filings.toolsItem 1A. Risk Factors
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Item 1A. Risk Factors
The following represents a material change in our risk factors in our Annual Report on Form 10-K for the year ended December 31, 2020.
Risks Relating to the Proposed Acquisition of Willis Towers Watson plc Treaty Reinsurance Brokerage Operations (the Acquisition).
There can be no assurance that the Acquisition will be completed or that we will realize the expected benefits of the Acquisition.
We can provide no assurance that the various conditions to closing of the Acquisition will be satisfied, including the closing of the receipt of anti-trust, regulatory or other necessary approvals, or as to the terms on which any such approvals may be given. Our ability to complete the Acquisition may also be negatively impacted by general market conditions, volatility in the capital markets and the other risks described herein.
Although we currently anticipate that the Acquisition, should it occur, will be accretive to earnings per share (on an as adjusted earnings basis for estimated reduction in revenue as a result of non-renewal of clients, departed key brokers and other employees, and expected changes in operating expenses and other items that is not pursuant to GAAP) from and after its closing, this expectation is based on assumptions about our business, the operations to be acquired and preliminary estimates, which may change materially. As a result, should the Acquisition occur, certain other amounts to be paid in connection with the Acquisition may cause dilution to our earnings per share or decrease or delay the expected accretive effect of the Acquisition and cause a decrease in the market price of our common stock. In addition, a change in the assumptions may result in a change in future earnings, which could be material.
We may encounter integration challenges and the Acquisition may not perform as expected.
We can provide no assurance that we will be able to successfully integrate the operations acquired in the Acquisition or achieve expected cost savings or synergies from such integration, that the acquired operations will perform as expected, or that we will not incur unforeseen obligations or liabilities. It is possible that our experience in running the operations acquired in the Acquisition will require us to adjust our expectations regarding the impact of the acquisition on our operating results. In particular, the amount of revenue we expect the acquired operations to lose, due to the departure of key employees, the loss of key clients within the acquired operations, or for other reasons, is based upon estimates, assumptions and projections that may turn out to be incorrect. As a result,
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actual lost revenue within the acquired operations may be greater than anticipated. In addition, integration efforts are anticipated to be complex and may divert management’s attention and resources, which could adversely affect our operating results.
The risk of non-compliance with non-U.S. laws, regulations and policies could adversely affect our results of operations, financial condition or strategic objectives.
The Acquisition will introduce us to a few new geographic markets, subjecting us to additional non-U.S. laws, regulations and policies which do not currently apply to us. These laws and regulations are complex, change frequently, have become more stringent over time, could increase our cost of doing business, and could result in conflicting legal requirements. These laws and regulations include international labor and employment laws, data privacy requirements, and local laws prohibiting corrupt payments to government officials. We will be subject to the risk that we, our employees, our agents, or our affiliated entities, or their respective officers, directors, employees and agents, may take actions determined to be in violation of any of these laws, regulations or policies, for which we might be held responsible. Actual or alleged violations could result in substantial fines, sanctions, civil or criminal penalties, debarment from government contracts, curtailment of operations in certain jurisdictions, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our results of operations, financial condition or strategic objectives.
While we believe that relations with work councils and trade unions in these countries are and will continue to be satisfactory, work stoppages could occur and we may not be successful in negotiating new collective bargaining agreements. In addition, collective bargaining negotiations may (1) result in significant increases in the cost of labor, (2) divert management’s attention away from operating the business or (3) break down and result in the disruption of operations. The occurrence of any of the preceding conditions could result in increased costs and impair our ability to operate our business.
There can be no assurance that we will be able to secure the required financing in connection with the Acquisition on acceptable terms, at favorable pricing, in a timely manner, or at all.
We expect to finance the Acquisition using cash on hand, including the $1.4 billion of net cash raised via the follow-on public offering and the $850 million of net cash borrowed via the May 12, 2021 30-year senior note issuance, short-term borrowings and/or capital market transactions and additional free cash generated before close. The completion of the Acquisition is not conditioned on our ability to obtain financing. If our ability to raise funds through the capital markets is impacted for any reason, including, but not limited to, a deterioration in our financial results, poor economic conditions, or stock market volatility, we may be unable to complete debt offerings on acceptable terms, at favorable pricing, in a timely manner, or at all. Additionally, the cost of financing the Acquisition could be more expensive than expected. If we are unable to obtain such financing as anticipated, we may be compelled to specifically perform our obligations to complete the Acquisition or could otherwise be subject to claims under the Security and Asset Purchase Agreement, each of which could have a material adverse effect on the Company.
We have made certain assumptions relating to the Acquisition which may prove to be materially inaccurate.
We have made certain assumptions relating to the Acquisition, which assumptions may be inaccurate, including as a result of the failure to realize the expected benefits of the Acquisition, higher than expected transaction and integration costs and unknown liabilities as well as general economic and business conditions that adversely affect the combined company following the Acquisition. These assumptions relate to numerous matters, including:
| • | Projections of future revenue, EBITDAC and our earnings per share, including assumptions and projections regarding revenue we expect to lose; |
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| • | Projections of future expenses and expense allocation relating to the Acquisition and the acquired assets; |
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| • | Our ability to maintain, develop and deepen relationships with employees, including key brokers, and customers associated with the acquired assets; |
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| • | Our ability to issue equity and debt or any other financing, or to generate and maintain needed cash from operations, to complete the Acquisition; |
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| • | The amount of goodwill and intangibles that will result from the Acquisition; |
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| • | Certain other purchase accounting adjustments that we may be required to record in our financial statements in connection with the Acquisition; |
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| • | Acquisition costs, including restructuring charges and transaction costs; and |
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| • | Other financial and strategic risks of the Acquisition. |
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table shows the purchases of our common stock made by or on behalf of us or any “affiliated purchaser” (as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of Gallagher for each fiscal month in the three-month period ended September 30, 2021:
| Maximum Dollar | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Value of Shares | ||||||||||||||||
| Total Number of | that May Yet be | |||||||||||||||
| Total | Shares Purchased | Purchased | ||||||||||||||
| Number of | Average | as Part of Publicly | Under the | |||||||||||||
| Shares | Price Paid | Announced Plans | Plans or | |||||||||||||
| Period | Purchased (1) | per Share (2) | or Programs (3) | Programs (3) (4) | ||||||||||||
| July 1 through July 31, 2021 | 1,759 | $ | 140.56 | — | 1,500 | |||||||||||
| August 1 through August 31, 2021 | 3,213 | 140.95 | — | 1,500 | ||||||||||||
| September 1 through September 30, 2021 | 28,236 | 149.32 | — | 1,500 | ||||||||||||
| Total | 33,208 | $ | 148.48 | — |
| (1) | Amounts in this column include shares of our common stock purchased by the trustees of trusts established under our Deferred Equity Participation Plan, including sub-plans (which we refer to as the DEPP), our Deferred Cash Participation Plan (which we refer to as the DCPP) and our Supplemental Savings and Thrift Plan (which we refer to as the Supplemental Plan), respectively. These plans are considered to be unfunded for purposes of federal tax law since the assets of these trusts are available to our creditors in the event of our financial insolvency. The DEPP is an unfunded, non-qualified deferred compensation plan that generally provides for distributions to certain of our key executives when they reach age 62 or upon or after their actual retirement. Under sub-plans of the DEPP for certain production staff, the plan generally provides for vesting and/or distributions no sooner than five years from the date of awards, although certain awards vest and/or distribute after the earlier of fifteen years or the participant reaching age 65. See Note 10 to the September 30, 2021 unaudited consolidated financial statements in this report for more information regarding the DEPP. The DCPP is an unfunded, non-qualified deferred compensation plan for certain key employees, other than executive officers, that generally provides for vesting and/or distributions no sooner than five years from the date of awards. Under the terms of the DEPP and the DCPP, we may contribute cash to the rabbi trust and instruct the trustee to acquire a specified number of shares of our common stock on the open market or in privately negotiated transactions. In the third quarter of 2021, we instructed the trustee for the DEPP and the DCPP to reinvest dividends on shares of our common stock held by these trusts and to purchase our common stock using cash that we contributed to the DCPP related to 2021 awards under the DCPP. The Supplemental Plan is an unfunded, non-qualified deferred compensation plan that allows certain highly compensated employees to defer compensation, including company match amounts, on a before-tax basis or after‑tax basis. Under the terms of the Supplemental Plan, all amounts credited to an employee’s account may be deemed invested, at the employee’s election, in a number of investment options that include various mutual funds, an annuity product and a fund representing our common stock. When an employee elects to have some or all of the amounts credited to the employee’s account under the Supplemental Plan deemed to be invested in the fund representing our common stock, the trustee of the trust for the Supplemental Plan purchases shares of our common stock in a number sufficient to ensure that the trust holds a number of shares of our common stock with a value equal to all equivalent to the amounts deemed invested in the fund representing our common stock. We want to ensure that at the time when an employee becomes entitled to a distribution under the terms of the Supplemental Plan, any amounts deemed to be invested in the fund representing our common stock are distributed in the form of shares of our common stock held by the trust. We established the trusts for the DEPP, the DCPP and the Supplemental Plan to assist us in discharging our deferred compensation obligations under these plans. All assets of these trusts, including any shares of our common stock purchased by the trustees, remain, at all times, assets of the Company, subject to the claims of our creditors in the event of our financial insolvency. The terms of the DEPP, the DCPP and the Supplemental Plan do not provide for a specified limit on the number of shares of common stock that may be purchased by the respective trustees of the trusts. |
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| (2) | The average price paid per share is calculated on a settlement basis and does not include commissions. |
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| (3) | Effective July 28, 2021, the board of directors approved a new common stock repurchase plan of up to $1.5 billion of common stock. Repurchases of common stock may be effected from time to time through open market purchases, trading plans established in accordance with the U.S. Securities and Exchange Commission’s rules, accelerated stock repurchases, private transactions or other means, depending on satisfactory market conditions, applicable legal requirements and other factors. The new repurchase plan has no expiration date and we are under no commitment or obligation to repurchase any particular amount of our common stock under his plan. At our discretion, we may suspend the new repurchase plan at any time. Previously, we had a common stock repurchase plan that the board of directors adopted on May 10, 1988 and has periodically amended since that date to authorize additional shares for repurchase (the last amendment was on January 24, 2008 and approved the repurchase of 10,000,000 shares). |
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| (4) | Dollar values stated in millions. |
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| Item 6. | Exhibits |
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Filed with this Form 10‑Q
- Such exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to item 601 of Regulation S-K.
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Signature
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Arthur J. Gallagher & Co. | ||
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| Date: October 29, 2021 | By: | /s/ Douglas K. Howell |
| Douglas K. Howell Vice President and Chief Financial Officer (principal financial officer and duly authorized officer) |
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