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GALLAGHER ARTHUR J & CO 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-15.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7.  
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2011 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
incorporation or organization)
  (I.R.S. Employer
Identification No.)

Two Pierce Place, Itasca, Illinois 60143-3141

(Address of principal executive offices) (Zip code)

(630) 773-3800

(Registrant’s telephone number, including area code)

Not Applicable

(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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of outstanding shares of the registrant’s Common Stock, $1.00 par value, as of September 30, 2011 was 112,883,000.

 

 

 


Table of Contents

Arthur J. Gallagher & Co.

Index

 

              Page No.  
Part I.   Financial Information   
  Item 1.    Financial Statements (Unaudited):   
    

Consolidated Statement of Earnings for the Three-month and Nine-month Periods Ended September 30, 2011 and 2010

     3   
     Consolidated Balance Sheet at September 30, 2011 and December 31, 2010      4   
     Consolidated Statement of Cash Flows for the Nine-month Periods Ended September 30, 2011 and 2010      5   
     Consolidated Statement of Stockholders’ Equity for the Nine-month Period Ended September 30, 2011      6   
     Notes to September 30, 2011 Consolidated Financial Statements      7-26   
     Report of Independent Registered Public Accounting Firm      27   
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      28-50   
  Item 3.    Quantitative and Qualitative Disclosure About Market Risk      50-51   
  Item 4.    Controls and Procedures      52   
Part II.   Other Information   
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     52   
  Item 6.   

Exhibits

     53   
 

Signature

     54   
 

Exhibit Index

     55   

 

- 2 -


Table of Contents

Part I – Financial Information

Item 1. Financial Statements (Unaudited)

Arthur J. Gallagher & Co.

Consolidated Statement of Earnings

(Unaudited-in millions, except per share data)

 

     Three-month period ended
September 30,
    Nine-month period ended
September 30,
 
     2011     2010     2011     2010  

Commissions

   $ 308.0      $ 251.9      $ 829.7      $ 713.1   

Fees

     225.1        185.7        628.8        530.1   

Supplemental commissions

     14.5        10.2        42.0        48.7   

Contingent commissions

     9.9        9.5        34.6        33.7   

Investment income and gains realized on books of business sales

     3.4        5.4        11.1        10.4   

Revenues from clean-coal activities

     1.9        1.0        10.0        66.1   

Other net revenues (loss)

     —          (0.5     0.1        3.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     562.8        463.2        1,556.3        1,405.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Compensation

     341.8        280.5        961.7        818.5   

Operating

     113.9        84.8        316.1        253.4   

Cost of revenues from clean-coal activities

     0.7        —          12.4        64.0   

Interest

     10.3        8.6        30.4        25.9   

Depreciation

     9.4        8.3        26.6        24.0   

Amortization

     20.0        14.5        54.7        45.0   

Change in estimated acquisition earnout payables

     (4.3     (3.9     (6.0     (2.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     491.8        392.8        1,395.9        1,227.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     71.0        70.4        160.4        177.2   

Provision for income taxes

     24.3        24.2        56.8        59.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations

     46.7        46.2        103.6        117.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

Earnings on discontinued operations before income taxes

     —          —          —          3.0   

Provision for income taxes

     —          —          —          0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from discontinued operations

     —          —          —          2.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 46.7      $ 46.2      $ 103.6      $ 119.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net earnings per share:

        

Earnings from continuing operations

   $ 0.41      $ 0.44      $ 0.93      $ 1.13   

Earnings from discontinued operations

     —          —          —          0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 0.41      $ 0.44      $ 0.93      $ 1.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net earnings per share:

        

Earnings from continuing operations

   $ 0.41      $ 0.44      $ 0.93      $ 1.12   

Earnings from discontinued operations

     —          —          —          0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 0.41      $ 0.44      $ 0.93      $ 1.14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.33      $ 0.32      $ 0.99      $ 0.96   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

- 3 -


Table of Contents

Arthur J. Gallagher & Co.

Consolidated Balance Sheet

(In millions)

 

     September 30,
2011
    December 31,
2010
 
     (Unaudited)        

Cash and cash equivalents

   $ 241.4      $ 249.8   

Restricted cash

     718.4        599.7   

Premiums and fees receivable

     982.0        750.1   

Other current assets

     146.9        126.4   
  

 

 

   

 

 

 

Total current assets

     2,088.7        1,726.0   

Fixed assets - net

     90.5        75.8   

Deferred income taxes

     214.2        245.2   

Other noncurrent assets

     204.9        181.8   

Goodwill - net

     1,092.9        883.7   

Amortizable intangible assets - net

     556.0        483.5   
  

 

 

   

 

 

 

Total assets

   $ 4,247.2      $ 3,596.0   
  

 

 

   

 

 

 

Premiums payable to insurance and reinsurance companies

   $ 1,600.4      $ 1,250.3   

Accrued compensation and other accrued liabilities

     246.2        226.5   

Unearned fees

     64.3        60.5   

Other current liabilities

     32.7        40.0   

Corporate related borrowings - current

     —          —     
  

 

 

   

 

 

 

Total current liabilities

     1,943.6        1,577.3   

Corporate related borrowings - noncurrent

     675.0        550.0   

Other noncurrent liabilities

     409.3        362.0   
  

 

 

   

 

 

 

Total liabilities

     3,027.9        2,489.3   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock - issued and outstanding 112.9 shares in 2011 and 108.4 shares in 2010

     112.9        108.4   

Capital in excess of par value

     638.1        507.8   

Retained earnings

     480.4        488.3   

Accumulated other comprehensive earnings (loss)

     (12.1     2.2   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,219.3        1,106.7   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,247.2      $ 3,596.0   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

Arthur J. Gallagher & Co.

Consolidated Statement of Cash Flows

(Unaudited - in millions)

 

     Nine-month period ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Earnings from continuing operations

   $ 103.6      $ 117.3   

Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:

    

Net gain on investments and other

     (1.2     (5.5

Depreciation and amortization

     81.3        69.0   

Change in estimated acquisition earnout payables

     (6.0     (2.9

Amortization of deferred compensation and restricted stock

     5.3        4.8   

Stock-based and other noncash compensation expense

     11.4        6.7   

Net change in restricted cash

     7.2        (32.2

Net change in premiums receivable

     109.1        26.0   

Net change in premiums payable

     (79.8     56.7   

Net change in other current assets

     (14.6     (8.8

Net change in accrued compensation and other accrued liabilities

     (32.4     (26.4

Net change in fees receivable/unearned fees

     (6.2     (14.7

Net change in income taxes payable

     (10.0     19.4   

Net change in deferred income taxes

     29.4        18.6   

Net change in other noncurrent assets and liabilities

     (15.1     (14.6
  

 

 

   

 

 

 

Net cash provided by operating activities of continuing operations

     182.0        213.4   

Earnings from discontinued operations

     —          2.1   

Noncash items related to discontinued operations

     —          (3.1
  

 

 

   

 

 

 

Net cash provided by operating activities

     182.0        212.4   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net additions to fixed assets

     (29.2     (18.1

Cash paid for acquisitions, net of cash acquired

     (240.0     (44.2

Net proceeds from sales of operations

     10.2        —     

Net (funding) proceeds of investment transactions

     (3.7     13.1   
  

 

 

   

 

 

 

Net cash used by investing activities

     (262.7     (49.2
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     54.8        26.4   

Tax impact from issuance of common stock

     2.2        1.1   

Repurchases of common stock

     (1.1     (0.6

Dividends paid

     (108.6     (99.7

Borrowings on line of credit facility

     102.0        48.0   

Repayments on line of credit facility

     (102.0     (48.0

Borrowings of long-term debt

     125.0        —     
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     72.3        (72.8
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (8.4     90.4   

Cash and cash equivalents at beginning of period

     249.8        205.9   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 241.4      $ 296.3   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 33.8      $ 30.2   

Income taxes paid

     31.0        21.2   

See notes to consolidated financial statements.

 

- 5 -


Table of Contents

Arthur J. Gallagher & Co.

Consolidated Statement of Stockholders’ Equity

(Unaudited - in millions)

 

    

 

Common Stock

     Capital in
Excess of
Par Value
    Retained
Earnings
    Accumulated
Other
Comprehensive
Earnings (Loss)
    Total  
     Shares      Amount           

Balance at December 31, 2010

     108.4       $ 108.4       $ 507.8      $ 488.3      $ 2.2      $ 1,106.7   

Net earnings

     —           —           —          103.6        —          103.6   

Net change in pension liability, net of taxes of $0.5 million

     —           —           —          —          0.7        0.7   

Foreign currency translation

     —           —           —          —          (15.0     (15.0
              

 

 

 

Comprehensive earnings

                 89.3   

Compensation expense related to stock option plan grants

     —           —           5.0        —          —          5.0   

Tax impact from issuance of common stock

     —           —           2.2        —          —          2.2   

Common stock issued in:

              

Sixteen purchase transactions

     2.4         2.4         67.1        —          —          69.5   

Stock option plans

     1.9         1.9         47.3        —          —          49.2   

Employee stock purchase plan

     0.2         0.2         5.4        —          —          5.6   

Deferred compensation and restricted stock

     —           —           4.4        —          —          4.4   

Common stock repurchases

     —           —           (1.1     —          —          (1.1

Cash dividends declared on common stock

     —           —           —          (111.5     —          (111.5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     112.9       $ 112.9       $ 638.1      $ 480.4      $ (12.1   $ 1,219.3   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

- 6 -


Table of Contents

Notes to September 30, 2011 Consolidated Financial Statements (Unaudited)

1. Nature of Operations and Basis of Presentation

Arthur J. Gallagher & Co. and its subsidiaries, collectively referred to herein as we, our or us, provide insurance brokerage and risk management services to a wide variety of commercial, industrial, institutional and governmental organizations through two reportable operating segments. Commission and fee revenue generated by our brokerage segment is primarily related to the negotiation and placement of insurance for our clients. Fee revenue generated by our risk management segment is primarily related to claims management, information management, risk control consulting (loss control) services and appraisals in the property/casualty market. Investment income and other revenue is generated from our investment portfolio, which includes invested cash and restricted funds, as well as clean-energy and other investments. We are headquartered in Itasca, Illinois, have operations in 16 countries and conduct business in more than 110 countries globally through a network of correspondent insurance brokers and consultants.

We have prepared the accompanying unaudited consolidated financial statements 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. We believe 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 our audited consolidated financial statements for the year ended December 31, 2010 and include all 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 to be reported 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 our Annual Report on Form 10-K for the year ended December 31, 2010.

Certain reclassifications have been made to the amounts reported in prior years’ unaudited consolidated financial statements in order to conform to the current year presentation.

In the preparation of our unaudited consolidated financial statements as of September 30, 2011, management evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued, for potential recognition in our disclosure therein.

2. Effect of New Accounting Pronouncements

Revenue Arrangements with Multiple Deliverables

In 2009, the Financial Accounting Standards Board (which we refer to as the FASB) issued Accounting Standards Update No. 2009-13, “Multiple Deliverable Revenue Arrangements” (which we refer to as ASU 2009-13). ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included in Accounting Standards Codification (which we refer to as ASC) Subtopic 605-25.

The revised guidance provides for two significant changes to the existing multiple-element revenue arrangements guidance. The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. ASU 2009-13 also significantly expands the disclosures required for multiple-element revenue arrangements.

The revised multiple-element revenue arrangements guidance is effective for the first annual reporting period beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. If the guidance is adopted prospectively, certain transitional disclosures are required for each reporting period in the initial year of adoption. The adoption of this guidance did not have any impact on our consolidated financial statements and notes thereto.

 

- 7 -


Table of Contents

3. Business Combinations

During the nine-month period ended September 30, 2011, we acquired substantially all of the net assets of the following firms in exchange for our common stock and/or cash. These acquisitions have been accounted for using the acquisition method for recording business combinations (in millions except share data):

 

Name and Effective Date of Acquisition

   Common
Shares
Issued
    Common
Share
Value
     Cash
Paid
     Accrued
Liability
     Escrow
Deposited
     Recorded
Earnout
Payable
     Total
Recorded
Purchase
Price
     Maximum
Potential
Earnout
Payable
 
     (000s)                       

The Gleason Agency, Inc. & its affiliate Gleason Financial, Ltd. (TGA) January 1, 2011

     342      $ 9.1       $ 4.3       $ —         $ 1.0       $ —         $ 14.4       $ 6.5   

James F. Reda & Associates, LLC February 1, 2011

     75        2.2         1.1         —           0.1         0.8         4.2         2.7   

Woodbrook Underwriting Agencies Limited (WUA) March 2, 2011

     437        13.6         1.2         —           1.6         2.3         18.7         2.4   

Risk Planners, Inc. March 4, 2011

     —          —           7.2         —           —           —           7.2         —     

Blue Water Benefits, Inc. April 1, 2011

     —          —           7.1         —           0.1         1.9         9.1         5.8   

Fish & Schulkamp, Inc. May 1, 2011

     81        2.0         0.5         —           0.3         0.1         2.9         0.4   

ITI Solutions Pte Ltd. May 1, 2011

     —          —           2.4         —           —           0.6         3.0         0.8   

Meyers-Reynolds & Associates, Inc. (MRA) May 1, 2011

     488        14.0         12.0         —           2.0         5.9         33.9         18.0   

Heath Lambert Group Holdings, Ltd. (HLG) May 13, 2011

     —          —           178.4         —           —           —           178.4         —     

Bushong Insurance Associates, Inc. June 1, 2011

     64        1.8         0.7         —           0.2         0.1         2.8         1.5   

Independent Fiduciary Services, Inc. (IFS) June 1, 2011

     368        10.1         0.7         —           0.3         2.8         13.9         7.0   

Mortgage Insurance Agency, Ltd. June 1, 2011

     108        2.2         1.0         —           0.4         1.1         4.7         2.2   

Potter-Holden & Company July 1, 2011

     73        1.8         2.0         0.3         0.3         0.4         4.8         1.7   

Group Benefits of Arkansas, LLC August 1, 2011

     64        1.7         0.6         —           0.1         0.6         3.0         2.6   

 

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Table of Contents

Name and Effective Date of Acquisition

   Common
Shares
Issued
    Common
Share
Value
     Cash
Paid
     Accrued
Liability
     Escrow
Deposited
     Recorded
Earnout
Payable
     Total
Recorded
Purchase
Price
     Maximum
Potential
Earnout
Payable
 
     (000s)                       

Robinson-Adams Insurance, Inc. (RAI) August 1, 2011

     —        $ —         $ 12.7       $ —         $ 1.4       $ 0.3       $ 14.4       $ 2.8   

BeneTex Group, Inc. September 1, 2011

     136        3.7         1.2         —           0.1         0.7         5.7         3.5   

Five other acquisitions completed in second and third quarters

     3        —           11.2         —           0.3         1.4         12.9         10.7   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,239      $ 62.2       $ 244.3       $ 0.3       $ 8.2       $ 19.0       $ 334.0       $ 68.6   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common shares issued in connection with acquisitions are valued at closing market prices as of the effective date of the applicable acquisition. We record escrow deposits that are returned to us as a result of adjustments to net assets acquired as reductions of goodwill when the escrows are settled. The maximum potential earnout payables disclosed in the foregoing table represent the maximum amount of additional consideration that could be paid pursuant to the terms of the purchase agreement for the applicable acquisition. The amounts recorded as earnout payables, which are primarily based upon the estimated future operating results of the acquired entities over a two- to three-year period subsequent to the acquisition date, are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration in the foregoing table. We will record subsequent changes in these estimated earnout obligations, including the accretion of discount, in our consolidated statement of earnings when incurred.

The fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, we estimated the acquired entity’s future performance using financial projections developed by management for the acquired entity and market participant assumptions that were derived for revenue growth and/or profitability. We estimated future payments using the earnout formula and performance targets specified in each purchase agreement and these financial projections. We then discounted these payments to present value using a risk-adjusted rate that takes into consideration market-based rates of return which reflect the ability of the acquired entity to achieve the targets. During the three-month periods ended September 30, 2011 and 2010, we recognized $2.3 million and $1.7 million, respectively, of expense in our consolidated statement of earnings related to the accretion of the discount recorded for earnout obligations related to our 2011, 2010 and 2009 acquisitions. During the nine-month periods ended September 30, 2011 and 2010, we recognized $6.2 million and $4.7 million, respectively, of expense in our consolidated statement of earnings related to the accretion of the discount recorded for earnout obligations related to our 2011, 2010 and 2009 acquisitions. In addition, during the three-month periods ended September 30, 2011 and 2010, we recognized $6.6 million and $5.6 million of income, respectively, related to net adjustments in the estimated fair value of earnout obligations related to revised projections of future performance for eight and nine acquisitions, respectively. In addition, during the nine-month periods ended September 30, 2011 and 2010, we recognized $12.2 million and $7.6 million of income, respectively, related to net adjustments in the estimated fair value of earnout obligations related to revised projections of future performance for thirteen and nine acquisitions, respectively. The aggregate amount of maximum earnout obligations related to acquisitions made in 2009 and subsequent years was $279.9 million, of which $101.8 million was recorded in our consolidated balance sheet as of September 30, 2011 based on the estimated fair value of the expected future payments to be made.

For all acquisitions made prior to January 1, 2009, we did not include potential earnout obligations in the recorded purchase price for each applicable acquisition at its respective acquisition date because such obligations were not fixed and determinable as of the acquisition date. We will generally record future payments made under these arrangements, if any, as additional goodwill when the earnouts are settled. The aggregate amount of unrecorded earnout payables outstanding as of September 30, 2011 was $120.9 million related to acquisitions we made from 2007 to 2008.

 

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The following is a summary of the estimated fair values of the net assets acquired at the date of each acquisition made in 2011 (in millions):

 

     TGA      WUA      MRA      HLG      IFS      RAI      Fifteen Other
Acquisitions
     Total  

Cash

   $ 0.1       $ —         $ —         $ 14.4       $ 0.1       $ —         $ 1.0       $ 15.6   

Other current assets

     4.3         1.0         12.4         420.1         1.5         11.7         13.8         464.8   

Fixed assets

     0.2         —           0.3         7.6         0.4         —           0.4         8.9   

Noncurrent assets

     0.2         1.6         —           9.3         —           —           —           11.1   

Goodwill

     9.7         4.9         21.5         123.5         9.7         6.1         24.6         200.0   

Trade names

     —           —           —           11.1         —           —           —           11.1   

Expiration lists

     6.6         14.7         11.3         46.9         4.8         8.1         38.4         130.8   

Non-compete agreements

     0.1         —           0.2         0.1         0.2         0.2         0.9         1.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets acquired

     21.2         22.2         45.7         633.0         16.7         26.1         79.1         844.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

     6.8         3.5         11.8         422.6         0.3         11.7         18.7         475.4   

Noncurrent liabilities

     —           —           —           32.0         2.5         —           0.1         34.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     6.8         3.5         11.8         454.6         2.8         11.7         18.8         510.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net assets acquired

   $ 14.4       $ 18.7       $ 33.9       $ 178.4       $ 13.9       $ 14.4       $ 60.3       $ 334.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

These acquisitions allow us to expand into desirable geographic locations, further extend our presence in the retail and wholesale insurance brokerage services industries and increase the volume of general services currently provided. The excess of the purchase price over the estimated fair value of the tangible net assets acquired at the acquisition date was allocated to goodwill, trade names, expiration lists and non-compete agreements in the amounts of $200.0 million, $11.1 million, $130.8 million and $1.7 million, respectively, within the brokerage segment.

Provisional estimates of fair value are established at the time of the acquisition and are subsequently reviewed within the first year of operations to determine the necessity for adjustments. The fair value of the current assets and current liabilities for each applicable acquisition at the acquisition date approximated their carrying values due to their short-term duration. The fair value of expiration lists was established using the excess earnings method, which is an income approach based on estimated financial projections developed by management for each acquired entity using market participant assumptions. We estimate the fair value as the present value of the benefits anticipated from ownership of the subject customer list in excess of returns required on the investment in contributory assets necessary to realize those benefits. The rate used to discount the net benefits was based on a risk-adjusted rate that takes into consideration market-based rates of return and reflects the risk of the asset relative to the acquired business. The fair value of non-compete agreements was established using the profit differential method, which is an income approach based on estimated financial projections developed by management for the acquired company using market participant assumptions and various non-compete scenarios.

Expiration lists, non-compete agreements and trade names related to these acquisitions are amortized using the straight-line method over their estimated useful lives (ten years for trade names, three to fifteen years for expiration lists and three to five years for non-compete agreements), while goodwill is not subject to amortization. We use the straight-line method to amortize trade names, expiration lists and non-compete agreements because the pattern of their economic benefits cannot be reasonably determined with any certainty. We review all of our intangible assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value is less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings. Based on the results of impairment reviews during the nine-month period ended September 30, 2010, we wrote-off $2.3 million of amortizable intangible assets related to the brokerage segment. No such indicators were noted in the three-month period ended September 30, 2010. No such indicators were noted in the three-month and nine-month periods ended September 30, 2011.

 

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Of the $11.1 million of trade names, $130.8 million of expiration lists and $1.7 million of non-compete agreements related to the 2011 acquisitions, $11.1 million, $48.8 million and $0.3 million, respectively, is not expected to be deductible for income tax purposes. Accordingly, we recorded a deferred tax liability of $16.9 million and a corresponding amount of goodwill in 2011 related to the nondeductible amortizable intangible assets.

During the nine-month period ended September 30, 2011, we issued 153,000 shares of our common stock, paid $7.3 million in cash, and accrued $10.2 million in liabilities related to earnout obligations for acquisitions made prior to 2009 and recorded additional goodwill of $11.7 million. During the nine-month period ended September 30, 2010, we issued 882,000 shares of our common stock, paid $2.8 million in cash and accrued $4.3 million in current liabilities related to earnout obligations for acquisitions made prior to 2009 and recorded additional goodwill of $17.2 million.

Our consolidated financial statements for the nine-month period ended September 30, 2011 include the operations of the acquired entities from their respective acquisition dates. The following is a summary of the unaudited pro forma historical results, as if these entities had been acquired at January 1, 2010 (in millions, except per share data):

 

     Three-month period ended
September 30,
     Nine-month period ended
September 30,
 
         2011              2010              2011                2010        

Total revenues

   $ 566.1       $ 523.8       $ 1,643.1       $ 1,583.7   

Earnings from continuing operations

     47.3         49.6         105.8         124.2   

Basic earnings from continuing operations per share

     0.42         0.46         0.95         1.17   

Diluted earnings from continuing operations per share

     0.42         0.46         0.94         1.16   

The unaudited pro forma results above have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had these acquisitions occurred at January 1, 2010, nor are they necessarily indicative of future operating results. Annualized revenues of the entities acquired during the nine-month period ended September 30, 2011 totaled approximately $234.8 million. For the nine-month period ended September 30, 2011, total revenues and earnings (loss) from continuing operations recorded in our unaudited consolidated statement of earnings related to the 2011 acquisitions in the aggregate were $88.7 million and ($1.5 million), respectively.

4. Intangible Assets

The carrying amount of goodwill at September 30, 2011 and December 31, 2010 allocated by domestic and foreign operations is as follows (in millions):

 

     Brokerage      Risk
Management
     Corporate      Total  

At September 30, 2011

           

United States

   $ 883.6       $ 18.5       $ —         $ 902.1   

Foreign, principally Australia, Canada and the U.K.

     190.6         0.2         —           190.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total goodwill - net

   $ 1,074.2       $ 18.7       $ —         $ 1,092.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2010

           

United States

   $ 806.8       $ 16.9       $ —         $ 823.7   

Foreign, principally Australia, Canada and the U.K.

     59.8         0.2         —           60.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total goodwill - net

   $ 866.6       $ 17.1       $ —         $ 883.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2011 are as follows (in millions):

 

     Brokerage     Risk
Management
     Corporate      Total  

Balance as of December 31, 2010

   $ 866.6      $ 17.1       $ —         $ 883.7   

Goodwill acquired during the period

     200.0        —           —           200.0   

Goodwill related to earnouts recognized during the period

     11.7        —           —           11.7   

Goodwill adjustments due to appraisals and other acquisition adjustments

     6.9        1.6         —           8.5   

Goodwill written-off related to sales of operations

     (4.3     —           —           (4.3

Foreign currency translation adjustments during the period

     (6.7     —           —           (6.7
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2011

   $ 1,074.2      $ 18.7       $ —         $ 1,092.9   
  

 

 

   

 

 

    

 

 

    

 

 

 

Major classes of amortizable intangible assets at September 30, 2011 and December 31, 2010 consist of the following (in millions):

 

     September 30,
2011
    December 31,
2010
 

Expiration lists

   $ 808.1      $ 699.1   

Accumulated amortization - expiration lists

     (272.8     (225.8
  

 

 

   

 

 

 
     535.3        473.3   
  

 

 

   

 

 

 

Non-compete agreements

     25.3        23.8   

Accumulated amortization - non-compete agreements

     (20.8     (19.7
  

 

 

   

 

 

 
     4.5        4.1   
  

 

 

   

 

 

 

Trade name

     19.1        8.3   

Accumulated amortization - trade name

     (2.9     (2.2
  

 

 

   

 

 

 
     16.2        6.1   
  

 

 

   

 

 

 

Net amortizable assets

   $ 556.0      $ 483.5   
  

 

 

   

 

 

 

Estimated aggregate amortization expense for each of the next five years is as follows:

 

2011 (remaining three months)

      $           19.7   

2012

        76.2   

2013

        74.7   

2014

        72.0   

2015

        68.1   
     

 

 

 

Total

      $ 310.7   
     

 

 

 

 

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5. Credit and Other Debt Agreements

Note Purchase Agreement - We are a party to an amended and restated note purchase agreement dated December 19, 2007, with certain accredited institutional investors, pursuant to which we issued and sold $100.0 million in aggregate principal amount of our 6.26% Senior Notes, Series A, due August 3, 2014 and $300.0 million in aggregate principal amount of our 6.44% Senior Notes, Series B, due August 3, 2017, in a private placement. These notes require semi-annual payments of interest that are due in February and August of each year.

We are also a party to a note purchase agreement dated November 30, 2009, with certain accredited institutional investors, pursuant to which we issued and sold $150.0 million in aggregate principal amount of our 5.85% Senior Notes, Series C, due in three equal installments on November 30, 2016, November 30, 2018 and November 30, 2019, in a private placement. These notes require semi-annual payments of interest that are due in May and November of each year.

We are also a party to a note purchase agreement dated February 10, 2011, with certain accredited institutional investors, pursuant to which we issued and sold $75.0 million in aggregate principal amount of our 5.18% Senior Notes, Series D, due February 10, 2021 and $50.0 million in aggregate principal amount of our 5.49% Senior Notes, Series E, due February 10, 2023, in a private placement. These notes require semi-annual payments of interest that are due in February and August of each year.

Under the terms of the note purchase agreements, we may redeem the notes at any time, in whole or in part, at 100% of the principal amount of such notes being redeemed, together with accrued and unpaid interest and a “make-whole amount.” The “make-whole amount” is derived from a net present value computation of the remaining scheduled payments of principal and interest using a discount rate based on U.S. Treasury yields plus 0.5% and is designed to compensate the purchasers of the notes for their investment risk in the event prevailing interest rates at the time of prepayment are less favorable than the interest rates under the notes. We do not currently intend to prepay the notes.

The note purchase agreements contain customary provisions for transactions of this type, including representations and warranties regarding us and our subsidiaries and various financial covenants, including covenants that require us to maintain specified financial ratios. We were in compliance with these covenants as of September 30, 2011. The note purchase agreements also provide customary events of default, generally with corresponding grace periods, including, without limitation, payment defaults with respect to the notes, covenant defaults, cross-defaults to other agreements evidencing our or our subsidiaries’ indebtedness, certain judgments against us or our subsidiaries and events of bankruptcy involving us or our material subsidiaries.

The notes issued under the note purchase agreements are senior unsecured obligations of ours and rank equal in right of payment with our Credit Agreement discussed below.

Credit Agreement - On July 15, 2010, we entered into an unsecured multicurrency credit agreement (which we refer to as the Credit Agreement), which expires on July 14, 2014, with a group of twelve financial institutions.

The Credit Agreement provides for a revolving credit commitment of up to $500.0 million, of which up to $75.0 million may be used for issuances of standby or commercial letters of credit and up to $50.0 million may be used for the making of swing loans, as defined in the Credit Agreement. We may from time to time request, subject to certain conditions, an increase in the revolving credit commitment up to a maximum aggregate revolving credit commitment of $600.0 million.

The Credit Agreement provides that we may elect that each borrowing in U.S. dollars be either base rate loans or Eurocurrency loans, as defined in the Credit Agreement. All loans denominated in currencies other than U.S. dollars will be Eurocurrency loans. Interest rates on base rate loans and outstanding drawings on letters of credit in U.S. dollars under the Credit Agreement are based on the base rate, as defined in the Credit Agreement. Interest rates on Eurocurrency loans or outstanding drawings on letters of credit in currencies other than U.S. dollars are based on an adjusted London Interbank Offered Rate, as defined in the Credit Agreement, plus a margin of 1.45%, 1.65%, 1.85% or 2.00%, depending on the financial leverage ratio we maintain. Interest rates on swing loans are based, at our election, on either the base rate, as defined in the Credit Agreement, or such alternate rate as may be quoted by the lead lender. The annual facility fee related to the Credit Agreement is either .30%, .35%, .40% or .50% of the used and unused portions of the revolving credit commitment, depending on the financial leverage ratio we maintain.

 

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The terms of our Credit Agreement include various financial covenants, including covenants that require us to maintain specified levels of net worth and financial leverage ratios. We were in compliance with these covenants as of September 30, 2011. The Credit Agreement also includes customary events of default, with corresponding grace periods, including, without limitation, payment defaults, cross-defaults to other agreements evidencing indebtedness and bankruptcy-related defaults.

At September 30, 2011, $16.5 million of letters of credit (for which we had $7.8 million of liabilities recorded at September 30, 2011) were outstanding under the Credit Agreement. There were no borrowings outstanding under the Credit Agreement at September 30, 2011. Accordingly, as of September 30, 2011, $483.5 million remained available for potential borrowings, of which $58.5 million may be in the form of additional letters of credit.

See Note 13 to the unaudited consolidated financial statements for additional discussion on our contractual obligations and commitments as of September 30, 2011.

The following is a summary of our corporate debt (in millions):

 

    September 30,
2011
    December 31,
2010
 

Note Purchase Agreements:

   

Semi-annual payments of interest, fixed rate of 6.26%, balloon due 2014

  $ 100.0      $ 100.0   

Semi-annual payments of interest, fixed rate of 6.44%, balloon due 2017

    300.0        300.0   

Semi-annual payments of interest, fixed rate of 5.85%, $50 million due in 2016, 2018 and 2019

    150.0        150.0   

Semi-annual payments of interest, fixed rate of 5.18%, balloon due 2021

    75.0        —     

Semi-annual payments of interest, fixed rate of 5.49%, balloon due 2023

    50.0        —     
 

 

 

   

 

 

 

Total Note Purchase Agreements

    675.0        550.0   

Credit Agreement:

   

Periodic payments of interest and principal, prime or LIBOR plus up to 2.00%, expires July 14, 2014

    —          —     
 

 

 

   

 

 

 
  $ 675.0      $ 550.0   
 

 

 

   

 

 

 

The fair value of the $675.0 million in debt under the note purchase agreements at September 30, 2011 was $758.9 million due to the long-tem duration and fixed interest rates associated with these debt obligations. No active or observable market exists for our private placement long-term debt. Therefore, the estimated fair value of this debt is based on discounted future cash flows using current interest rates available for debt with similar terms and remaining maturities. To estimate an all-in interest rate for discounting, we obtain market quotes for notes with the same terms as ours, which we have deemed to be the closest approximation of current market rates. We have not adjusted this rate for risk profile changes, covenant issues or credit ratings changes.

 

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6. Earnings Per Share

The following table sets forth the computation of basic and diluted net earnings per share (in millions, except per share data):

 

     Three-month period ended
September 30,
     Nine-month period ended
September 30,
 
         2011              2010              2011              2010      

Earnings from continuing operations

   $ 46.7       $ 46.2       $ 103.6       $ 117.3   

Earnings from discontinued operations

     —           —           —           2.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 46.7       $ 46.2       $ 103.6       $ 119.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding

     112.6         105.5         111.0         104.2   

Dilutive effect of stock options using the treasury stock method

     0.5         0.2         0.7         0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common and common equivalent shares outstanding

     113.1         105.7         111.7         104.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net earnings per share:

           

Earnings from continuing operations

   $ 0.41       $ 0.44       $ 0.93       $ 1.13   

Earnings from discontinued operations

     —           —           —           0.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 0.41       $ 0.44       $ 0.93       $ 1.15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net earnings per share:

           

Earnings from continuing operations

   $ 0.41       $ 0.44       $ 0.93       $ 1.12   

Earnings from discontinued operations

     —           —           —           0.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 0.41       $ 0.44       $ 0.93       $ 1.14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options to purchase 5.0 million and 9.3 million shares of common stock were outstanding at September 30, 2011 and 2010, respectively, but were not included in the computation of the dilutive effect of stock options for the three-month periods then ended. Options to purchase 3.8 million and 11.5 million shares of common stock were outstanding at September 30, 2011 and 2010, respectively, but were not included in the computation of the dilutive effect of stock options for the nine-month periods then ended. These options were excluded from the computation because the options’ exercise prices were greater than the average market price of our common shares during the respective period, and therefore would be anti-dilutive to earnings per share under the treasury stock method.

7. Stock Option Plans

Long-Term Incentive Plan

On May 10, 2011, our stockholders approved the 2011 Long-Term Incentive Plan (which we refer to as the LTIP), which replaced our previous stockholder-approved 2009 Long-Term Incentive Plan (which we refer to as the 2009 LTIP). The LTIP term began May 10, 2011 and terminates on the date of the annual meeting of stockholders that occurs during the year of the seventh anniversary of its effective date, unless terminated earlier by our board of directors. All of our officers, employees and non-employee directors are eligible to receive awards under the LTIP. The compensation committee of our board of directors determines the participants under the LTIP. The LTIP provides for non-qualified and incentive stock options, stock appreciation rights, restricted stock, restricted stock units and performance units, any or all of which may be made contingent upon the achievement of performance criteria. A stock appreciation right entitles the holder to receive upon exercise (subject to withholding taxes), cash or shares of our common stock (which may be restricted stock) with a value equal to the difference between the fair market value of our common stock on the exercise date and the base price of the stock appreciation right. Subject to the LTIP limits, the compensation committee has the discretionary authority to determine the size of an award.

 

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As of the effective date of the LTIP, 6.1 million shares of our common stock were available for awards granted under the LTIP. The number of available shares will be reduced by the aggregate number of shares that become subject to outstanding awards granted under the LTIP. To the extent that shares subject to an outstanding award granted under either the LTIP or the 2009 LTIP are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the settlement of such award in cash, then such shares will again be available under the LTIP. Shares that are subject to a stock appreciation right and were not issued upon the net settlement or net exercise of such stock appreciation right, shares that are used to pay the exercise price of an option, delivered to or withheld by us to pay withholding taxes, and shares that are purchased on the open market with the proceeds of an option exercise, may not again be made available for issuance.

Shares of our common stock available for issuance under the LTIP include authorized and unissued shares of common stock or authorized and issued shares of common stock reacquired and held as treasury shares or otherwise, or a combination thereof. The maximum number of shares available under the LTIP for restricted stock, restricted stock unit awards and performance unit awards settled with stock (i.e., all awards other than stock options and stock appreciation rights) is 1.2 million. The maximum number of shares with respect to which options or stock appreciation rights or a combination thereof that may be granted during any fiscal year to any person is 200,000. The maximum number of shares with respect to which performance-based restricted stock or restricted stock units that may be granted during any fiscal year to any person is 100,000. The maximum amount that may be payable with respect to performance units granted during any fiscal year of the company to any person is $3.0 million.

The LTIP provides for the grant of stock options, which may be either tax-qualified incentive stock options or non-qualified options and stock appreciation rights. The compensation committee determines the period for the exercise of a non-qualified stock option, tax-qualified incentive stock option or stock appreciation right, provided that no option can be exercised later than seven years after its date of grant. The exercise price of a non-qualified stock option or tax-qualified incentive stock option and the base price of a stock appreciation right cannot be less than 100% of the fair market value of a share of our common stock on the date of grant, provided that the base price of a stock appreciation right granted in tandem with an option will be the exercise price of the related option.

Upon exercise, the option exercise price may be paid in cash, by the delivery of previously owned shares of our common stock or through a cashless exercise arrangement. The compensation committee determines all of the terms relating to the exercise, cancellation or other disposition of an option or stock appreciation right upon a termination of employment, whether by reason of disability, retirement, death or any other reason. Stock option and stock appreciation right awards under the LTIP are non-transferable.

On March 8, 2011, the compensation committee granted 851,000 options under the 2009 LTIP to our officers and key employees that become exercisable at the rate of 20% per year on the anniversary date of the grant. On March 2, 2010, the compensation committee granted 858,000 options to our officers and key employees that become exercisable at the rate of 20% per year on the anniversary date of the grant. The 2011 and 2010 options expire seven years from the date of grant, or earlier in the event of termination of the employee.

Other Information

All of our stock option plans provide for the immediate vesting of all outstanding stock option grants in the event of a change in control of our company, as defined in the plan documents.

During the three-month periods ended September 30, 2011 and 2010, we recognized $2.0 million and $2.1 million, respectively, of compensation expense related to our stock option grants. During the nine-month periods ended September 30, 2011 and 2010, we recognized $5.0 million and $5.6 million, respectively, of compensation expense related to our stock option grants.

For purposes of expense recognition, the estimated fair values of the stock option grants are amortized to expense over the options’ expected lives. We estimated the fair value of stock options at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

     2011     2010  

Expected dividend yield

     4.5     5.0

Expected risk-free interest rate

     2.7     2.8

Volatility

     26.8     27.1

Expected life (in years)

     6.0        6.1   

 

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Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because our employee and non-employee director stock options have characteristics significantly different from those of traded options, and because changes in the selective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee and non-employee director stock options. The weighted average fair value per option for all options granted during the nine-month periods ended September 30, 2011 and 2010, as determined on the grant date using the Black-Scholes option pricing model, was $5.25 and $3.90, respectively.

The following is a summary of our stock option activity and related information for 2011 (in millions, except exercise price and year data):

 

     Nine-month period ended September 30, 2011  
     Shares
Under
Option
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(in years)
     Aggregate
Intrinsic
Value
 

Beginning balance

     12.5      $ 26.71         

Granted

     0.9        30.95         

Exercised

     (1.9     25.90         

Forfeited or canceled

     (0.2     26.73         
  

 

 

   

 

 

       

Ending balance

     11.3      $ 27.16         3.59       $ 9.5   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at end of period

     7.5      $ 27.05         3.02       $ 6.7   
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending vested and expected to vest

     11.3      $ 27.16         3.58       $ 9.5   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options with respect to 6.1 million shares (less any shares of restricted stock issued under the LTIP - see Note 9 to our unaudited consolidated financial statements) were available for grant under the LTIP at September 30, 2011.

The total intrinsic value of options exercised during the nine-month periods ended September 30, 2011 and 2010 amounted to $6.9 million and $6.3 million, respectively. As of September 30, 2011, we had approximately $20.4 million of total unrecognized compensation cost related to nonvested options. We expect to recognize that cost over a weighted average period of approximately four years.

Other information regarding stock options outstanding and exercisable at September 30, 2011 is summarized as follows (in millions, except exercise price and year data):

 

         Options Outstanding      Options Exercisable  

Range of Exercise Prices

       Number
Outstanding
     Weighted
Average
Remaining
Contractual
Term
(in years)
     Weighted
Average
Exercise
Price
     Number
Exercisable
     Weighted
Average
Exercise
Price
 

$    5.79   -  $   24.13

       2.4         3.81       $ 23.33         1.4       $ 22.92   

    24.58   -       27.03

       2.3         2.71         25.32         1.8         25.22   

    27.06   -       27.75

       2.2         3.82         27.24         1.5         27.23   

    27.89   -       29.42

       2.7         3.51         29.15         2.0         29.15   

    29.45   -       36.94

       1.7         4.27         31.77         0.8         32.64   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                                

$    5.79   -  $   36.94

       11.3         3.59       $ 27.16         7.5       $ 27.05   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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8. Deferred Compensation

We have a Deferred Equity Participation Plan, which is a non-qualified plan that provides for distributions to certain of our key executives when they reach age 62 or upon or after their actual retirement. Under the provisions of the plan, we contribute shares of our common stock or cash, in an amount approved by the compensation committee, to a rabbi trust on behalf of the executives participating in the plan. Distributions under the plan may not normally be made until the participant reaches age 62 and are subject to forfeiture in the event of voluntary termination of employment prior to age 62. All distributions of stock contributions from the plan, except for accumulated non-invested dividends, are made in the form of our common stock and all distributions of cash contributions are distributed in cash.

Our common stock that is issued under the plan to the rabbi trust is valued at historical cost, which equals its fair market value at the date of grant. When common stock is issued, we record an unearned deferred compensation obligation as a reduction of capital in excess of par value in the accompanying consolidated balance sheet, which is amortized to compensation expense ratably over the vesting period of the participants. Future changes in the fair market value of our common stock owed to the participants do not have any impact on the amounts recorded in our consolidated financial statements. During the three-month periods ended September 30, 2011 and 2010, we charged $0.4 million in each period to compensation expense related to this plan. During the nine-month periods ended September 30, 2011 and 2010, we charged $1.0 million and $1.1 million, respectively, to compensation expense related to this plan. At September 30, 2011 and December 31, 2010, we recorded $7.1 million (related to 629,000 shares) and $8.1 million (related to 646,000 shares), respectively, of unearned deferred compensation as a reduction of capital in excess of par value in the accompanying consolidated balance sheet. The total intrinsic value of our unvested common stock under the plan at September 30, 2011 and December 31, 2010 was $16.5 million and $18.8 million, respectively.

In first quarter 2011 and 2010, the compensation committee approved $6.5 million and $5.9 million, respectively, of cash awards in the aggregate to certain of our key executives under the Deferred Equity Participation Plan that were contributed to the rabbi trust in first quarter 2011 and second quarter 2010, respectively. The fair value of the funded cash award assets at September 30, 2011 and December 31, 2010 was $26.2 million and $21.1 million, respectively, and has been included in other noncurrent assets in the accompanying consolidated balance sheet. During the three-month periods ended September 30, 2011 and 2010, we charged $0.8 million and $0.7 million, respectively, to compensation expense related to these awards. During the nine-month periods ended September 30, 2011 and 2010, we charged $2.5 million and $2.0 million, respectively, to compensation expense related to these awards. During the nine-month periods ended September 30, 2011 and 2010, cash and equity awards with an aggregate fair value of $0.5 million and $1.1 million were vested and distributed to employees under this plan.

9. Restricted Stock and Cash Awards

Restricted Stock Awards

As discussed in Note 7 to our unaudited consolidated financial statements, on May 10, 2011, our stockholders approved the LTIP, which replaced our previous stockholder-approved 2009 LTIP. The LTIP provides for the grant of a stock award either as restricted stock or as restricted stock units. In either case, the compensation committee may determine that the award will be subject to the attainment of performance measures over an established performance period. Stock awards are non-transferable and subject to forfeiture if the holder does not remain continuously employed with us during the applicable restriction period or, in the case of a performance-based award, if applicable performance measures are not attained. The compensation committee will determine all of the terms relating to the satisfaction of performance measures and the termination of a restriction period, or the forfeiture and cancellation of a restricted stock award upon a termination of employment, whether by reason of disability, retirement, death or any other reason. The compensation committee may grant unrestricted shares of common stock or units representing the right to receive shares of common stock to employees who have attained age 62.

The agreements awarding restricted stock units will specify whether such award may be settled in shares of our common stock, cash or a combination of shares and cash and whether the holder will be entitled to receive dividend equivalents, on a current or deferred basis, with respect to such award. Prior to the settlement of a restricted stock unit, the holder of a restricted stock unit will have no rights as a stockholder of the company. The maximum number of shares available under the LTIP for restricted stock, restricted stock units and performance units settled with stock (i.e., all awards other than stock options and stock appreciation rights) is 1.2 million. At September 30, 2011, 1.2 million shares were available for grant under the LTIP for such awards.

 

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In first quarter 2011 and 2010, we granted 200,000 and 185,000 shares, respectively, of our common stock to employees under the 2009 LTIP with an aggregate fair value of $6.2 million and $4.5 million, respectively, at the date of grant. In second quarter 2011 and 2010, we granted 20,000 and 29,000 shares, respectively, of our common stock to employees under the 2009 LTIP with an aggregate fair value of $0.6 million at the dates of each grant.

The 2011 and 2010 restricted stock awards (consisting of restricted stock or restricted stock units) vest as follows: 200,000 shares granted in first quarter 2011 and 185,000 shares granted in first quarter 2010, vest in full based on continued employment through March 8, 2015 and March 3, 2014, respectively.

We account for restricted stock at historical cost, which equals the fair market value of the award at the date of grant. When restricted shares are issued, we record an unearned restricted stock obligation as a reduction of capital in excess of par value in the accompanying consolidated balance sheet, which is amortized to compensation expense ratably over the vesting period of the participants. Future changes in the fair value of our common stock that is owed to the participants do not have any impact on the amounts recorded in our consolidated financial statements. During the three-month periods ended September 30, 2011 and 2010, we charged $1.1 million in each period to compensation expense related to restricted stock awards granted in 2006 through 2011. During the nine-month periods ended September 30, 2011 and 2010, we charged $4.3 million and $3.7 million, respectively, to compensation expense related to restricted stock awards granted in 2006 through 2011. At September 30, 2011 and December 31, 2010, we recorded $1.4 million (related to 165,000 shares) and $2.1 million (related to 188,000 shares), respectively, of unearned restricted stock outstanding as a reduction of capital in excess of par value in the accompanying consolidated balance sheet. The total intrinsic value of unvested restricted stock at September 30, 2011 and 2010 was $23.2 million and $22.5 million, respectively. During the nine-month periods ended September 30, 2011 and 2010, equity awards (including accrued dividends) with an aggregate fair value of $3.9 million and $1.7 million were vested and distributed to employees under this plan.

Cash Awards

On March 8, 2011, pursuant to our Performance Unit Program (which we refer to as the Program), the compensation committee approved the future grant of provisional cash awards of $14.4 million in the aggregate to our officers and key employees that are denominated in units (464,000 units in the aggregate), each of which was equivalent to the value of one share of our common stock on the date the provisional award was approved. The Program consists of a one-year performance period based on our financial performance and a two-year vesting period. At the discretion of the compensation committee and determined based on our performance, the officer or key employee will be granted a percentage of the provisional cash award units that equates to the EBITAC growth achieved (as defined in the Program). At the end of the performance period, eligible employees will be granted a number of units based on achievement of the performance goal and subject to approval by the compensation committee. Granted units for the 2011 provisional award will fully vest based on continuous employment through January 1, 2014. The ultimate award value will be equal to the trailing twelve-month stock price on December 31, 2013, multiplied by the number of units subject to the award, but limited to between 0.5 and 1.5 times the original value of the units determined as of the grant date. The fair value of the granted units will be paid out in cash as soon as practicable in 2014. If an eligible employee leaves us prior to the vesting date, the entire award will be forfeited. We did not recognize any compensation expense during the nine-month period ended September 30, 2011 related to the 2011 provisional award under the Program.

On March 2, 2010, pursuant to the Program, the compensation committee approved the future grant of provisional cash awards of $17.0 million in the aggregate to our officers and key employees that were denominated in units (706,000 units in the aggregate), each of which was equivalent to the value of one share of our common stock on the date the provisional award was approved. Terms of the 2010 provisional award were similar to the terms discussed above for the 2011 provisional award. However, based on company performance for 2010, we did not grant any units in 2011 related to the 2010 provisional award under the Program. We did not recognize any compensation expense during 2011 or 2010 related to this provisional award.

On March 4, 2009, pursuant to the Program, the compensation committee approved the future grant of provisional cash awards of $19.4 million in the aggregate to our officers and key employees that are denominated in units (1.3 million units in the aggregate), each of which was equivalent to the value of one share of our common stock on the date the provisional award was approved. Terms of the 2009 provisional award were similar to the terms discussed above for the 2011 provisional award. Based on our performance for 2009, we granted 1.2 million units under the Program in first quarter 2010 that will fully vest on January 1, 2012. During the three-month periods ended September 30, 2011 and 2010, we charged $3.0 million and $3.5 million, respectively, to compensation expense related to these awards. During the nine-month periods ended September 30, 2011 and 2010, we charged $9.4 million and $10.5 million, respectively, to compensation expense related to these awards.

 

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During the nine-month period ended September 30, 2010, cash awards related to the 2007 provisional award with an aggregate fair value of $4.6 million (215,000 units in the aggregate) were vested and distributed to employees under the Program. No cash awards were vested or distributed during the nine-month period ended September 30, 2011 related to the 2008 provisional award because, based on our performance for 2008, we did not grant any units in 2009 related to the 2008 provisional award under the Program.

10. Employee Stock Purchase Plan

We have an employee stock purchase plan (which we refer to as the ESPP), under which the sale of 4.0 million shares of our common stock has been authorized. Eligible employees may contribute up to 15% of their compensation towards the quarterly purchase of our common stock at a purchase price equal to 95% of the lesser of the fair market value of our common stock on the first business day or the last business day of the quarterly offering period. Eligible employees may annually purchase shares of our common stock with an aggregate fair market value of up to $25,000 (measured as of the first day of each quarterly offering period of each calendar year), provided that no employee may purchase more than 2,000 shares of our common stock under the ESPP during any calendar year. Currently, 1.2 million shares of our common stock are reserved for future issuance under the ESPP.

The quarterly ESPP information for the nine-month periods ended September 30, 2011 and 2010 is as follows (in millions, except per share and share data):

 

2011    1st Quarter      2nd Quarter      3rd Quarter  

Fair market value per share at date of purchase

   $ 30.41       $ 28.54       $ 26.30   

Purchase price per share

   $ 27.98       $ 27.11       $ 24.99   

Shares issued

     92,000         64,000         65,000   

Aggregate purchase price

   $ 2.6       $ 1.7       $ 1.6   

2010

        

Fair market value per share at date of purchase

   $ 24.55       $ 24.38       $ 24.39   

Purchase price per share

   $ 21.21       $ 23.16       $ 23.17   

Shares issued

     116,000         66,000         60,000   

Aggregate purchase price

   $ 2.5       $ 1.5       $ 1.4   

11. Retirement Plans

We have a noncontributory defined benefit pension plan that, prior to July 1, 2005, covered substantially all domestic employees who had attained a specified age and one year of employment. Benefits under the plan were based on years of service and salary history. In 2005, we amended our defined benefit pension plan to freeze the accrual of future benefits for all domestic employees, effective on July 1, 2005. In the table below, the service cost component represents plan administration costs that are incurred directly by the plan.

The components of the net periodic pension benefit cost for the plan consists of the following (in millions):

 

     Three-month period ended
September 30,
    Nine-month period ended
September 30,
 
         2011             2010             2011             2010      

Service cost

   $ 0.1      $ 0.1      $ 0.3      $ 0.3   

Interest cost on benefit obligation

     3.0        2.9        9.0        8.7   

Expected return on plan assets

     (3.8     (3.3     (11.3     (9.9

Amortization of net actuarial loss

     0.4        0.5        1.2        1.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (income) cost

   $ (0.3   $ 0.2      $ (0.8   $ 0.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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We are required under the IRC to make a minimum contribution to the plan for each of the 2011 and 2010 plan years of $0.3 million. This level of required funding is based on the plan being frozen and the aggregate amount of our historical funding. During the nine-month periods ended September 30, 2011 and 2010, we made discretionary contributions of $5.4 million and $4.5 million, respectively, to the plan. We are considering making additional discretionary contributions to the plan in 2011 and may be required to make minimum contributions to the plan in future years.

12. Investments

The following is a summary of our investments reported in other current and non-current assets in the accompanying consolidated balance sheet and the related funding commitments (in millions):

 

     September 30, 2011      December  31,
2010
 
            Funding     
     Assets      Commitments      Assets  

Chem-Mod LLC

   $ 2.4       $ —         $ 1.4   

Chem-Mod International LLC

     —           —           —     

C-Quest Technology LLC

     —           —           —     

Clean-coal investments

        

Non-controlling interest in twelve 2009 era refined-fuel plants

     9.2         —           10.1   

Controlling interest in two 2009 era refined-fuel plants

     1.6         —           1.7   

Controlling interest in sixteen 2011 era refined-fuel plants

     10.4         15.2         —     

Notes receivable and interest from co-investor

     8.5         —           8.2   

Biomass energy venture

     —           —           0.4   

Other investments

     2.3         1.3         2.0   
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 34.4       $ 16.5       $ 23.8   
  

 

 

    

 

 

    

 

 

 

Chem-Mod LLC - At September 30, 2011, we held a 42% controlling interest in Chem-Mod LLC, which has the rights to market The Chem-Mod Solution in the U.S. and Canada. Chem-Mod, a multi-pollutant reduction venture, possesses rights, information and technologies for the reduction of unwanted emissions created during the combustion of coal. Chem-Mod has developed and is the exclusive licensee of proprietary emissions technologies it refers to as The Chem-Mod™ Solution, which uses a dual injection sorbent system to reduce mercury, sulfur dioxide and other toxic emissions at coal-fired power plants.

We believe that the application of The Chem-Mod™ Solution qualifies for refined-coal tax credits under Internal Revenue Code (IRC) Section 45 when used with refined-coal production plants placed in service by December 31, 2011. Chem-Mod has been marketing The Chem-Mod™ Solution technologies principally to coal-fired power plants owned by utility companies, including those utilities that are operating with the Section 45 refined-coal production plants. To date, Chem-Mod technologies have been approved for coal-fired utilities in eleven states. Several other states are in the process of granting similar approvals.

Chem-Mod has been determined to be a variable interest entity (which we refer to as a VIE). We are the manager of Chem-Mod and consolidate its operations into our consolidated financial statements. At September 30, 2011, total assets and total liabilities of this investment that were included in our consolidated balance sheet were each less than $2.5 million. We are under no obligation to fund Chem-Mod’s operations in the future and Chem-Mod has no debt that is recourse to us.

Chem-Mod International LLC - At September 30, 2011, we held a non-controlling 20% interest in Chem-Mod International LLC, which has the rights to market The Chem-Mod™ Solution in countries other than the U.S. and Canada. Such marketing activity has been limited to date.

 

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C-Quest Technology LLC - At September 30, 2011, we held an 8% interest in C-Quest’s global operations. C-Quest possesses rights, information and technology for the reduction of carbon dioxide emissions created by burning fossil fuels. Thus far, C-Quest’s operations have been limited to laboratory testing. C-Quest has been determined to be a VIE, but due to our lack of control over the operation of C-Quest, we do not consolidate this investment into our consolidated financial statements. We also have options to acquire an additional 19% interest in C-Quest’s global operations for $9.5 million at any time on or prior to August 1, 2013.

Clean-Coal Investments -

Twelve 2009 Era Refined-Fuel Plants - At September 30, 2011, we held non-controlling, minority interests in five limited liability companies that own 12 commercial refined-coal production plants that were placed in service in 2009. These plants are currently producing refined-fuel using Chem-Mod’s technologies, which reduce harmful emissions. We believe the production and sale of refined-coal and the reduction of harmful emissions qualifies for IRC Section 45 tax credits through 2019. These limited liability companies are considered to be VIEs. Because we do not control the operations of these entities, we account for the investments using equity method accounting. At September 30, 2011, total assets and total liabilities of these five limited liability companies were approximately $108.2 million and $78.2 million, respectively. For the nine-month period ended September 30, 2011, total revenues and expenses were $223.3 million and $238.2 million, respectively. Each investor funds their portion of the obligations of the limited liability companies, in proportion to their investment ownership percentage. There are no additional debts or other obligations that we are committed to fund related to these investments.

Two 2009 Era Refined-Fuel Plants - At September 30, 2011, we held a controlling, majority interest in a limited liability company that owns two commercial refined-coal plants that were placed in service in 2009. This limited liability company is considered to be a VIE and its operations are consolidated into our consolidated financial statements. While these plants are currently idle, they have produced refined-fuel using Chem-Mod’s technologies. We believe the production and sale of refined-coal and the reduction of harmful emissions at these plants qualifies for IRC Section 45 tax credits through 2019.

Sixteen 2011 Era Refined-Fuel Plants Under Construction - We are building 16 commercial refined-coal production plants that we expect to place-in-service prior to December 31, 2011. We expect these plants to be capable of producing refined-fuel using Chem-Mod’s technologies, that we believe will qualify for IRC Section 45 tax credits through 2021. These plants are currently under construction, and we have received commitments from utilities to purchase refined-fuel from the plants when they are placed-in-service: Six of the plants have received long-term purchase commitments and 10 of the plants have received short-term purchase commitments. Ultimately, we plan to sell majority ownership interests to co-investors and relinquish control of the plants under structures similar to the 2009 era plants, thereby becoming a non-controlling, minority investor.

Notes Receivable and Interest From a Co-investor - As of September 30, 2011, we have a promissory note from a co-investor as part of the consideration for the sale of ownership interests in three of the commercial refined-coal production plants in March 2010. The face amount of the note was $8.4 million and the note bears interest at 4.7% per annum. The note is due in installments through February 15, 2020.

Biomass Energy Ventures - At September 30, 2011, we owned a non-controlling, minority interest in a biomass company and related partnerships which own the rights to biogas from landfills and the wells, infrastructure and a pipeline to capture, distribute and sell biogas. Our maximum exposure to a potential loss related to this investment was zero at September 30, 2011, which equaled the net carrying value of our investment in this venture. We sold our entire interest in the biomass company as of October 12, 2011 for $0.1 million.

Other Investments - At September 30, 2011, we owned a non-controlling, minority interest in three venture capital funds totaling $1.8 million, a 20% non-controlling interest in an investment management company totaling $0.5 million, twelve certified low-income housing developments with zero carrying value and two real estate entities with zero carrying value. Of these eighteen investments, fourteen have been determined to be VIEs, but are not required to be consolidated due to our lack of control over the respective operations. At September 30, 2011, total assets and total debt of these fourteen investments were approximately $62.0 million and $19.0 million, respectively. Our maximum exposure to a potential loss related to these investments was zero at September 30, 2011, which equaled the net aggregate carrying value of our investments in these ventures.

 

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13. Commitments, Contingencies and Off-Balance Sheet Arrangements

In connection with our investing and operating activities, we have entered into certain contractual obligations and commitments. See Notes 5 and 12 to our unaudited consolidated financial statements for additional discussion of these obligations and commitments. Our future minimum cash payments, excluding interest, associated with our contractual obligations pursuant to the note purchase agreements and Credit Agreement, operating leases and purchase commitments at September 30, 2011 were as follows (in millions):

 

     Payments Due by Period  

Contractual Obligations

   2011     2012     2013     2014     2015     Thereafter      Total  

Note purchase agreements

   $ —        $ —        $ —        $ 100.0      $ —        $ 575.0       $ 675.0   

Credit Agreement

     —          —          —          —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total debt obligations

     —          —          —          100.0        —          575.0         675.0   

Operating lease obligations

     37.8        67.1        48.7        33.4        27.4        49.9         264.3   

Less sublease arrangements

     (3.7     (3.3     (2.0     (1.5     (0.6     —           (11.1

Outstanding purchase obligations

     2.1        6.6        4.5        3.2        —          —           16.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total contractual obligations

   $ 36.2      $ 70.4      $ 51.2      $ 135.1      $ 26.8      $ 624.9       $ 944.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The amounts presented in the table above may not necessarily reflect our actual future cash funding requirements, because the actual timing of the future payments made may vary from the stated contractual obligation.

Note Purchase Agreements and Credit Agreement - See Note 5 to the unaudited consolidated financial statements for a discussion of the terms of the note purchase agreements and the Credit Agreement.

Operating Lease Obligations - Our corporate segment’s executive offices and certain subsidiary and branch facilities of our brokerage and risk management segments are located at Two Pierce Place, Itasca, Illinois, where we lease approximately 306,000 square feet of space, or approximately 60% of the building. The lease commitment on this property expires February 28, 2018.

We generally operate in leased premises at our other locations. Certain of these leases have options permitting renewals for additional periods. In addition to minimum fixed rentals, a number of leases contain annual escalation clauses which are generally related to increases in an inflation index.

We have leased certain office space to several non-affiliated tenants under operating sublease arrangements. In the normal course of business, we expect that the leases will not be renewed or replaced. We adjust charges for real estate taxes and common area maintenance annually based on actual expenses, and we recognize the related revenues in the year in which the expenses are incurred. These amounts are not included in the minimum future rentals to be received in the contractual obligations table above.

Outstanding Purchase Obligations - As a service company, we typically do not have a material amount of outstanding purchase obligations at any point in time. The amount disclosed in the contractual obligations table above represents the aggregate amount of unrecorded purchase obligations that we had outstanding as of September 30, 2011. These obligations represent agreements to purchase goods or services that were executed in the normal course of business.

Off-Balance Sheet Commitments - Our total unrecorded commitments associated with outstanding letters of credit and funding commitments as of September 30, 2011 were as follows (in millions):

 

      Amount of Commitment Expiration by Period      Total
Amounts

Committed
 

Off-Balance Sheet Commitments

   2011      2012      2013      2014      2015      Thereafter     

Letters of credit

   $ —         $ —         $ —         $ —         $ —         $ 16.5       $ 16.5   

Funding commitments

     15.2         —           —           —           —           1.3         16.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commitments

   $ 15.2       $ —         $ —         $ —         $ —         $ 17.8       $ 33.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash funding requirements. See Note 12 to our unaudited consolidated financial statements for a discussion of our funding commitments related to our corporate segment and the Off-Balance Sheet Debt section below for a discussion of our letters of credit. All of the letters of credit represent multiple year commitments that have annual, automatic renewing provisions and are classified by the latest commitment date.

Since January 1, 2002, we have acquired 177 companies, all of which were accounted for using the acquisition method for recording business combinations. Substantially all of the purchase agreements related to these acquisitions contain provisions for potential earnout obligations. For all of our 2011, 2010 and 2009 acquisitions that contain potential earnout obligations, such obligations are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration for the respective acquisition. The amounts recorded as earnout payables are primarily based upon estimated future operating results of the acquired entities over a two-to-three-year period subsequent to the acquisition date. The aggregate amount of maximum earnout obligations related to these acquisitions was $279.9 million, of which $101.8 million was recorded in our consolidated balance sheet as of September 30, 2011 based on the estimated fair value of the expected future payments to be made. For acquisitions made prior to January 1, 2009, we did not include potential earnout obligations in the recorded purchase price for each applicable acquisition at its respective acquisition date because such obligations are not fixed and determinable. We will generally record future payments made related to the 2008 and prior arrangements, if any, as additional goodwill when the earnouts are settled. The aggregate amount of unrecorded earnout payables outstanding as of September 30, 2011 was $120.9 million related to acquisitions we made in 2007 and 2008.

Off-Balance Sheet Debt - Our unconsolidated investment portfolio includes investments in enterprises where our ownership interest is between 1% and 50%, in which management has determined that our level of control and economic interest is not sufficient to require consolidation. As a result, these investments are accounted for using the equity method. None of these unconsolidated investments had any outstanding debt at September 30, 2011 or December 31, 2010 that was recourse to us.

At September 30, 2011, we had posted two letters of credit totaling $10.8 million, in the aggregate, related to our self-insurance deductibles, for which we had a recorded liability of $7.8 million. We have an equity investment in a rent-a-captive facility, which we use as a placement facility for certain of our insurance brokerage operations. At September 30, 2011, we had posted $5.7 million of letters of credit to allow the rent-a-captive facility to meet minimum statutory surplus requirements and for additional collateral related to premium and claim funds held in a fiduciary capacity. These letters of credit have never been drawn upon.

Litigation - We are the defendant in various legal actions related to employment matters and otherwise incident to the nature of our business. We believe we have meritorious defenses and intend to defend ourselves vigorously in all unresolved legal actions. In addition, we are the plaintiff in certain legal actions with and relating to former employees regarding alleged breaches of non-compete or other restrictive covenants, theft of trade secrets, breaches of fiduciary duties and related causes of action. Neither the outcomes of these legal actions nor their effect upon our business, financial condition or results of operations can be determined at this time.

Contingent Liabilities - We purchase insurance to provide protection from errors and omissions (which we refer to as E&O) claims that may arise during the ordinary course of business. We currently retain the first $5.0 million of each and every E&O claim. Our E&O insurance provides aggregate coverage for E&O losses up to $175.0 million in excess of our retained amounts. We have historically maintained self-insurance reserves for the portion of our E&O exposure that is not insured. We periodically determine a range of possible reserve levels using actuarial techniques that rely heavily on projecting historical claim data into the future. Our E&O reserve in the September 30, 2011 consolidated balance sheet is above the lower end of the most recently determined actuarial range by $1.8 million and below the upper end of the actuarial range by $5.3 million. We can make no assurances that the historical claim data used to project the current reserve levels will be indicative of future claim activity. Thus, the E&O reserve level and corresponding actuarial range could change in the future as more information becomes known, which could materially impact the amounts reported and disclosed herein.

 

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Tax-advantaged Investments No Longer Held - Between 1996 and 2007, we developed and then sold portions of our ownership in various energy related investments, many of which qualified for tax credits under IRC Section 29. In connection with the sales to other investors, we provided various indemnifications. At September 30, 2011, the maximum potential amount of future payments that we could be required to make under these indemnifications totaled approximately $195.0 million, net of the applicable income tax benefit. In addition, we recorded tax benefits in connection with our ownership in these investments. At September 30, 2011, we had exposure on $148.8 million of previously earned tax credits. In 2004, 2007 and 2009, the IRS examined several of these investments and all examinations were closed without any changes being proposed by the IRS. However, any future adverse tax audits, administrative rulings or judicial decisions could disallow previously claimed tax credits or cause us to be subject to liability under our indemnification obligations. Because of the contingent nature of these exposures, no liabilities have been recorded in our September 30, 2011 consolidated balance sheet related to these indemnifications.

14. Comprehensive Earnings

The after-tax components of our comprehensive earnings consist of the following:

 

     Three-month period ended
September 30,
     Nine-month period ended
September 30,
 
     2011     2010      2011     2010  

Net earnings

   $ 46.7      $ 46.2       $ 103.6      $ 119.4   

Other comprehensive earnings (loss):

         

Net change in pension liability, net of taxes

     0.2        0.2         0.7        0.7   

Foreign currency translation

     (16.0     10.5         (15.0     5.7   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive earnings

   $ 30.9      $ 56.9       $ 89.3      $ 125.8   
  

 

 

   

 

 

    

 

 

   

 

 

 

The after-tax components of our accumulated comprehensive earnings (loss) consist of the following:

 

     Pension
Liability
    Foreign
Currency
Translation
    Accumulated
Comprehensive
Earnings (Loss)
 

Balance as of December 31, 2010

   $ (18.3   $ 20.5      $ 2.2   

Net change in period

     0.7        (15.0     (14.3
  

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011

   $ (17.6   $ 5.5      $ (12.1
  

 

 

   

 

 

   

 

 

 

The foreign currency translation during the three-month and nine-month periods ended September 30, 2011 and 2010 primarily relates to the net impact of changes in the value of the local currencies relative to the U.S. dollar for our operations in Australia, Canada and the U.K.

15. Segment Information

We have identified three reportable operating segments: brokerage, risk management and corporate.

The brokerage segment is primarily comprised of our retail and wholesale insurance brokerage operations. The brokerage segment generates revenues through commissions paid by insurance underwriters and through fees charged to our clients. Our brokers, agents and administrators act as intermediaries between insurers and their customers and we do not assume underwriting risks.

The risk management segment provides contract claim settlement and administration services for enterprises that choose to self-insure some or all of their property/casualty coverages and for insurance companies that choose to outsource some or all of their property/casualty claims departments. These operations also provide claims management, loss control consulting and insurance property appraisal services. Revenues are principally generated on a negotiated per-claim or per-service fee basis.

 

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The corporate segment manages our clean-energy and other investments. This segment also holds all of our corporate debt.

Allocations of investment income and certain expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information. We allocate the provision for income taxes to the brokerage and risk management segments as if those segments were preparing income tax provisions on a separate company basis. Reported operating results by segment would change if different methods were applied.

Financial information relating to our segments for 2011 and 2010 is as follows (in millions):

 

     Three-month period ended
September 30,
    Nine-month period ended
September 30,
 
     2011     2010     2011     2010  

Brokerage

        

Total revenues

   $ 421.9      $ 351.3      $ 1,143.1      $ 1,002.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

   $ 75.0      $ 73.6      $ 178.6      $ 175.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable assets at September 30, 2011 and 2010

       $ 3,220.2      $ 2,493.7   
      

 

 

   

 

 

 

Risk Management

        

Total revenues

   $ 139.0      $ 111.4      $ 403.1      $ 333.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

   $ 13.5      $ 10.8      $ 34.6      $ 39.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable assets at September 30, 2011 and 2010

       $ 510.0      $ 436.8   
      

 

 

   

 

 

 

Corporate

        

Total revenues

   $ 1.9      $ 0.5      $ 10.1      $ 69.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

   $ (17.5   $ (14.0   $ (52.8   $ (38.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable assets at September 30, 2011 and 2010

       $ 517.0      $ 530.2   
      

 

 

   

 

 

 

 

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Review by Independent Registered Public Accounting Firm

The interim consolidated financial statements at September 30, 2011 and for the three-month and nine-month periods ended September 30, 2011 and 2010 have been reviewed by Ernst & Young LLP, our independent registered public accounting firm, and their report is included herein.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Arthur J. Gallagher & Co.

We have reviewed the consolidated balance sheet of Arthur J. Gallagher & Co. as of September 30, 2011, and the related consolidated statement of earnings for the three-month and nine-month periods ended September 30, 2011 and 2010, the consolidated statement of cash flows for the nine-month periods ended September 30, 2011 and 2010, and the consolidated statement of stockholders’ equity for the nine-month period ended September 30, 2011. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Arthur J. Gallagher & Co. as of December 31, 2010, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated February 7, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Ernst & Young LLP

Ernst & Young LLP

Chicago, Illinois

October 28, 2011

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis that follows relates to our financial condition and results of operations for the three-month and nine-month periods ended September 30, 2011. You should review this information in conjunction with the unaudited consolidated financial statements and the notes included in Item 1 of Part I of this quarterly report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our annual report on Form 10-K for the year ending December 31, 2010.

This discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please see “Information Regarding Forward-Looking Statements” below for a discussion of risks and uncertainties related to these statements.

Information Regarding Non-GAAP Measures and Other

In this discussion and analysis, we provide information regarding EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, adjusted EBITDAC margin excluding Heath Lambert, diluted earnings from continuing operations per share (as adjusted), organic change in commission, fee and supplemental commission revenues, adjusted revenues, expenses and earnings from continuing operations, adjusted compensation expense ratio and adjusted operating expense ratio. These measures are not in accordance with, or an alternative to, the GAAP information provided in this quarterly report on Form 10-Q. We believe that these presentations provide useful information to management, analysts and investors regarding financial and business trends relating to our results of operations and financial condition. Our industry peers provide similar supplemental non-GAAP information, although they may not use the same or comparable terminology and may not make identical adjustments. The non-GAAP information we provide should be used in addition to, but not as a substitute for, the GAAP information provided. Certain reclassifications have been made to the prior year amounts reported in this quarterly report on Form 10-Q in order to conform them to the current-year presentation.

Adjusted presentation - We believe that the adjusted presentation of our 2011 and 2010 statements of earnings, presented on the following pages, provides stockholders and other interested persons with useful information regarding certain financial metrics of the company that will assist such persons in analyzing our operating results as they develop a future earnings outlook for the company. The after tax amounts related to the adjustments were computed using the effective tax rate for each respective period.

 

   

Adjusted revenues, expenses and earnings from continuing operations - We define these measures as revenues, expenses and earnings from continuing operations, respectively, each adjusted to exclude gains realized from sales of books of business, supplemental commission timing amounts, workforce related charges, lease termination related charges, acquisition related integration costs, litigation settlements and adjustments to the change in estimated acquisition earnout payables, as applicable. Acquisition related integration costs include costs related to transactions not expected to occur on an ongoing basis in the future once we fully assimilate the applicable acquisition. These costs are typically associated with redundant workforce, extra lease space, duplicate services and external costs incurred to assimilate the acquisition on to our IT related systems.

 

   

Adjusted ratios - Compensation expense ratio and operating expense ratio are defined as adjusted compensation expense and adjusted operating expense, respectively, each divided by adjusted revenues.

Earnings Measures - We believe that the presentation of EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, adjusted EBITDAC margin excluding Heath Lambert and diluted earnings from continuing operations per share (as adjusted) provides a meaningful representation of our operating performance. We consider EBITDAC and EBITDAC margin as a way to measure financial performance on an ongoing basis. Adjusted EBITDAC, adjusted EBITDAC margin, adjusted EBITDAC margin excluding Heath Lambert and diluted earnings from continuing operations per share (as adjusted) are presented to improve the comparability of our results between periods by eliminating the impact of the items that have a high degree of variability.

 

   

EBITDAC - We define this measure as earnings from continuing operations before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables.

 

   

EBITDAC margin - We define this measure as EBITDAC divided by total revenues.

 

   

Adjusted EBITDAC - We define this measure as EBITDAC adjusted to exclude gains realized from sales of books of business, supplemental commission timing amounts, workforce related charges, lease termination related charges, acquisition related integration costs, litigation settlements and the period-over-period impact of foreign currency translation.

 

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Adjusted EBITDAC margin - We define this measure as adjusted EBITDAC divided by total revenues, as adjusted to exclude gains realized from sales of books of business and supplemental commission timing amounts.

 

   

Adjusted EBITDAC margin excluding Heath Lambert - We define this measure as adjusted EBITDAC further adjusted to exclude the EBITDAC associated with the acquired Heath Lambert operations divided by total revenues, as adjusted to exclude gains realized from sales of books of business, supplemental commission timing amounts and the revenues associated with the acquired Heath Lambert operations.

 

   

Diluted earnings from continuing operations per share (as adjusted) - We define this measure as earnings from continuing operations adjusted to exclude the after-tax impact of gains realized from sales of books of business, supplemental commission timing amounts, workforce related charges, lease termination related charges, acquisition related integration costs, litigation settlements and adjustments to the change in estimated acquisition earnout payables, divided by diluted weighted average shares outstanding.

Organic Revenues - Organic change in commission and fee revenues excludes the first twelve months of net commission and fee revenues generated from acquisitions accounted for as purchases and the net commission and fee revenues related to operations disposed of in each year presented. These commissions and fees are excluded from organic revenues in order to determine the change in organic revenues that is associated with the operations that were a part of our business in both the current and prior year. In addition, change in organic revenues excludes the impact of supplemental and contingent commission revenues and the period-over-period impact of foreign currency translation. The amounts excluded with respect to foreign currency translation are calculated by applying current year foreign exchange rates to the same prior year periods.

Reconciliation of Non-GAAP Information Presented to GAAP Measures - This quarterly report on Form 10-Q includes tabular reconciliations to the most comparable GAAP measures for adjusted revenues, expenses and earnings from continuing operations, EBITDAC, EBITDAC margin, adjusted EBITDAC, adjusted EBITDAC margin, adjusted EBITDAC margin excluding Heath Lambert, diluted earnings from continuing operations per share (as adjusted) and organic change in commission, fee and supplemental commission revenues.

Other Information - Allocations of investment income and certain expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information. We allocate the provision for income taxes to the brokerage and risk management segments as if those segments were computing income tax provisions on a separate company basis. As a result, the provision for income taxes for the corporate segment reflects the entire benefit to us of the Internal Revenue Code Section 45 (which we refer to as IRC Section 45) credits generated in 2011, because that is the segment which produced the credits. The law that provides for IRC Section 45 credits expires on December 31, 2021 for our related investments. We anticipate reporting an effective tax rate of approximately 39.0% to 41.0% in both our brokerage and risk management segments for the foreseeable future. Reported operating results by segment would change if different allocation methods were applied.

In the discussion that follows regarding our results of operations, we also provide the following ratios with respect to our operating results: pretax profit margin, compensation expense ratio and operating expense ratio. Pretax profit margin represents pretax earnings divided by total revenues. The compensation expense ratio is compensation expense divided by total revenues. The operating expense ratio is operating expense divided by total revenues.

Overview and Third Quarter 2011 Highlights

We are engaged in providing insurance brokerage and third-party property/casualty claims settlement and administration services to entities in the United States and abroad. We generate approximately 81% of our revenues domestically, with the remaining 19% derived in Australia, Bermuda, Canada, New Zealand and the U.K. (based on 2011 reported revenues). We expect that by the end of 2011, we will generate approximately 77% of our revenues domestically and approximately 23% internationally. We have three reportable operating segments: brokerage, risk management and corporate, which contributed approximately 73%, 26% and 1%, respectively, to revenues during the nine-month period ended September 30, 2011. Our major sources of operating revenues are commissions, fees and supplemental and contingent commissions from brokerage operations and fees from risk management operations. Investment income is generated from our investment portfolio, which includes invested cash and fiduciary funds, as well as clean-energy and other investments.

 

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Even though we have generated positive organic growth in the nine-month period ended September 30, 2011 in both the brokerage and risk management segments, the economic downturn has continued to provide headwinds for our business in third quarter 2011. In first quarter 2011, surveys by the Council of Insurance Agents & Brokers (which we refer to as the CIAB) indicated that commercial property/casualty rates had again declined for the 29th consecutive quarter, although the rate of decrease slowed from that reported in fourth quarter 2010. The second quarter report indicated that rates remained stable with negligible declines. The third quarter report indicated that rates were up on average 0.9% across all sized accounts, with small accounts leading the way with an average 2.1% increase. The CIAB survey did not reveal any significant new emerging trends, but did note that rates appear to be moving towards positive territory. Although competition is still stiff in the marketplace, the third quarter survey indicated that property/casualty insurance carriers appear to be tightening their underwriting standards, particularly on accounts with poor loss experience. The survey also indicated that there is some upward rate pressure on workers’ compensation and property lines of business. However, the demand for insurance continues to be flat due to the weak economy, which could offset the impact of the favorable pricing trend noted in the third quarter survey. The CIAB represents the leading domestic and international insurance brokers, who write approximately 80% of the commercial property/casualty premiums in the United States.

Despite these headwinds, our operating results improved in third quarter 2011 compared to the same period in 2010 in both our brokerage and risk management segments:

 

   

In our brokerage segment, total revenues and adjusted total revenues were up 20% and 21%, respectively, organic commission, fee and supplemental commission revenues were up 2.6%, earnings from continuing operations were up 5% and adjusted EBITDAC was up 17%. In addition, we completed eight acquisitions totaling $23.5 million of annualized revenues in third quarter 2011 and 21 acquisitions totaling $234.8 million of annualized revenues year-to-date.

 

   

In our risk management segment, total revenues and adjusted total revenues were both up 25%, organic revenues were up 12.9%, earnings from continuing operations were up 30% and adjusted EBITDAC was up 35%.

 

   

In our combined brokerage and risk management segments, total revenues and adjusted total revenues were up 21% and 22%, respectively, organic growth in commissions, fees and supplemental commissions was 5.2%, earnings from continuing operations were up 8% and adjusted EBITDAC was up 20%.

Results of Operations

Brokerage

The brokerage segment accounted for 73% of our revenue during the nine-month period ended September 30, 2011. Our brokerage segment is primarily comprised of retail and wholesale brokerage operations. Our retail brokerage operations negotiate and place property/casualty, employer-provided health and welfare insurance and retirement solutions, principally for middle-market commercial, industrial, public entity, religious and not-for-profit entities. Many of our retail brokerage customers choose to place their insurance with insurance underwriters, while others choose to use alternative vehicles such as self-insurance pools, risk retention groups or captive insurance companies. Our wholesale brokerage operations assist our brokers and other unaffiliated brokers and agents in the placement of specialized, unique and hard-to-place insurance programs.

Our primary sources of compensation for our retail brokerage services are commissions paid by insurance companies, which are usually based upon a percentage of the premium paid by insureds, and brokerage and advisory fees paid directly by our clients. For wholesale brokerage services, we generally receive a share of the commission paid to the retail broker from the insurer. Commission rates are dependent on a number of factors, including the type of insurance, the particular insurance company underwriting the policy and whether we act as a retail or wholesale broker. Advisory fees are dependent on the extent and value of services we provide. In addition, under certain circumstances, both retail brokerage and wholesale brokerage services receive supplemental and contingent commissions. A supplemental commission is a commission paid by an insurance carrier that is above the base commissions paid, is determined by the insurance carrier and is established annually in advance of the contractual period based on historical performance criteria. A contingent commission is a commission paid by an insurance carrier based on the overall profit and/or volume of the business placed with that insurance carrier during a particular calendar year and is determined after the contractual period.

 

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The following two tables provide GAAP (Reported) and non-GAAP information (see page 28), and a reconciliation to the most directly comparable GAAP measure, that management believes is helpful when comparing brokerage segment results for the three-month and nine-month periods ended September 30, 2011 to the same periods in 2010 (in millions, except per share, percentages and workforce data):

 

     Three-month period ended
September 30, 2011
    Three-month period ended
September 30, 2010
 

Statement of Earnings

   Reported     Adjustments     Adjusted     Reported     Adjustments     Adjusted  

Commissions

   $ 308.0      $ —        $ 308.0      $ 251.9      $ —        $ 251.9   

Fees

     86.8        —          86.8        74.8        —          74.8   

Supplemental commissions

     14.5        —          14.5        10.2        —          10.2   

Contingent commissions

     9.9        —          9.9        9.5        —          9.5   

Investment income and gains realized on books of business sales

     2.7        (0.8     1.9        4.9        (3.8     1.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     421.9        (0.8     421.1        351.3        (3.8     347.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Compensation

     248.5        (4.2     244.3        205.0        (1.2     203.8   

Operating

     77.7        (2.2     75.5        57.1        —          57.1   

Depreciation

     5.6        —          5.6        5.1        —          5.1   

Amortization

     19.4        —          19.4        14.4        —          14.4   

Change in estimated acquisition earnout payables

     (4.3     6.6        2.3        (3.9     5.6        1.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     346.9        0.2        347.1        277.7        4.4        282.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     75.0        (1.0     74.0        73.6        (8.2     65.4   

Provision for income taxes

     28.5        (0.4     28.1        29.4        (3.3     26.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations

   $ 46.5      $ (0.6   $ 45.9      $ 44.2      $ (4.9   $ 39.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings from continuing operations per share

   $ 0.41      $ —        $ 0.41      $ 0.42      $ (0.05   $ 0.37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Information

                                    

Change in diluted earnings from continuing operations per share

     (2 %)        11     17       (5 %) 

Growth in revenues

     20       21     8       5

Organic change in commissions and fees

     2       2     0       0

Compensation expense ratio

     59       58     58       59

Operating expense ratio

     18       18     16       16

Effective income tax rate

     38       38     40       40

Workforce at end of period (includes acquisitions)

     7,762          7,762        6,068          6,068   

Identifiable assets at September 30

   $ 3,220.2        $ 3,220.2      $ 2,493.7        $ 2,493.7   

EBITDAC

            

Earnings from continuing operations

   $ 46.5      $ (0.6   $ 45.9      $ 44.2      $ (4.9   $ 39.3   

Provision for income taxes

     28.5        (0.4     28.1        29.4        (3.3     26.1   

Depreciation

     5.6        —          5.6        5.1        —          5.1   

Amortization

     19.4        —          19.4        14.4        —          14.4   

Change in estimated acquisition earnout payables

     (4.3     6.6        2.3        (3.9     5.6        1.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAC

   $ 95.7      $ 5.6      $ 101.3      $ 89.2      $ (2.6   $ 86.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAC margin

     23       24     25       25

EBITDAC growth

     7       17     10       0

 

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     Nine-month period ended
September 30, 2011
    Nine-month period ended
September 30, 2010
 

Statement of Earnings

   Reported     Adjustments     Adjusted     Reported     Adjustments     Adjusted  

Commissions

   $ 829.7      $ —        $ 829.7      $ 713.1      $ —        $ 713.1   

Fees

     227.7        —          227.7        198.2        —          198.2   

Supplemental commissions

     42.0        —          42.0        48.7        (14.7     34.0   

Contingent commissions

     34.6        —          34.6        33.7        —          33.7   

Investment income and gains realized on books of business sales

     9.1        (4.4     4.7        9.0        (5.3     3.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,143.1        (4.4     1,138.7        1,002.7        (20.0     982.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Compensation

     697.7        (13.1     684.6        603.2        (4.8     598.4   

Operating

     204.2        (4.0     200.2        167.4        (4.1     163.3   

Depreciation

     15.7        —          15.7        14.6        —          14.6   

Amortization

     52.9        —          52.9        44.6        (2.3     42.3   

Change in estimated acquisition earnout payables

     (6.0     12.2        6.2        (2.9     7.6        4.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     964.5        (4.9     959.6        826.9        (3.6     823.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     178.6        0.5        179.1        175.8        (16.4     159.4   

Provision for income taxes

     70.3        0.2        70.5        70.7        (6.6     64.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations

   $ 108.3      $ 0.3      $ 108.6      $ 105.1      $ (9.8   $ 95.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings from continuing operations per share

   $ 0.97      $ —        $ 0.97      $ 1.00      $ (0.09   $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Information

                                    

Change in diluted earnings from continuing operations per share

     (3 %)        7     (3 %)        (7 %) 

Growth (decline) in revenues

     14       16     5       4

Organic change in commissions and fees

     2       2     (3 %)        (3 %) 

Compensation expense ratio

     61       60     60       61

Operating expense ratio

     18       18     17       17

Effective income tax rate

     39       39     40