<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 MARCH 31, 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 March 31, 1995 was 15,016,858.
<PAGE>
ARTHUR J. GALLAGHER & CO.
INDEX
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<CAPTION>
PAGE NO.
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Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statement of Earnings for the three-month
periods ended March 31, 1995 and 1994........................... 3
Consolidated Balance Sheet at March 31, 1995 and
December 31, 1994............................................... 4
Consolidated Statement of Cash Flows for the three-month periods
ended March 31, 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
MARCH 31,
1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues:
Commissions $51,762 $47,979
Fees 36,100 32,314
Investment income and other 2,661 2,656
------- -------
Total revenues 90,523 82,949
Expenses:
Salaries and employee benefits 50,523 46,191
Other operating expenses 30,339 28,500
------- -------
Total expenses 80,862 74,691
------- -------
Earnings before income taxes 9,661 8,258
Provision for income taxes 3,381 3,024
------- -------
Net earnings $ 6,280 $ 5,234
======= =======
Net earnings per common and
common equivalent share $ .40 $ .32
Dividends declared per common share $ .25 $ .22
Weighted average number of common and
common equivalent shares outstanding 15,767 16,175
</TABLE>
See accompanying notes.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,516 $ 39,689
Restricted cash 67,179 69,135
Premiums and fees receivable 161,672 179,823
Investment strategies - trading 44,318 42,637
Other 18,252 19,788
-------- --------
Total current assets 336,937 351,072
Marketable securities - available for sale 40,482 37,836
Other noncurrent assets 32,606 34,294
Fixed assets 62,366 58,930
Accumulated depreciation and amortization (41,273) (38,918)
-------- --------
Net fixed assets 21,093 20,012
Intangible assets - net 7,750 7,896
-------- --------
$438,868 $451,110
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $240,158 $251,508
Accrued salaries and bonuses 6,288 12,060
Accounts payable and other accrued liabilities 47,770 44,862
Unearned fees 14,970 13,859
Income taxes payable 8,044 11,590
Other 7,163 7,847
-------- --------
Total current liabilities 324,393 341,726
Deferred income taxes and other noncurrent accounts 12,233 12,653
Stockholders' equity:
Common stock - issued 15,017 shares at
March 31, 1995 and 14,784 shares at
December 31, 1994 15,017 14,784
Capital in excess of par value 1,577 -
Retained earnings 87,517 84,840
Unrealized holding loss on available for sale
securities - net of income taxes (1,869) (2,893)
-------- --------
Total stockholders' equity 102,242 96,731
-------- --------
$438,868 $451,110
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
1995 1994
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(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,280 $ 5,234
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net loss (gain) on investments 286 (1,151)
Depreciation and amortization 1,963 1,854
Increase in restricted cash 1,956 15,385
Decrease in premiums receivable 15,451 21,334
Decrease in premiums payable (11,350) (26,975)
Increase in trading investments - net (2,022) (991)
Decrease in other current assets 1,536 2,716
Decrease in accrued salaries and bonuses (5,772) (3,593)
Increase in accounts payable and other
accrued liabilities 2,406 6,978
(Decrease) increase in income taxes payable (3,546) 871
Decrease in deferred income taxes (279) (245)
Other 4,866 (3,307)
-------- --------
Net cash provided by operating activities 11,775 18,110
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (4,215) (10,828)
Proceeds from the sale of marketable securities 2,633 13,399
Proceeds from maturities of marketable securities 453 265
Additions to fixed assets (2,898) (521)
Other 140 -
-------- --------
Net cash (used) provided by investing
activities
(3,887) 2,315
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,157 451
Tax benefit from issuance of common stock 678 112
Repurchase of common stock (2,165) (18,527)
Dividends paid (3,252) (2,733)
Retirement of long-term debt (630) (4,276)
Equity transactions of pooled companies prior
to dates of acquisition 151 (1,059)
-------- --------
Net cash used by financing activities (2,061) (26,032)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,827 (5,607)
Cash and cash equivalents at beginning of period 39,689 43,525
-------- --------
Cash and cash equivalents at end of period $ 45,516 $ 37,918
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 137 $ 522
Income taxes paid $ 5,586 $ 1,974
</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 January 1, 1995, a wholly-owned subsidiary of the Company acquired
substantially all the net assets of RMI Insurance Services, Inc., a
California corporation engaged in the insurance brokerage business.
On February 28, 1995, a wholly-owned subsidiary of the Company
acquired substantially all the net assets of Walter Bryce Insurance
Agency, Inc., an Oklahoma corporation engaged in the insurance
brokerage business. Neither acquisition individually nor in the
aggregate was 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
During the first quarter of 1995, an excess of risk-taking capital continued to
put pressure on insurance premium rates and there has been no significant change
in the insurance pricing environment. The overall effect these factors will
have on Company revenues in 1995 remains uncertain.
Commission revenues increased by 8% to $51.8 million in the first quarter of
1995 over the same period in 1994. This increase is the result of new business
production partially offset by lost business and an increase in contingent
commissions.
Fee revenues increased by $3.8 million or 12% to $36.1 million in the first
quarter of 1995 over the same period in 1994. This increase reflects new
business production of approximately $6.2 million and, to a lesser extent,
renewal increases of self-insurance products generated primarily by Gallagher
Bassett Services, Inc. (a Company subsidiary), partially offset by lost
business.
Investment income for the first quarter of 1995 was essentially unchanged from
the same period in 1994. The Company recognized higher investment income due
primarily to higher interest rates and improved performance in funds managed by
outside fund managers. These increases were offset by lower income due
primarily to fewer funds available for investment because of common stock
repurchases of $43.8 million throughout 1994, the retirement of a $20.0 million
debt in the fourth quarter of 1994 and unrealized gains on trading securities in
the first quarter of 1994.
The increase in total revenues was partially offset by an 8% or $6.2 million
increase in 1995 first quarter expenses over the same period in 1994.
Salaries and employee benefits increased by 9% to $50.5 million in the first
quarter of 1995 over the same period in 1994. This increase is due to growth in
employee head count of 8% combined with salary increases and higher fringe
benefit costs.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other operating expenses increased by 6% to $30.3 million in the first quarter
of 1995 over the same period in 1994. New and expanded offices and the costs
associated with more rentable space resulted in increased rent and general
office expenses. 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 first quarter of 1995 approximates
the statutory federal rate of 35% and is less than the Company's effective tax
rate of 37% for the first quarter 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 first quarter of 1995 were $.40 compared to $.32 for
the same period in 1994, a 25% increase. This increase reflects 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 March 31, 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: May 9, 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
MARCH 31,
1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net earnings applicable to computation $ 6,280 $ 5,234
======= =======
Average common shares outstanding 14,903 15,392
Dilutive effect of stock options 864 783
------- -------
Weighted average number of common and
common equivalent shares outstanding 15,767 16,175
======= =======
Net earnings per common and common
equivalent share $ .40 $ .32
</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 FIRST QUARTER FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 112,695
<SECURITIES> 44,318
<RECEIVABLES> 161,672
<ALLOWANCES> 786
<INVENTORY> 0
<CURRENT-ASSETS> 336,937
<PP&E> 62,366
<DEPRECIATION> (41,273)
<TOTAL-ASSETS> 438,868
<CURRENT-LIABILITIES> 324,393
<BONDS> 0
<COMMON> 15,017
0
0
<OTHER-SE> 87,225
<TOTAL-LIABILITY-AND-EQUITY> 438,868
<SALES> 87,862
<TOTAL-REVENUES> 90,523
<CGS> 50,523
<TOTAL-COSTS> 50,523
<OTHER-EXPENSES> 30,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> 9,661
<INCOME-TAX> 3,381
<INCOME-CONTINUING> 6,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,280
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
