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 - -------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------- (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.
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-
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-
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-
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-
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> -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 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-
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-
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-
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-