SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 1997
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
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 .
As of October 31, 1997, there were outstanding 169,853,912
shares of common stock, par value $1.00 per share, of the
registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements. Such
statements may include, without limitation, discussions concerning
revenue and expense growth, market and industry conditions,
interest rates, foreign exchange rates, contingencies and matters
relating to the operations and income taxes of Marsh & McLennan
Companies, Inc. and subsidiaries (the "Company"). Such forward-
looking statements are based on available current market and
industry materials, experts' reports and opinions, as well as
management's expectations concerning future events impacting the
Company. Forward-looking statements by their very nature involve
risks and uncertainties. Factors that may cause actual results to
differ materially from those contemplated by any forward-looking
statements contained herein include the impact of changes in
insurance markets and natural catastrophes in the case of the
Company's risk and insurance services business, changes in
worldwide and national securities and fixed income markets in the
case of the Company's investment management business and, with
respect to all of the Company's activities, changes in worldwide
and national economies, fluctuations in foreign currencies, changes
in interest rates and the impact of tax and other legislation and
regulation in the jurisdictions in which the Company operates.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenue $1,455.8 $ 989.0 $4,114.3 $3,096.5
Expense 1,206.9 814.8 3,326.5 2,486.5
Operating Income 248.9 174.2 787.8 610.0
Interest Income 6.0 3.7 17.0 10.7
Interest Expense (28.1) (14.5) (77.0) (45.6)
Income Before Income Taxes 226.8 163.4 727.8 575.1
Income Taxes 86.8 60.8 278.4 214.2
Net Income $ 140.0 $ 102.6 $ 449.4 $ 360.9
Net Income Per Share (A) (B) $.83 $.72 $2.80 $2.49
Average Number of
Shares Outstanding (A) 168.0 143.4 160.3 145.2
Dividends Declared $.50 $.45 $1.45 $1.25
(A) Restated to reflect the two-for-one stock split in the form of
a 100% stock distribution issued on June 27, 1997.
(B) Net income per share is computed independently for each of the
periods presented. Accordingly, the sum of the quarterly net
income per share amounts may not equal the total for the year.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents
(including interest-bearing amounts
of $375.0 at September 30, 1997 and
$261.1 at December 31, 1996) $ 434.9 $ 299.6
Receivables-
Commissions and fees 1,244.2 937.6
Advanced premiums and claims 100.4 88.5
Other receivables 122.1 103.0
1,466.7 1,129.1
Less-allowance for doubtful accounts (45.1) (43.3)
Net receivables 1,421.6 1,085.8
Other current assets 480.1 363.2
Total current assets 2,336.6 1,748.6
Long-term securities 729.5 573.3
Fixed assets, net 960.5 770.1
(net of accumulated depreciation and
amortization of $773.0 at
September 30, 1997 and $695.7
at December 31, 1996)
Intangible assets 2,171.4 545.3
Other assets 1,187.1 907.9
$7,385.1 $4,545.2
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 297.4 $ 392.4
Accrued compensation and employee benefits 450.8 391.7
Accounts payable and accrued liabilities 679.2 447.5
Accrued income taxes 212.5 259.6
Dividends payable 84.7 65.1
Total current liabilities 1,724.6 1,556.3
Fiduciary liabilities 2,514.0 1,685.9
Less - cash and investments held in
a fiduciary capacity (2,514.0) (1,685.9)
- -
Long-term debt 1,268.4 458.2
Other liabilities 1,068.6 642.1
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
400,000,000 shares, issued 172,641,153
shares at September 30, 1997 and
153,589,062 at December 31, 1996 * 172.6 76.8
Additional paid-in capital 998.1 148.1
Retained earnings 2,110.5 1,901.6
Unrealized securities holding gains,
net of income taxes 320.4 221.2
Cumulative translation adjustments (147.3) (75.7)
3,454.3 2,272.0
Less - treasury shares, at cost,
2,962,834 shares at September 30, 1997 and
8,951,142 shares at December 31, 1996 * (130.8) (383.4)
Total stockholders' equity 3,323.5 1,888.6
$7,385.1 $4,545.2
* Restated to reflect the two-for-one stock split in the form of
a 100% stock distribution issued on June 27, 1997.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
Operating cash flows:
Net income $ 449.4 $360.9
Gain on sale of business (10.0) (33.2)
Unusual charges - 33.4
Depreciation and amortization 147.3 104.0
Deferred income taxes (.7) 38.7
Other liabilities 12.1 16.2
Prepaid dealer commissions (125.0) (267.4)
Other, net 1.1 (4.7)
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (77.6) (28.8)
Other current assets (12.7) 2.2
Accrued compensation and employee benefits 47.0 56.1
Accounts payable and accrued liabilities (39.1) (41.9)
Accrued income taxes (78.7) 22.7
Effect of exchange rate changes (12.1) 4.6
Net cash generated from operations 301.0 262.8
Financing cash flows:
Net increase (decrease) in commercial paper (100.1) 96.4
Other borrowings 2,175.3 1.5
Other repayments (1,507.0) (73.5)
Purchase of treasury shares - (225.4)
Issuance of common stock 195.4 96.3
Dividends paid (221.0) (174.5)
Other, net - 2.4
Net cash provided by (used for)
financing activities 542.6 (276.8)
Investing cash flows:
Additions to fixed assets (159.1) (93.4)
Proceeds from sale of business,
net of cash sold 29.4 241.8
Acquisitions (568.3) (4.7)
Other, net (.1) (37.9)
Net cash provided by (used for)
investing activities (698.1) 105.8
Effect of exchange rate changes on cash
and cash equivalents (10.2) (2.5)
Increase in cash & cash equivalents 135.3 89.3
Cash & cash equivalents at beginning of period 299.6 328.1
Cash & cash equivalents at end of period $ 434.9 $417.4
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to
such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements
should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual
report on Form 10-K.
The financial information contained herein reflects all
adjustments which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the
three and nine month periods ended September 30, 1997 and
1996.
2. Fiduciary Cash and Liabilities
In its capacity as an insurance broker or agent, the Company
collects premiums from insureds and, after deducting its
commissions, remits the premiums to the respective insurance
underwriters; the Company also collects claims or refunds from
underwriters on behalf of insureds. Unremitted insurance
premiums and claims are held in a fiduciary capacity.
Interest income on these fiduciary funds, included in revenue,
amounted to $83.8 million and $71.0 million for the nine
months ended September 30, 1997 and 1996, respectively.
Net uncollected premiums and claims and the related payables
amounting to $4.6 billion at September 30, 1997 and $3.2
billion at December 31, 1996, are not included in the
accompanying Consolidated Balance Sheets.
3. Net Income Per Share
Net income per share is computed by dividing net income by the
average number of shares of common stock outstanding. Common
stock equivalents (relating principally to stock options),
which have been excluded from the calculation because their
dilutive effect is immaterial, are shown below for the three
and nine month periods ended September 30, 1997 and 1996.
(In millions of shares)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Primary 4.7 2.4 3.9 2.4
Fully Diluted 5.0 2.8 4.7 2.8
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", which is effective for annual and interim periods
ending after December 15, 1997. In accordance with this
statement, the Company will include the required basic and
diluted earnings per share figures on the face of the income
statement in the 1997 Annual Report. The adoption of this
accounting standard would not have had a material impact on
the reported earnings per share figures.
4. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information
concerning acquisitions:
Nine Months Ended
September 30,
(In millions of dollars) 1997 1996
Purchase acquisitions:
Assets acquired, excluding cash $2,659.2 $8.1
Liabilities assumed (1,115.3) (3.4)
Shares issued (975.2) -
Net cash outflow for acquisitions 568.7 4.7
Cash acquired in pooling of
interests acquisition (.4) -
$ 568.3 $4.7
Interest paid during the nine months ended September 30, 1997
and 1996 was $66.1 million and $45.0 million, respectively.
Income taxes paid during the nine months ended September 30,
1997 and 1996 were $338.8 million and $155.2 million,
respectively.<PAGE>
5. Income Taxes
The Company has received a Notice of Proposed Adjustment from
a field office of the Internal Revenue Service ("IRS")
challenging its tax treatment related to 12b-1 fees paid by
the Putnam Mutual Funds. The Company believes its tax
treatment of these fees is consistent with current industry
practice and applicable requirements of the Internal Revenue
Code and previously issued IRS technical advice.
Taxing authorities periodically challenge positions taken by
the Company on its tax returns. On the basis of present
information and advice received from counsel, it is the
opinion of the Company's management that any assessments
resulting from current tax audits will not have a material
adverse effect on the Company's consolidated results of
operations or its consolidated financial position.
6. Acquisitions
On March 27, 1997, the Company consummated a business
combination with Johnson & Higgins ("J&H"), a privately-held
insurance broking and employee benefit consulting firm. The
Company agreed to pay total consideration of approximately
$1.8 billion consisting of approximately $600 million in cash
and approximately 9.8 million shares (on a pre-split basis) of
the Company's common stock. Approximately $1.3 billion has
been paid and approximately $500 million will be paid in equal
annual installments on each of the next three or four
anniversaries of the closing date. The business combination
is being accounted for using the purchase method of
accounting. Accordingly, the goodwill of approximately $1.5
billion which results from the preliminary purchase price
allocation will be amortized over 40 years.
Subject to certain limited exceptions, an agreed number of
shares issued in connection with this transaction may not be
sold during the first and second years following the closing.
In addition, approximately 800,000 shares of common stock (on
a pre-split basis) were placed in escrow for a period of up to
two years in order to secure certain indemnification
obligations with respect to certain representations and
warranties.
The following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the
business combination had occurred on January 1, 1997 and 1996,
respectively.
(In millions of dollars, except per share figures)
Year-to-Date Ended September 30,
1997 1996
Revenue $4,419.3 $3,915.7
Net Income 460.2 380.1
Earnings per share 2.76 2.31
The pro forma information is based on certain estimates and
assumptions which the Company believes are reasonable. The
pro forma results are shown for illustrative purposes only and
do not purport to be indicative of the results which would
have been reported if the business combination had occurred on
the dates indicated or which may occur in the future.
In January 1997, the Company purchased Compagnie Europeenne De
Courtage d'Assurances et de Reassurances ("CECAR"), an
insurance broker in France, for approximately $200 million.
The 1996 pro forma information presented above does not
include the operating results of CECAR since the impact is not
material.
7. Claims, Lawsuits and Other Contingencies
The Company and its subsidiaries are subject to various claims
and lawsuits, consisting principally of alleged errors and
omissions in connection with the placement of insurance or
reinsurance and in rendering investment and consulting
services that arise in the ordinary course of business. Some
of these claims and lawsuits seek damages, including punitive
damages, in amounts which could, if assessed, be significant.
Among these is a group of claims relating to reinsurance
contracts placed by reinsurance broking subsidiaries of the
Company that were called into question. In general, these
contracts concern so-called run-off exposures under which
reinsurers assumed some or all remaining liability for claims
against Lloyd's syndicates or other London insurers on
policies, typically written in the past over a period of many
years and sometimes without aggregate limits. Over several
years, disputes concerning these contracts and involving
cedants, reinsurers, members of syndicates, their underwriting
and members' names agencies and, in some instances,
subsidiaries of the Company have been negotiated, litigated or
deferred. As part of the Lloyd's Reconstruction and Renewal
("R&R") Plan, most of this group of claims have been
extinguished or assigned to the reinsurance entity created to
effectuate the R&R Plan. The Company believes that its
subsidiaries performed their reinsurance broking services in
conformity with accepted and customary practices in the London
market.
Subsidiaries of the Company in the course of their consulting
and insurance activities advised certain clients in connection
with their purchase of guaranteed investment contracts and
annuities issued by Executive Life Insurance Company, which is
in rehabilitation under the supervision of the California
Insurance Department. Some of those clients as well as the
Company's subsidiaries have been or may be involved in claims
or lawsuits relating to losses in connection with those
investments. In some instances, the subsidiaries have entered
into agreements extending the time in which possible claims
may be asserted against them, or have engaged in negotiating
the deferral or resolution of claims and litigation. The
Company believes that its subsidiaries acted in a proper and
professional manner in connection with these matters.
On the basis of present information, available insurance
coverage and advice received from counsel, it is the opinion
of the Company's management that the disposition or ultimate
determination of these claims and lawsuits will not have a
material adverse effect on the Company's consolidated results
of operations or its consolidated financial position.
8. Unusual Items
In June of 1996, the Company completed the sale of The
Frizzell Group Ltd. for approximately $290 million. Results
for the second quarter of 1996 include a $33.2 million pretax
gain on the sale which was offset by non-recurring charges
totaling $33.4 million, representing a $15.5 million provision
related to the London market, a $10 million goodwill write-off
primarily attributable to a U.K. reinsurance operation and a
$7.9 million provision for various real estate matters. These
amounts are included in Expense in the Consolidated Statements
of Income.
9. Common Stock
On May 21, 1997, the Company's Board of Directors authorized
a 100% stock distribution of $1 par value common stock, which
was issued on June 27, 1997 to shareholders of record on
June 6, 1997. Upon issuance of the shares, paid-in capital
was reduced and the common stock account increased by
$86.3 million, the par value of the additional common shares
issued. All references to per share amounts have been
restated for this stock distribution.
10. Stock Benefit Plans
In September 1997, Putnam adopted the Putnam Investments, Inc.
Equity Partnership Plan ("Plan") pursuant to which Putnam is
authorized to grant or sell to certain key employees of Putnam
or its subsidiaries restricted shares of a new class of non-
voting common stock of Putnam ("Class B Common Stock") and
options to acquire the Class B Common Stock. Awards of
restricted stock and/or options may be granted under the Plan
with respect to a maximum of 12,000,000 shares of Class B
Common Stock, which represents approximately 12% of the
outstanding shares on a fully diluted basis. On September 30,
1997, Putnam made initial awards pursuant to the Plan with
respect to approximately 4,000,000 shares of Class B Common
Stock, including 2,000,000 shares of restricted stock and
2,000,000 shares subject to options. The purpose of the Plan
is to foster and promote the long-term success of Putnam and
to increase shareholder value by enabling Putnam to attract
and retain the services of an outstanding management team and
professional staff.
11. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information", both of which are
effective for fiscal years beginning after December 15, 1997.
The Company will adopt these standards in 1998.
12. Reclassifications
Certain reclassification have been made to the prior year
financial statements to conform with the current year
presentation.
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Third Quarter and Nine Months Ended September 30, 1997
General
Marsh & McLennan Companies, Inc. and Subsidiaries (the "Company")
is a professional services firm providing risk and insurance
services, investment management and consulting. More than 36,000
employees worldwide provide analysis, advice and transactional
capabilities to clients in over 100 countries.
This management's discussion and analysis of financial condition
and results of operations should be read in conjunction with the
Company's latest annual report on Form 10-K.
The consolidated results of operations follow:
Third Quarter Nine Months
(In millions of dollars) 1997 1996 1997 1996
Revenue:
Risk and Insurance
Services $ 706.9 $ 425.0 $2,017.3 $1,458.6
Investment Management 402.2 271.8 1,098.0 775.5
Consulting 346.7 292.2 999.0 862.4
1,455.8 989.0 4,114.3 3,096.5
Expense:
Compensation and Benefits 811.4 542.1 2,236.2 1,630.9
Other Operating Expenses 395.5 272.7 1,090.3 855.4
Unusual Charge, net - - - .2
1,206.9 814.8 3,326.5 2,486.5
Operating Income $ 248.9 $ 174.2 $ 787.8 $ 610.0
Operating Income Margin 17.1% 17.6% 19.1% 19.7%
The Company has reflected its business combination with Johnson &
Higgins ("J&H"), completed on March 27, 1997, in its results of
operations beginning with the second quarter.
Revenue, derived mainly from commissions and fees, rose 47% from
the third quarter of 1996 and grew by 33% for the nine months
reflecting the impact of the combination with J&H and the
acquisition of Compagnie Europeenne De Courtage d'Assurances et de
Reassurances ("CECAR") in January 1997. Excluding acquisitions and
dispositions, revenue grew approximately 15% for both the third
quarter of 1997 and for the nine months driven principally by
increased revenue in the investment management segment, which was
largely attributable to higher assets under management. Also,
there was strong demand for the Company's retirement consulting
services.
Operating expenses rose 48% in the third quarter of 1997 and 34%
for the nine months primarily due to the combination with J&H and
the CECAR acquisition. Excluding acquisitions and dispositions,
expenses grew 14% for both the third quarter and for the nine
months primarily due to costs associated with staff growth in the
investment management and consulting segments as well as higher
incentive compensation levels in the investment management segment
commensurate with strong operating performance. Service related
costs for investment management also increased resulting from the
higher level of business activity.
The translated values of revenue and expense from the Company's
international insurance services and consulting operations are
affected by fluctuations in currency exchange rates. However, the
net impact of these fluctuations on the Company's results of
operations has not been material.
Risk and Insurance Services
Third Quarter Nine Months
(In millions of dollars) 1997 1996 1997 1996
Revenue:
Insurance Broking $526.6 $293.9 $1,520.2 $ 994.8
Reinsurance Broking 81.3 62.2 225.8 204.1
Insurance Program
Management 67.4 43.7 187.5 188.7
Interest Income on
Fiduciary Funds 31.6 25.2 83.8 71.0
706.9 425.0 2,017.3 1,458.6
Expense 606.3 363.0 1,628.7 1,152.2
Operating Income $100.6 $ 62.0 $ 388.6 $ 306.4
Operating Income Margin 14.2% 14.6% 19.3% 21.0%
Insurance Broking Revenue
Insurance broking revenue, received from a predominantly corporate
clientele, increased 79% from the third quarter of 1996 and 53% for
the nine months primarily due to the J&H and CECAR transactions.
Excluding acquisitions, revenue increased approximately 2% for the
third quarter of 1997 and 3% for the nine months. Client revenue
rose primarily due to new business partially offset by declines in
commercial property and casualty premium rates.
Reinsurance Broking Revenue
Reinsurance broking revenue increased 31% in the third quarter of
1997 primarily due to the combination with J&H and higher Risk
Capital related revenue. Excluding J&H, client revenue fell
approximately 3% compared with the prior year. Revenue levels
continue to decline reflecting reduced demand for reinsurance
resulting from insurance company consolidations as well as higher
risk retentions by ceding insurance companies and the impact of
lower premium rates. For the first nine months of 1997, client
revenue, excluding J&H, decreased approximately 6% compared with
the same period of 1996.
Insurance Program Management Revenue
Insurance program management revenue increased 54% from the third
quarter of 1996 primarily due to the J&H combination and the
acquisition of Albert H. Wohlers & Co. in May 1997. Adjusting for
the impact of acquisitions and dispositions, revenue for Seabury &
Smith increased 5% from the third quarter of 1996 and 4% for the
nine months.
Interest Income on Fiduciary Funds
Interest income on fiduciary funds increased 25% in the third
quarter of 1997 and 18% for the nine months due to the combination
with J&H and the CECAR acquisition. Excluding acquisitions,
interest income on fiduciary funds decreased approximately 4% for
the third quarter of 1997 and 2% for the nine months due to
generally lower average short-term interest rates outside the
United States.
Expense
Risk and insurance services expenses increased 67% from the third
quarter of 1996 and 41% for the nine months primarily due to the
impact of acquisitions. Excluding acquisitions and dispositions,
expenses increased approximately 2% for both the third quarter of
1997 and for the nine months.
Unusual Charge, net
In June of 1996, the Company completed the sale of Frizzell for
approximately $290 million. Second quarter results for 1996
include a $33.2 million pretax gain on the sale which was offset by
non-recurring charges totaling $33.4 million, representing a
$15.5 million provision related to the London market, a $10 million
goodwill write-off largely attributable to a U.K. reinsurance
operation and a $7.9 million provision for various real estate
matters.
Investment Management
Third Quarter Nine Months
(In millions of dollars) 1997 1996 1997 1996
Revenue $402.2 $271.8 $1,098.0 $775.5
Expense 276.5 181.0 756.5 531.7
Operating Income $125.7 $ 90.8 $ 341.5 $243.8
Operating Income Margin 31.3% 33.4% 31.1% 31.4%
Revenue
Putnam's revenue increased 48% compared with the third quarter of
1996 and 42% for the nine months reflecting exceptional growth in
the level of assets under management on which management fees are
earned. The higher asset level reflects strong mutual fund sales,
and significantly higher equity market valuations compared with the
third quarter of 1996.
Expense
Putnam's expenses rose 53% in the third quarter of 1997 and 42% for
the nine months reflecting the effect of staff growth to support
new business and incentive compensation levels commensurate with
strong operating performance along with increased service related
costs, including a new service center, resulting from the higher
level of business activity.
Quarter-end and average assets under management for the third
quarter are presented below:
(In billions of dollars) 1997 1996
Mutual Funds:
Domestic Equity $114.7 $ 72.7
Taxable Bond 33.4 28.0
Tax-Free Income 16.4 16.3
International Equity 11.9 6.4
176.4 123.4
Institutional Accounts:
Fixed Income 20.5 18.6
Domestic Equity 20.4 12.9
International Equity 10.2 5.3
51.1 36.8
Quarter-end Assets $227.5 $160.2
Average Assets $218.0 $150.8
Assets under management are affected by fluctuations in domestic
and international bond and stock market prices and by the level of
investments and withdrawals for current and new fund shareholders
and clients. They are also affected by investment performance,
service to clients, the development and marketing of new investment
products, the relative attractiveness of the investment style under
prevailing market conditions and changes in the investment patterns
of clients. Revenue levels are sensitive to all of the factors
above, but in particular, to significant changes in bond and stock
market valuations.
Putnam provides individual and institutional investors with a broad
range of equity and fixed income investment products and services
designed to meet varying investment objectives and which affords
its clients the opportunity to allocate their investment resources
among various alternative investment products as changing worldwide
economic and market conditions warrant. At the end of the third
quarter, assets held in equity securities represented 69% of assets
under management, compared with 61% in 1996, while investments in
fixed income products represented 31%, compared with 39% last year.
Consulting
Third Quarter Nine Months
(In millions of dollars) 1997 1996 1997 1996
Revenue $346.7 $292.2 $999.0 $862.4
Expense 304.3 258.5 887.5 770.1
Operating Income $ 42.4 $ 33.7 $111.5 $ 92.3
Operating Income Margin 12.2% 11.5% 11.2% 10.7%
Revenue
Consulting services revenue increased 19% in 1997 compared with the
third quarter of 1996 and grew 16% for the nine months reflecting
the J&H acquisition and increased demand for services. Adjusting
for the J&H combination, revenue increased approximately 11% in
both the third quarter of 1997 and for the nine months. Retirement
consulting revenue, which represented 43% of the consulting
segment, grew 11% in the third quarter reflecting higher worldwide
demand. Revenue rose 31% in the global compensation practice, 15%
in general management consulting and was essentially the same in
health care consulting during the third quarter of 1997.
Expense
Consulting services expenses increased 18% for the third quarter of
1997 and 15% for the nine months. Excluding the J&H acquisition,
expenses increased approximately 9% for both the third quarter and
the nine months reflecting normal salary progressions and the
impact of staff growth to support new business.
Interest
Interest income earned on corporate funds increased to $6.0 million
in the third quarter of 1997 compared with $3.7 million in 1996 and
increased 59% for the nine months primarily due to the J&H
acquisition.
Interest expense increased to $28.1 million in the third quarter of
1997 from $14.5 million in 1996. This increase was primarily due
to the J&H and CECAR acquisitions, principally reflecting the
impact of increased bank borrowings used to finance those
transactions. For the nine months, interest expense increased to
$77.0 million from $45.6 million in 1996.
Income Taxes
The Company's consolidated tax rate was 38.25% of income before
income taxes in the third quarter and nine months of 1997 compared
with 37.25%, for the comparable periods of 1996. The increase in
the 1997 tax rate is largely attributable to the J&H acquisition.
The overall tax rates are higher than the U.S. statutory rates
primarily because of state and local income taxes.
Liquidity and Capital Resources
As previously mentioned, the Company completed its business
combination with Johnson & Higgins, a leading insurance broker, on
March 27, 1997 for total consideration of approximately $1.8
billion. Approximately one-third of the total consideration was
cash and two-thirds the Company's common stock. The Company also
purchased CECAR for approximately $200 million during January 1997.
The cash portion of these transactions is being financed with bank
borrowings and commercial paper.
The Company's cash and cash equivalents aggregated $434.9 million
on September 30, 1997, compared with $299.6 million on December 31,
1996. The increase primarily reflects the consolidation of cash
associated with the J&H and CECAR acquisitions. In the nine months
ended September 30, 1997, the Company generated $301.0 million of
cash from operations compared with $262.8 million in 1996.
Cash flow from operations includes the net cash requirements of
Putnam's prepaid dealer commissions, which amounted to
$125.0 million for the nine months compared with $267.4 million
during the same period of 1996.
The Company's capital expenditures, which amounted to $159.1
million in the first nine months of 1997 and $93.4 million in 1996,
were primarily related to computer equipment purchases and the
refurbishing and modernizing of office facilities.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which is effective for annual and interim periods ending
after December 15, 1997. In accordance with this statement, the
company will include the required basic and diluted earnings per
share figures on the face of the income statement in the 1997
Annual Report.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information", both of which are effective for fiscal years
beginning after December 15, 1997. The Company will adopt these
standards in 1998.
The other liabilities in the Consolidated Balance Sheets, which
totaled $1.1 billion on September 30, 1997 and $.6 billion on
December 31, 1996, include the Company's long-term pension
liability, reserves related to the Company's professional liability
insurance program, the postretirement liability for certain health
care and life insurance benefits, and that portion of the
consideration payable on the J&H transaction which will be paid in
installments over the next three to four years.
In September 1997, Putnam adopted the Putnam Investments, Inc.
Equity Partnership Plan ("Plan") pursuant to which Putnam is
authorized to grant or sell to certain key employees of Putnam or
its subsidiaries restricted shares of a new class of non-voting
common stock of Putnam ("Class B Common Stock") and options to
acquire the Class B Common Stock. Awards of restricted stock
and/or options may be granted under the Plan with respect to a
maximum of 12,000,000 shares of Class B Common Stock, which
represents approximately 12% of the outstanding shares on a fully
diluted basis. On September 30, 1997, Putnam made initial awards
pursuant to the Plan with respect to approximately 4,000,000 shares
of Class B Common Stock, including 2,000,000 shares of restricted
stock and 2,000,000 shares subject to options. The purpose of the
Plan is to foster and promote the long-term success of Putnam and
to increase shareholder value by enabling Putnam to attract and
retain the services of an outstanding management team and
professional staff.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
SEPTEMBER 30, 1997
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Company has duly caused this report to
be signed this 14th day of November, 1997 on its behalf
by the undersigned, thereunto duly authorized and in the
capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
By:/s/FRANK J. BORELLI
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Marsh & McLennan Companies, Inc. and subsidiaries September 30,
1997 financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 434,900,000
<SECURITIES> 0
<RECEIVABLES> 1,466,700,000
<ALLOWANCES> 45,100,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,336,600,000
<PP&E> 1,733,500,000
<DEPRECIATION> 773,000,000
<TOTAL-ASSETS> 7,385,100,000
<CURRENT-LIABILITIES> 1,724,600,000
<BONDS> 1,268,400,000
<COMMON> 172,600,000
0
0
<OTHER-SE> 3,150,900,000
<TOTAL-LIABILITY-AND-EQUITY> 7,385,100,000
<SALES> 0
<TOTAL-REVENUES> 4,114,300,000
<CGS> 0
<TOTAL-COSTS> 3,326,500,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,000,000
<INCOME-PRETAX> 727,800,000
<INCOME-TAX> 278,400,000
<INCOME-CONTINUING> 449,400,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 449,400,000
<EPS-PRIMARY> 2.80
<EPS-DILUTED> 2.80
</TABLE>
