee head count combined
with salary increases and higher employee fringe benefit costs.
Other operating expenses increased by $3.6 million or 13% to $31.0 million in
the second quarter of 1995 and by 10% to $61.6 million in the first six months
of 1995 over the respective periods in 1994. These increases are due primarily
to new and expanded offices and costs associated with more rentable space and
general office expenses and increased business insurance costs. Travel and other
direct employee expenses were up due to the growth in sales volume and employee
head count.
The effective income tax rate of 35% for the second quarter and first six months
of 1995 approximates the statutory federal rate of 35% and is less than the
Company's effective tax rate of 37% for the second quarter and first six months
of 1994 due primarily to the net effect of state and foreign taxes which are
substantially offset by the tax benefits of certain investments.
Earnings per share for the second quarter of 1995 were $.36 compared to $.28 in
1994, a 29% increase. First half earnings per share increased 25% from $.61 in
1994 to $.76 in 1995. These earnings per share increases reflect the growth in
revenues and a smaller growth in expenses noted above.
-8-
<PAGE>
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.
Exhibit 13.0 - Liquidity and Capital Resources (from "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" from Form 10-K for fiscal year ended
December 31, 1994).
Exhibit 27.0 - Financial Data Schedule.
b. Reports on Form 8-K. No Reports on Form 8-K were filed during the
three-month period ended June 30, 1995.
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<PAGE>
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: August 1, 1995
/s/ Michael J. Cloherty
--------------------------
Michael J. Cloherty
Vice President - Finance
Chief Financial Officer
/s/ David B. Hoch
------------------------
David B. Hoch
Controller
Chief Accounting Officer
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<PAGE>
Exhibit 11.0
ARTHUR J. GALLAGHER & CO.
COMPUTATION OF NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net earnings applicable to computation $ 5,721 $ 4,517 $12,033 $ 9,751
======= ======= ======= =======
Average common shares outstanding 15,039 15,110 14,971 15,251
Dilutive effect of stock options 920 781 892 782
------- ------- ------- -------
Weighted average number of common and
common equivalent shares outstanding 15,959 15,891 15,863 16,033
======= ======= ======= =======
Net earnings per common and common
equivalent share $ .36 $ .28 $ .76 $ .61
</TABLE>
<PAGE>
Exhibit 13.0
LIQUIDITY AND CAPITAL RESOURCES
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable with a positive cash flow from operations and has
consequently been able to finance its operations and capital expenditures from
internally generated funds. Funds restricted as to the Company's use (primarily
premiums held as fiduciary funds) have not been included in determining the
Company's liquidity.
In February, 1993, the Company entered into a $20 million unsecured revolving
credit agreement (the "Credit Agreement") with two banks. Loans under the Credit
Agreement are repayable no later than February, 1998, and bear floating interest
rates over the term of the loan. In February, 1993, a loan was funded for $20
million. The Company simultaneously entered into interest rate exchange
agreements which fixed the rate of interest payable on the loan. The Company
retired the $20 million loan in the fourth quarter of 1994 and has fully
satisfied all obligations associated with the loan. The Company also recognized
a gain of $656,000 in closing out the interest rate exchange agreements. The
Credit Agreement remains in effect and as of December 31, 1994, there are no
borrowings currently existing under this agreement.
The Company also entered into two term loan agreements (the "Term Loan
Agreements") with a bank for $3.2 million and $2.5 million in 1993. Loans under
the Term Loan Agreements are repayable in equal annual installments no later
than January 11, 1998, and June 15, 1998, respectively, and bear interest rates
over the terms of the loans of 6.64% and 6.30%, respectively.
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 $17.5 million and $10.0 million
which expire on April 30, 1995 and February 28, 1996, respectively. No
borrowings currently exist under these facilities.
The Company paid $12.7 million in cash dividends on its common stock in 1994.
The Company's dividend policy is determined by the Board of Directors and
payments are fixed after considering the Company's available cash from earnings
and its known or anticipated cash needs. In each quarter of 1994, the Company's
Board of Directors declared a dividend of $.22 per share which is $.04 or 22%
greater than each quarterly dividend in 1993. In January, 1995, the Company
announced a first quarter dividend of $.25 per share, a 14% increase over the
quarterly dividend in 1994.
Net capital expenditures for fixed assets amounted to $7.4 million, $7.6 million
and $6.2 million in 1994, 1993 and 1992, respectively. In 1995, the Company
intends to make additional capital improvements of approximately $7.5 million to
upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
1995, to repurchase its common stock. Under the plan, the Company repurchased
1.4 million shares at a cost of $43.8 million, 225,000 shares at a cost of $7.0
million, and 610,000 shares at a cost of $15.9 million in 1994, 1993 and 1992,
respectively. The 1994 common stock repurchases, in part, caused the weighted
average shares outstanding to decrease by 590,000 shares from 1993 to 1994. The
repurchases were funded entirely by internally generated funds and 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 340,000 additional shares through June 30, 1995. 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.
<PAGE>
The Company believes that internally generated funds will continue to be
sufficient to meet the Company's foreseeable cash needs, including non-operating
cash disbursements such as anticipated dividends, capital expenditures and
repayment of borrowings under its loan agreements if the Company so determines.
Due to changes in the United States federal income tax laws, effective in 1994,
the Company began providing for U.S. income taxes on the undistributed earnings
of its foreign subsidiaries. Prior to 1994, the Company did not provide for U.S.
income taxes on the undistributed earnings of certain foreign subsidiaries
($19.2 million) which are considered permanently invested outside the United
States. See Note 13 of the Notes to Consolidated Financial Statements. Although
not available for domestic needs, the undistributed earnings generated by the
foreign subsidiaries referred to above may be used to finance foreign operations
and acquisitions.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Arthur J. Gallagher & Co. Consolidated Financial Statements included in the 1995
second quarter Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-01-1995
<PERIOD-END> Jun-30-1995
<CASH> 124,846
<SECURITIES> 45,396
<RECEIVABLES> 193,284
<ALLOWANCES> 768
<INVENTORY> 0
<CURRENT-ASSETS> 382,638
<PP&E> 65,417
<DEPRECIATION> (43,606)
<TOTAL-ASSETS> 487,073
<CURRENT-LIABILITIES> 370,965
<BONDS> 0
<COMMON> 15,083
0
0
<OTHER-SE> 88,847
<TOTAL-LIABILITY-AND-EQUITY> 487,073
<SALES> 176,639
<TOTAL-REVENUES> 182,759
<CGS> 102,614
<TOTAL-COSTS> 164,246
<OTHER-EXPENSES> 61,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> 18,513
<INCOME-TAX> 6,480
<INCOME-CONTINUING> 12,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,033
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
</TABLE>
