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 - ------------------------------------------------------------------------------- (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.
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-
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-
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. -4-
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-
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> -6-
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-
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-
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-
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-