<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 SEPTEMBER 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
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO PIERCE PLACE, ITASCA, ILLINOIS 60143-3141
- -------------------------------------------------------------------------------
(Address ofprincipal executive offices)
(Zip Code)
(708) 773-3800
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(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 September 30, 1995 was 15,551,510.
<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
nine-month periods ended September 30, 1995 and 1994...... 3
Consolidated Balance Sheet at September 30, 1995 and
December 31, 1994......................................... 4
Consolidated Statement of Cash Flows for the nine-month
periods ended September 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>
-2-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
----------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 65,119 $ 61,045 $174,491 $160,680
Fees 42,197 37,338 117,020 103,534
Investment income and other 3,325 2,308 9,628 5,756
-------- -------- -------- --------
Total revenues 110,641 100,691 301,139 269,970
Expenses:
Salaries and employee benefits 54,176 49,758 161,949 146,470
Other operating expenses 32,761 30,637 96,201 87,998
-------- -------- -------- --------
Total expenses 86,937 80,395 258,150 234,468
-------- -------- -------- --------
Earnings before income taxes 23,704 20,296 42,989 35,502
Provision for income taxes 8,272 7,469 15,046 13,034
-------- -------- -------- --------
Net earnings $ 15,432 $ 12,827 $ 27,943 $ 22,468
======== ======== ======== ========
Net earnings per common and
common equivalent share $.94 $.79 $1.72 $ 1.38
Dividends declared per common share $.25 $.22 $.75 $ .66
Weighted average number of common and
common equivalent shares outstanding 16,450 16,237 16,291 16,333
</TABLE>
See accompanying notes.
-3-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 70,232 $ 44,240
Restricted cash 80,124 70,154
Premiums and fees receivable 174,212 183,207
Investment strategies - trading 47,028 42,637
Other 17,697 20,617
-------- --------
Total current assets 389,293 360,855
Marketable securities - available for sale 42,307 37,929
Other noncurrent assets 31,747 34,515
Fixed assets 67,485 60,776
Accumulated depreciation and amortization (44,387) (40,155)
-------- --------
Net fixed assets 23,098 20,621
Intangible assets - net 7,772 8,149
-------- --------
$494,217 $462,069
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $270,562 $257,108
Accrued salaries and bonuses 9,620 12,060
Accounts payable and other accrued liabilities 52,002 47,168
Unearned fees 14,005 13,859
Income taxes payable 12,303 11,590
Other 7,037 10,923
-------- --------
Total current liabilities 365,529 352,708
Deferred income taxes and other noncurrent accounts 12,574 13,116
Stockholders' equity:
Common stock - issued 15,552 shares at
September 30, 1995 and 15,132 shares at
December 31, 1994 15,552 15,132
Capital in excess of par value 987 -
Retained earnings 100,100 84,048
Unrealized holding loss on available for sale
securities - net of income taxes (525) (2,935)
-------- --------
Total stockholders' equity 116,114 96,245
-------- --------
$494,217 $462,069
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended
September 30,
1995 1994
-------- --------
<S> <C> <C>
(In thousands)
Cash flows from operating activities:
Net earnings $ 27,943 $ 22,468
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Net (gain) loss on investments (878) 2,862
Depreciation and amortization 5,972 5,809
Increase in restricted cash (9,970) (9,421)
Decrease in premiums receivable 7,459 7,261
Increase in premiums payable 13,454 17,229
(Increase) decrease in trading
investments - net (3,608) 24,278
Decrease in other current assets 2,241 3,259
Decrease in accrued salaries
and bonuses (2,440) (2,132)
Increase in accounts payable and other
accrued liabilities 4,198 5,124
Increase (decrease) in income taxes
payable 713 (1,347)
Increase (decrease) in deferred income
taxes 413 (867)
Other (249) (6,165)
-------- --------
Net cash provided by operating
activities 45,248 68,358
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (14,992) (25,086)
Proceeds from the sale of marketable
securities 13,324 27,080
Proceeds from maturities of
marketable securities 1,462 1,900
Additions to fixed assets (8,072) (5,214)
Other 296 131
------- -------
Net cash used by investing activities (7,982) (1,189)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 6,178 2,517
Tax benefit from issuance of common
stock 1,596 577
Repurchase of common stock (6,663) (28,444)
Dividends paid (10,778) (9,380)
Retirement of long-term debt (1,130) (4,776)
Equity transactions of pooled companies
prior to dates of acquisition (477) (2,021)
-------- --------
Net cash used by financing activities (11,274) (41,527)
-------- --------
Net increase in cash and cash equivalents 25,992 25,642
Cash and cash equivalents
at beginning of period 44,240 45,696
-------- --------
Cash and cash equivalents at end
of period $ 70,232 $ 71,338
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 378 $ 1,396
Income taxes paid $ 12,186 $ 14,216
</TABLE>
See accompanying notes.
-5-
<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
During the three-month period ended September 30, 1995, the Company acquired
substantially all of the net assets of IMC Risk Management Group, Inc. and
W. Lawrence Pfeiffer & Associates, Inc. in exchange for approximately
348,000 shares of its Common Stock. These acquisitions were accounted for as
poolings of interests. The financial statements for all periods prior to the
acquisition dates have been restated to include the operations of these
companies.
The following summarizes the restatement to reflect these acquisitions (in
thousands):
<TABLE>
<CAPTION>
ATTRIBUTABLE
THREE-MONTH PERIOD ARTHUR J. TO POOLED
ENDED SEPTEMBER 30, 1994 GALLAGHER & CO. COMPANIES AS RESTATED
------------------------- --------------- ------------- -----------
<S> <C> <C> <C>
Revenues $ 97,653 $3,038 $100,691
Net earnings $ 12,806 $ 21 $ 12,827
======== ====== ========
NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1994
-------------------------
Revenues $261,546 $8,424 $269,970
Net earnings (loss) $ 22,557 $ (89) $ 22,468
======== ====== ========
</TABLE>
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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
Commission revenues increased by 7% to $65.1 million in the third quarter of
1995 and by 9% to $174.5 million in the first nine months 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 13% to $42.2 million in the third quarter of 1995 over
the same period in 1994. This increase reflects new business production of
approximately $7.0 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 $117.0 million for the first nine months of 1995 over the same period
in 1994. This increase again reflects new business production of approximately
$19.7 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 44% to $3.3 million in the third quarter of 1995 and
by 67% to $9.6 million in the first nine months 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.
-7-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total expenses increased by 8% or $6.5 million in the third quarter of 1995 from
the same period in 1994 and increased by 10% or $23.7 million in the first nine
months of 1995 over the same period in 1994.
Salaries and employee benefits increased by $4.4 million or 9%, to $54.2 million
in the third quarter of 1995 and by $15.5 million or 11% to $161.9 million in
the first nine 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 $2.1 million or 7% to $32.8 million in the
third quarter of 1995 and by 9% to $96.2 million in the first nine 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 third quarter and first nine months
of 1995 approximates the statutory federal rate of 35% and is less than the
Company's effective tax rate of 37% for the third quarter and first nine 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 third quarter of 1995 were $.94 compared to $.79 in
1994, a 19% increase. In the first nine months, earnings per share increased
25% from $1.38 in 1994 to $1.72 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 September 30, 1995.
-9-
<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: November 6, 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
-10-
<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 NINE-MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings applicable to computation $15,432 $12,827 $27,943 $22,468
======= ======= ======= =======
Average common shares outstanding 15,472 15,408 15,370 15,536
Dilutive effect of stock options 978 829 921 797
------- ------- ------- -------
Weighted average number of common and
common equivalent shares outstanding 16,450 16,237 16,291 16,333
======= ======= ======= =======
Net earnings per common and common
equivalent share $ .94 $ .79 $ 1.72 $ 1.38
</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.
-11-
<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.
-12-
<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 third quarter Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 150,356
<SECURITIES> 47,028
<RECEIVABLES> 174,212
<ALLOWANCES> 765
<INVENTORY> 0
<CURRENT-ASSETS> 389,293
<PP&E> 67,485
<DEPRECIATION> (44,387)
<TOTAL-ASSETS> 494,217
<CURRENT-LIABILITIES> 365,529
<BONDS> 0
<COMMON> 15,552
0
0
<OTHER-SE> 100,562
<TOTAL-LIABILITY-AND-EQUITY> 494,217
<SALES> 291,511
<TOTAL-REVENUES> 301,139
<CGS> 161,949
<TOTAL-COSTS> 258,150
<OTHER-EXPENSES> 96,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 378
<INCOME-PRETAX> 42,989
<INCOME-TAX> 15,046
<INCOME-CONTINUING> 27,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,943
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
</TABLE>
