Why did Gallagher restate its 1998 financial statements?

The SEC staff reviewed the original 1998 Form 10-K and applied stricter materiality guidelines to pooling-of-interests acquisitions than the company had used. As a result, the company restated its financials to include three additional 1998 pooling acquisitions, and it also included three 1999 pooling acquisitions that closed in the first quarter of 1999. The effect on earnings per share was small, at roughly ($0.01) to ($0.03) per year.

How did the restatement change Gallagher's reported 1998 results?

Restated 1998 total revenues rose to $554.5 million from $544.4 million as previously reported, and restated net earnings rose to $57.4 million from $56.6 million. Diluted EPS (on common and common equivalent shares) was $3.06, compared with $3.09 previously reported. The restated figures include the operations of the acquired firms for all periods before their acquisition dates.

What drove Gallagher's revenue growth in 1998?

Growth came mainly from Risk Management Services, where fees rose 15% on strong new business production of $39.0 million and favorable retention rates. Commissions rose 8%, with new business production of $54.1 million partly offset by $35.2 million of lost business. Investment income fell 24%, which partly offset these gains.

Is Gallagher financially stable, and how is it funded?

Yes. The company carries no long-term debt and had no borrowings under its $20 million revolving credit agreement at year end. Operations have been funded by cash flow and short-term credit lines, which had $15.0 million outstanding at year end. Operating cash flow was $54.5 million in 1998, though it varies significantly from year to year because of the timing of premiums receivable and payable.

What are the main risks and outlook for investors?

Management expects property/casualty premium rates to stay under pressure and not improve in 1999 because of the soft market. The company's revenues are seasonal, with the heaviest policy inception dates in the third quarter. It also has contingent exposures, including $30.0 million of guaranteed third-party debt and $7.5 million of committed investments. Management sees growth opportunities in alternative insurance markets, captives, and self-insurance services.

AJG 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed July 7, 1999. Cited figures are marked; the original filing is the authoritative source.

Arthur J.

Gallagher & Co. (AJG) filed this Amendment No. 1 to its 1998 Form 10-K to restate prior financials after an SEC staff review of its pooling-of-interests accounting. The SEC applied stricter materiality guidelines than the company had used, which led AJG to restate for three additional 1998 pooling acquisitions and three 1999 pooling acquisitions. The restatement is modest in size: restated 1998 total revenues are $554.5 million^a (up from the previously reported $544.4 million) and net earnings are $57.4 million (up from $56.6 million), with diluted EPS of $3.06 versus $3.09 previously reported.

The restatement lowered per-share earnings by roughly $0.01 to $0.03^b per year. Underlying performance was solid. Restated 1998 revenue grew about 7% year over year, pretax earnings rose about 1% to $85.5 million, and net earnings rose about 2% to $57.4 million.

Growth came mainly from Risk Management Services, where fee revenue rose 15% on new business and favorable retention, while Insurance Brokerage Services grew 7%. Investment income fell 24% because of weaker returns from outside managers and a $24.0 million^c reduction in invested assets, and 1997 comparisons were flattered by $9.0 million of non-recurring gains. Return on beginning equity was 33%, and the dividend was raised to $1.40 per share for 1998, with the first-quarter 1999 dividend announced at $0.40.

The balance sheet is conservative. Stockholders' equity reached $205.5 million^d, the company carried no long-term debt, and it had no borrowings under its $20 million revolver at year end.

Management expects continued pricing pressure in the soft property/casualty market, with growth tied to alternative risk, captive, and self-insurance services. Investors should note that the company's revenues are seasonal, peaking in the third quarter, and that operating cash flow is volatile because of timing swings in premiums receivable and payable.

02—Key points

Key Highlights

Restatement under SEC review: restated 1998 revenues of $554.5M (vs. $544.4M previously reported) and net earnings of $57.4M (vs. $56.6M), reflecting three additional 1998 and three 1999 pooling acquisitions; EPS impact was roughly ($0.01) to ($0.03).
Revenue growth of 7% in 1998 to $554.5M, led by Risk Management Services fees (+15%) and commissions (+8%).
Pretax earnings of $85.5M (+1%) and net earnings of $57.4M (+2%); effective tax rate of 32.9%; 1998 return on beginning equity of 33%.
Investment income fell 24% to $18.8M due to weaker outside fund manager returns and a $24.0M reduction in invested assets; 1997 included $9.0M of non-recurring gains.
Dividends declared rose to $1.40 per share (up 13%), and the Q1 1999 dividend was raised 14% to $0.40 per share; the company repurchased 215,000 shares in 1998.
Strong balance sheet: total assets of $758.4M, stockholders' equity of $205.5M, no long-term debt, and no borrowings under the $20M revolver at year end.
Contingent exposures include $30.0M of guaranteed third-party debt, $7.5M of committed investments, and $8.7M of letters of credit, with no funds expended as of year end.

03—Questions

Frequently Asked Questions

Why did Gallagher restate its 1998 financial statements?
The SEC staff reviewed the original 1998 Form 10-K and applied stricter materiality guidelines to pooling-of-interests acquisitions than the company had used. As a result, the company restated its financials to include three additional 1998 pooling acquisitions, and it also included three 1999 pooling acquisitions that closed in the first quarter of 1999. The effect on earnings per share was small, at roughly ($0.01) to ($0.03) per year.
How did the restatement change Gallagher's reported 1998 results?
Restated 1998 total revenues rose to $554.5 million from $544.4 million as previously reported, and restated net earnings rose to $57.4 million from $56.6 million. Diluted EPS (on common and common equivalent shares) was $3.06, compared with $3.09 previously reported. The restated figures include the operations of the acquired firms for all periods before their acquisition dates.
What drove Gallagher's revenue growth in 1998?
Growth came mainly from Risk Management Services, where fees rose 15% on strong new business production of $39.0 million and favorable retention rates. Commissions rose 8%, with new business production of $54.1 million partly offset by $35.2 million of lost business. Investment income fell 24%, which partly offset these gains.
Is Gallagher financially stable, and how is it funded?
Yes. The company carries no long-term debt and had no borrowings under its $20 million revolving credit agreement at year end. Operations have been funded by cash flow and short-term credit lines, which had $15.0 million outstanding at year end. Operating cash flow was $54.5 million in 1998, though it varies significantly from year to year because of the timing of premiums receivable and payable.
What are the main risks and outlook for investors?
Management expects property/casualty premium rates to stay under pressure and not improve in 1999 because of the soft market. The company's revenues are seasonal, with the heaviest policy inception dates in the third quarter. It also has contingent exposures, including $30.0 million of guaranteed third-party debt and $7.5 million of committed investments. Management sees growth opportunities in alternative insurance markets, captives, and self-insurance services.

04—Continue

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