<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, 1996 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
- --------------------------------------------------------------------------------
(Address of principal 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 [_] NO [_]
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of March 31, 1996 was 15,637,408.
<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
period ended March 31, 1996 and 1995 ............................. 3
Consolidated Balance Sheet at March 31, 1996 and
December 31, 1995 ................................................ 4
Consolidated Statement of Cash Flows for the
three-month period ended
March 31, 1996 and 1995 .......................................... 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, 1995)
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
MARCH 31,
1996 1995
------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues:
Commissions $ 58,187 $ 57,432
Fees 38,192 36,404
Investment income and other 4,338 2,854
-------- --------
Total revenues 100,717 96,690
Expenses:
Salaries and employee benefits 55,375 54,201
Other operating expenses 32,904 32,171
-------- --------
Total expenses 88,279 86,372
-------- --------
Earnings before income taxes 12,438 10,318
Provision for income taxes 4,229 3,590
-------- --------
Net earnings $ 8,209 $ 6,728
======== ========
Net earnings per common and
common equivalent share $ .48 $ .41
Dividends declared per common share $ .29 $ .25
Weighted average number of common and
common equivalent shares outstanding 17,122 16,228
</TABLE>
See accompanying notes.
-3-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- -------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 63,353 $ 53,764
Restricted cash 61,350 69,043
Premiums and fees receivable 168,140 194,330
Investment strategies - trading 48,365 46,123
Other 21,974 20,615
-------- --------
Total current assets 363,182 383,875
Marketable securities - available for sale 41,106 41,712
Other noncurrent assets 40,857 42,223
Fixed assets 66,877 67,569
Accumulated depreciation and amortization (43,604) (44,850)
-------- --------
Net fixed assets 23,273 22,719
Intangible assets - net 7,401 7,576
-------- --------
$475,819 $498,105
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $237,027 $265,181
Accrued salaries and bonuses 7,922 13,468
Accounts payable and other accrued liabilities 63,213 57,160
Unearned fees 15,925 12,746
Income taxes payable 10,614 10,409
Other 6,862 6,907
-------- --------
Total current liabilities 341,563 365,871
Deferred income taxes and other noncurrent accounts 11,235 13,801
Stockholders' equity:
Common stock - issued and outstanding 15,637 shares
in 1996 and 15,538 shares in 1995 15,637 15,538
Capital in excess of par value 1,731 -
Retained earnings 105,668 102,861
Unrealized holding (loss) gain on available for sale
securities - net of income taxes (15) 34
-------- --------
Total stockholders' equity 123,021 118,433
-------- --------
$475,819 $498,105
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
1996 1995
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings $ 8,209 $ 6,728
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net (gain) loss on investments (1,138) 286
Depreciation and amortization 2,238 2,434
Decrease in restricted cash 7,693 1,506
Decrease in premiums receivable 28,857 15,559
Decrease in premiums payable (28,154) (11,654)
Increase in trading investments - net (1,099) (2,022)
(Increase) decrease in other current assets (1,359) 882
Decrease in accrued salaries and bonuses (5,546) (5,772)
Increase in accounts payable and other accrued liabilities 5,374 1,570
Increase (decrease) in income taxes payable 205 (3,546)
(Decrease) increase in deferred income taxes (421) 400
Other 361 4,819
-------- --------
Net cash provided by operating activities 15,220 11,190
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (5,829) (4,215)
Proceeds from the sale of marketable securities 5,819 2,633
Proceeds from maturities of marketable securities 530 453
Additions to fixed assets (2,617) (2,921)
Other - 140
-------- --------
Net cash provided by investing activities (2,097) (3,910)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,157 3,157
Tax benefit from issuance of common stock 695 678
Repurchase of common stock (2,022) (2,165)
Dividends paid (3,856) (3,252)
Retirement of long-term debt (630) (630)
Equity transactions of pooled companies prior to dates of acquisition (878) 766
-------- --------
Net cash used by financing activities (3,534) (1,446)
-------- --------
Net increase in cash and cash equivalents 9,589 5,834
Cash and cash equivalents at beginning of period 53,764 44,306
-------- --------
Cash and cash equivalents at end of period $ 63,353 $ 50,140
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 143 $ 137
Income taxes paid $ 3,868 $ 5,586
</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, 1995 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 1995 Annual Report to Stockholders.
2. ACQUISITIONS - POOLINGS OF INTERESTS
During the three-month period ended March 31, 1996, the Company acquired
substantially all of the net assets of The Levitt/Kristan Company in
exchange for approximately 112,000 shares of its Common Stock. This
acquisition was accounted for as a pooling of interests. The financial
statements for all periods prior to the acquisition date have been restated
to include the operations of this company.
The following summarizes the restatement to reflect this acquisition (in
thousands):
<TABLE>
<CAPTION>
ATTRIBUTABLE
THREE-MONTH PERIOD ARTHUR J. TO POOLED
ENDED MARCH 31, 1995 GALLAGHER & CO. COMPANIES AS RESTATED
- ------------------------ --------------- ------------ -----------
<S> <C> <C> <C>
Revenues $95,605 $1,085 $96,690
Net earnings $ 6,636 $ 92 $ 6,728
======= ====== =======
</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 1995 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
The soft market continued during the first quarter of 1996, especially in the
workers' compensation area. Continuing competitive pressure in the insurance
marketplace has led to an environment of decreasing renewal commissions
resulting in some reluctance on the part of insurance purchasers to seek out
alternative market products.
Commission revenues increased by 1% to $58.2 million in the first quarter of
1996 over the same period in 1995. This increase is the result of new business
production which was substantially offset by lost business.
Fee revenues increased by $1.8 million or 5% to $38.2 million in the first
quarter of 1996 over the same period in 1995. This increase reflects new
business production 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 1996 increased by 52% to $4.3 million
over the same period in 1995. The Company recognized higher investment income
due primarily to strong performance in funds managed by outside fund managers.
The increase in total revenues was partially offset by a 2% or $1.9 million
increase in 1996 first quarter expenses over the same period in 1995.
Salaries and employee benefits increased by 2% to $55.4 million in the first
quarter of 1996 over the same period in 1995. This increase is due to growth in
employee head count combined with salary increases and higher fringe benefit
costs.
Other operating expenses increased by 2% to $32.9 million in the first quarter
of 1996 over the same period in 1995. 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 34% for the first quarter of 1996 is less than
the statutory federal rate of 35% and is less than the Company's effective tax
rate of 35% for the first quarter of 1995 due primarily to the net effect of
state and foreign taxes which are substantially offset by the tax benefits of
certain investments.
-7-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Earnings per share for the first quarter of 1996 were $.48 compared to $.41 for
the same period in 1995, a 17% increase. This increase reflects the growth in
revenues and a smaller growth in expenses noted above.
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.
-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 (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, 1995).
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, 1996.
-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: April 26, 1996
/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
-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
MARCH 31,
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net earnings applicable to computation $ 8,209 $ 6,728
======= =======
Average common shares outstanding 15,586 15,364
Dilutive effect of stock options 1,536 864
------- -------
Weighted average number of common and
common equivalent shares outstanding 17,122 16,228
======= =======
Net earnings per common and common
equivalent share $ .48 $ .41
</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, 1995, there are no
borrowings currently existing under this agreement.
The Company also entered into two term loan agreements (the "Term Loan
Agreements") that have outstanding balances of $1.9 million and $1.5 million at
December 31, 1995. 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 also has line of credit facilities of $17.5 million and $10.0
million which expire on April 30, 1996 and February 28, 1997, respectively. No
borrowings currently exist under these facilities.
The Company paid $14.7 million in cash dividends on its common stock in 1995.
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 1995, the Company's
Board of Directors declared a dividend of $.25 per share which is $.03 or 14%
greater than each quarterly dividend in 1994. In January, 1996, the Company
announced a first quarter dividend of $.29 per share, a 16% increase over the
quarterly dividend in 1995.
Net capital expenditures for fixed assets amounted to $9.4 million, $7.5 million
and $7.8 million in 1995, 1994 and 1993, respectively. In 1996, the Company
intends to make additional capital improvements of approximately $10.5 million
to upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
1996, to repurchase its common stock. Under the plan, the Company repurchased
437,000 shares at a cost of $15.1 million, 1.4 million shares a cost of $43.8
million and 225,000 shares at a cost of $7.0 million in 1995, 1994 and 1993,
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 360,000 additional shares through June 30, 1996. 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
certain 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
1996 first quarter Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995 DEC-31-1995
<CASH> 124,703 120,086 122,807
<SECURITIES> 48,365 44,318 46,123
<RECEIVABLES> 168,140 165,108 194,330
<ALLOWANCES> (621) (791) (709)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 363,182 348,647 383,875
<PP&E> 66,877 64,774 67,569
<DEPRECIATION> (43,604) (43,018) (44,850)
<TOTAL-ASSETS> 475,819 453,201 498,105
<CURRENT-LIABILITIES> 341,563 336,607 365,871
<BONDS> 0 0 0
<COMMON> 15,637 15,477 15,538
0 0 0
0 0 0
<OTHER-SE> 107,384 88,421 102,895
<TOTAL-LIABILITY-AND-EQUITY> 475,819 453,201 498,105
<SALES> 96,379 93,836 399,006
<TOTAL-REVENUES> 100,717 96,690 415,142
<CGS> 55,375 54,201 220,809
<TOTAL-COSTS> 55,375 54,201 220,809
<OTHER-EXPENSES> 32,904 32,171 132,875
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 12,438 10,318 61,458
<INCOME-TAX> 4,229 3,590 21,374
<INCOME-CONTINUING> 8,209 6,728 40,084
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,209 6,728 40,084
<EPS-PRIMARY> .48 .41 2.44
<EPS-DILUTED> .48 .41 2.44
</TABLE>
