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 June 30, 2000
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 July 31, 2000, there were outstanding 271,332,505 shares of common
stock, par value $1.00 per share, of the registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and its
representatives may from time to time make written or verbal forward-looking
statements, including statements contained in this report and other MMC filings
with the Securities and Exchange Commission and in our reports to stockholders.
Such statements are "forward-looking" statements as that term is defined in the
Private Securities Litigation Reform Act of 1995 and may include, without
limitation, discussions concerning revenue and expense growth, cost savings and
efficiencies expected from the integration of Sedgwick Group plc, market and
industry conditions, interest rates, foreign exchange rates, contingencies and
matters relating to the operations and income taxes of MMC. 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 MMC. 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, in the case of MMC's risk and insurance services and consulting
businesses, the integration of the business of Sedgwick Group plc (including the
achievement of synergies and cost reductions) or other adverse consequences from
that transaction; in the case of MMC's risk and insurance service business,
changes in competitive conditions, a decrease in the premium rate levels in the
global property and casualty insurance markets, the impact of changes in
insurance markets and natural catastrophes; in the case of MMC's investment
management business, changes in worldwide and national equity and fixed income
markets; and with respect to all of MMC's activities, changes in general
worldwide and national economic conditions, fluctuations in foreign currencies,
actions of competitors or regulators, changes in interest rates, developments
relating to claims, lawsuits and contingencies, changes in the tax or accounting
treatment of MMC's operations and the impact of tax and other legislation and
regulation in the jurisdictions in which MMC 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 Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenue $ 2,481 $ 2,245 $ 5,146 $ 4,596
Expense 1,975 1,898 4,028 3,730
------- ------- ------- -------
Operating Income 506 347 1,118 866
Interest Income 6 4 11 11
Interest Expense (68) (55) (128) (115)
------- ------- ------- -------
Income Before Income Taxes 444 296 1,001 762
Income Taxes 168 119 388 306
------- ------- ------- -------
Net Income $ 276 $ 177 $ 613 $ 456
======= ======= ======= =======
Basic Net Income
Per Share $ 1.02 $ .68 $ 2.28 $ 1.76
======= ======= ======= =======
Diluted Net Income
Per Share $ .96 $ .63 $ 2.15 $ 1.66
======= ======= ======= =======
Average Number of Shares
Outstanding - Basic 270 263 269 260
======= ======= ======= =======
Average Number of Shares
Outstanding - Diluted 283 272 281 269
======= ======= ======= =======
Dividends Declared $ .50 $ .45 $ .95 $ .85
======= ======= ======= =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
June 30, December 31,
2000 1999
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 439 $ 428
-------- --------
Receivables-
Commissions and fees 2,282 1,949
Advanced premiums and claims 215 246
Other receivables 291 260
-------- --------
2,788 2,455
Less-allowance for doubtful accounts (132) (132)
-------- --------
Net receivables 2,656 2,323
-------- --------
Prepaid dealer commissions -
current portion 361 326
Other current assets 239 206
-------- --------
Total current assets 3,695 3,283
Intangible assets 5,540 5,542
Fixed assets, net 1,339 1,314
(net of accumulated depreciation and
amortization of $964 at June 30, 2000
and $898 at December 31, 1999)
Prepaid dealer commissions 821 760
Long-term securities 618 611
Other assets 1,623 1,511
-------- --------
$ 13,636 $ 13,021
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
June 30, December 31,
2000 1999
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,299 $ 1,131
Accounts payable and accrued liabilities 1,817 1,721
Accrued compensation and employee benefits 898 1,157
Accrued income taxes 176 188
Dividends payable 136 121
-------- --------
Total current liabilities 4,326 4,318
-------- --------
Fiduciary liabilities 3,962 3,333
Less - cash and investments held in
a fiduciary capacity (3,962) (3,333)
-------- --------
-- --
-------- --------
Long-term debt 2,349 2,357
-------- --------
Other liabilities 2,322 2,176
-------- --------
Commitments and contingencies -- --
-------- --------
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued -- --
Common stock, $1 par value, authorized
800,000,000 shares, issued 271,994,474
shares at June 30, 2000 and 268,695,790
at December 31, 1999 272 269
Additional paid-in capital 1,596 1,411
Retained earnings 3,031 2,674
Accumulated other comprehensive income (157) (75)
-------- --------
4,742 4,279
Less - treasury shares, at cost,
1,319,538 shares at June 30, 2000 and
1,669,993 shares at December 31, 1999 (103) (109)
-------- --------
Total stockholders' equity 4,639 4,170
-------- --------
$ 13,636 $ 13,021
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Six Months Ended
June 30,
------------------
2000 1999
------- -------
Operating cash flows:
Net income $ 613 $ 456
Special charge -- 84
Integration payments (103) (93)
Depreciation of fixed assets 112 109
Amortization of intangible assets 88 69
Provision for deferred income taxes 120 64
Other liabilities (66) 47
Prepaid dealer commissions (96) (6)
Other, net (9) 16
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (320) (264)
Other current assets (2) 112
Accounts payable and accrued liabilities 179 (78)
Accrued compensation and employee benefits (259) (82)
Accrued income taxes 58 (14)
Effect of exchange rate changes (3) (29)
------- -------
Net cash generated from operations 312 391
------- -------
Financing cash flows:
Net increase (decrease) in commercial paper 241 (1,359)
Other borrowings 60 1,109
Other repayments (139) (36)
Issuance of common stock 113 369
Dividends paid (241) (208)
------- -------
Net cash provided by (used for) financing activities 34 (125)
------- -------
Investing cash flows:
Additions to fixed assets (184) (164)
Acquisitions (34) (92)
Other, net (107) (13)
------- -------
Net cash used for investing activities (325) (269)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (10) (8)
------- -------
Increase (decrease) in cash & cash equivalents 11 (11)
Cash & cash equivalents at beginning of period 428 610
------- -------
Cash & cash equivalents at end of period $ 439 $ 599
======= =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have been prepared by
MMC 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 MMC 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 MMC'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 six-month periods ended June 30,
2000 and 1999.
2. Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, MMC collects premiums from
insureds and, after deducting its commissions, remits the premiums to the
respective insurance underwriters; MMC 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 $89 million and $83 million for the
six months ended June 30, 2000 and 1999, respectively.
Net uncollected premiums and claims and the related payables amounting to
$11.7 billion at June 30, 2000 and $11.5 billion at December 31, 1999, are
not included in the accompanying Consolidated Balance Sheets.
3. Per Share Data
Basic net income per share is calculated by dividing net income by the
average number of shares of MMC's common stock outstanding. Diluted net
income per share is calculated by reducing net income for the potential
minority interest associated with unvested shares granted under the Putnam
Equity Partnership Plan. This result is then divided by the average common
shares outstanding which have been adjusted for the dilutive effect of
potentially issuable common shares.
The following reconciles net income to net income for diluted earnings per
share and basic weighted average common shares outstanding to diluted
weighted average common shares outstanding for the three- and six-month
periods ended June 30, 2000 and 1999.
(In millions)
-----------
Three Months Six Months Ended
Ended June 30, June 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
Net income $ 276 $ 177 $ 613 $ 456
Less: Potential minority
interest associated
with Putnam Equity
Partnership Plan (4) (4) (9) (8)
----- ----- ----- -----
Net income for diluted
earnings per share $ 272 $ 173 $ 604 $ 448
===== ===== ===== =====
Basic weighted average
common shares outstanding 270 263 269 260
Dilutive effect of stock options
and stock units 13 9 12 9
----- ----- ----- -----
Diluted weighted average
common shares outstanding 283 272 281 269
===== ===== ===== =====
4. Comprehensive Income
The components of comprehensive income for the six-month periods ended June
30, 2000 and 1999 are as follows:
2000 1999
---- ----
Foreign currency translation adjustments $ (73) $(119)
Unrealized securities holding gains (losses),
net of income taxes 20 (82)
Less: Reclassification adjustment for gains
included in net income,
net of income taxes (29) (12)
----- -----
Other comprehensive income (loss) (82) (213)
Net income 613 456
----- -----
Comprehensive income $ 531 $ 243
===== =====
5. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information concerning
acquisitions and interest and income taxes paid:
Six Months Ended
June 30,
-------------------
(In millions of dollars) 2000 1999
------------------------ ---- ----
Purchase acquisitions:
Assets acquired, excluding cash $ 126 $ 92
Liabilities assumed (80) --
Shares issued (12) --
----- -----
Net cash outflow for acquisitions $ 34 $ 92
===== =====
Interest paid $ 127 $ 101
Income taxes paid $ 175 $ 222
6. Income Taxes
In 1997, MMC received a Notice of Proposed Adjustment from a local field
office of the Internal Revenue Service ("IRS") challenging its tax
treatment related to 12b-1 fees paid by Putnam. The notice reflected the
preliminary thinking of the IRS field office and did not constitute a
formal assertion of liability by the IRS. The notice in question asserts a
position contrary to the position enunciated in an IRS 1993 Technical
Advice Memorandum. The IRS field office withdrew the Notice of Proposed
Adjustment and the IRS continues to have the matter under consideration.
MMC 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 MMC on its tax
returns. On the basis of present information and advice received from
counsel, it is the opinion of MMC's management that any assessments
resulting from current tax audits will not have a material adverse effect
on MMC's consolidated results of operations or its consolidated financial
position.
7. Special Charge
In the second quarter of 1999, MMC recorded a special charge of $84 million
that reduced diluted net income per share by $0.19. This charge included
$71 million of merger-related costs associated with the combination with
Sedgwick and $13 million representing acquisition-related awards pertaining
to the Sedgwick transaction.
An additional special charge of $253 million was recorded in the fourth
quarter of 1999 resulting in a combined special charge of $337 million
representing $266 million of merger-related costs associated with the
combination with Sedgwick and $71 million primarily from
acquisition-related awards pertaining to the Sedgwick transaction. The $266
million of merger-related costs are discussed in detail in Note 8.
8. Acquisitions, Dispositions and Integration Costs
Acquisitions: In May 2000, MMC acquired Delta Consulting Group, an industry
leader in corporate organizational design and change management consulting.
In July 1999, MMC acquired a minority ownership interest in Thomas H. Lee
Partners, a private equity business.
In the fourth quarter of 1998, MMC consummated a business combination with
Sedgwick Group plc ("Sedgwick"), a London-based holding company of one of
the world's leading insurance and reinsurance broking and consulting
groups, for total cash consideration of approximately $2.2 billion, which
was initially funded with commercial paper borrowings. In April 1999, MMC
completed the sale of 4.1 million common shares, realizing approximately
$300 million of net proceeds. In June 1999, MMC sold $600 million of 6.625%
Senior Notes due 2004 and $400 million of 7.125% Senior Notes due 2009. The
proceeds of these sales were used to repay a portion of the commercial
paper borrowings. The business combination was accounted for using the
purchase method of accounting. Accordingly, goodwill of approximately $2.8
billion resulting from the purchase price allocation is being amortized
over 40 years. Assets acquired and liabilities assumed have been recorded
at their estimated fair values. No intangible assets, other than goodwill,
were acquired as part of the business combination with Sedgwick.
Dispositions: As part of the combination with Sedgwick, MMC acquired
several businesses that it intended to sell, including insurance
underwriting operations already in run-off and consulting businesses not
compatible with its existing operations. During 1999, MMC sold certain of
these businesses for $85 million and the after tax gains from these sales
of $16 million have been subtracted from the cost of the Sedgwick
acquisition. During the first quarter of 2000, MMC sold another of these
businesses for $33 million which approximated its carrying value. The net
liabilities of businesses to be disposed are reflected at their estimated
realizable value of $120 million and $101 million at June 30, 2000 and
December 31, 1999, respectively, and are included in accounts payable and
accrued liabilities in the Consolidated Balance Sheet.
Integration Costs: In 1999, as part of the integration of Sedgwick, MMC
adopted a plan to reduce staff and consolidate duplicative offices. The
estimated cost of this plan relating to employees and offices of Sedgwick
("Sedgwick Plan") amounted to $285 million and was included in the cost of
the acquisition. Merger-related costs for employees and offices of MMC
("MMC Plan") amounted to $266 million and were recorded as part of a 1999
special charge.
The utilization of these charges is summarized as follows:
Utilized in Balance
Initial Utilized Six Mos. June 30,
(In millions of dollars) Balance in 1999 2000 2000
--------- -------- ----------- --------
Sedgwick Plan:
Termination payments to
employees $ 183 $ (93) $ (34) $ 56
Other employee-related costs 5 (2) -- 3
Future rent under
noncancelable leases 48 (8) (7) 33
Leasehold termination costs 49 (10) (8) 31
------- ------- ------- -------
$ 285 $ (113) $ (49) $ 123
======= ======= ======= =======
Number of employee terminations 2,400 (1,700) (300) 400
Number of office consolidations 125 (50) (55) 20
Utilized in Balance
Initial Utilized Six Mos. June 30,
(In millions of dollars) Balance in 1999 2000 2000
--------- -------- ----------- --------
MMC Plan:
Termination payments to
employees $ 194 $ (74) $ (45) $ 75
Future rent under
noncancelable leases 31 (5) (3) 23
Leasehold termination costs 16 (3) (6) 7
Other integration-related costs 25 (25) -- --
------- ------- ------- -------
$ 266 $ (107) $ (54) $ 105
======= ======= ======= =======
Number of employee terminations 2,100 (1,300) (300) 500
Number of office consolidations 50 (20) (20) 10
The other integration-related costs primarily consist of consulting fees
and system conversion costs incurred in 1999 as a result of the
restructuring and merging of MMC and Sedgwick operations.
As of June 30, 2000, the actions contemplated by this plan were in progress
and are expected to be completed by the end of 2000. Some accruals,
primarily future rent under noncancelable leases (net of anticipated
sublease income), are expected to be paid over several years.
9. Claims, Lawsuits and Other Contingencies
MMC and its subsidiaries are subject to various claims, lawsuits and
proceedings consisting principally of alleged errors and omissions in
connection with the placement of insurance or reinsurance and in rendering
investment and consulting services. Some of these matters seek damages,
including punitive damages, in amounts which could, if assessed, be
significant.
Three actions were filed in the United States District Court for the
Southern District of New York by former directors of Johnson & Higgins
("J&H"), which was acquired by MMC in 1997, against twenty-four selling
shareholders of J&H, as well as J&H itself and MMC. These actions
essentially challenge the allocation of the consideration paid in
connection with MMC's combination with J&H as between the defendants who
were directors and shareholders of J&H at the time of the transaction and
the plaintiffs who were former directors and shareholders of J&H. The
former directors assert, among others, claims for breach of fiduciary duty,
federal securities law violations, breach of contract, and ERISA
violations. Plaintiffs seek compensatory and punitive damages. On October
12, 1999, the Court dismissed MMC entirely from these cases and dismissed
certain (but not all) of the claims brought against J&H. The principal
surviving claims asserted against J&H in these cases include a claim under
the federal securities laws and a claim for breach of ERISA. In December
1999, two additional cases were filed by two former directors of J&H and
have been assigned to the judge hearing the other three cases. These two
additional cases raise substantially similar issues as the three previous
actions.
Sedgwick Group plc, since prior to its acquisition, has been engaged in a
review of previously undertaken personal pension plan business as required
by United Kingdom regulators to determine whether redress should be made to
customers. As of June 30, 2000, settlements and related costs previously
paid amount to approximately $155 million of which approximately $30
million is due from or has been paid by insurers. The contingent exposure
of Sedgwick for pension redress and related costs is estimated to be $320
million. Sedgwick has recorded $160 million of reserves and recognized
approximately $160 million of insurance recoveries related to this
exposure.
Other present and former subsidiaries of MMC are engaged in a comparable
review of their personal pension plan businesses, although the extent of
their activity in this area, and consequently their financial exposure, was
proportionally much less than Sedgwick. The contingent exposure of the
present and former non-Sedgwick subsidiaries of MMC for pension redress and
related costs is estimated to be approximately $145 million. Approximately
$140 million of this amount is expected to be recovered from insurers and
accounting reserves have been provided for the remaining balance. As of
June 30, 2000, settlements and related costs previously paid total
approximately $40 million.
MMC's ultimate exposure from the United Kingdom's Personal Investment
Authority review, as presently calculated and including Sedgwick, is
subject to a number of variable factors including, among others, the
interest rate established quarterly by the U.K. Personal Investment
Authority for calculating compensation, equity markets, and the precise
scope, duration, and methodology of the review as required by that
Authority.
As part of the combination with Sedgwick, MMC acquired several insurance
underwriting businesses that were already in run-off. Sedgwick had issued
guarantees with respect to certain liabilities of these operations.
On the basis of present information, anticipated insurance coverage and
advice received from counsel, it is the opinion of MMC's management that
the disposition or ultimate determination of these claims, lawsuits,
proceedings or guarantees will not have a material adverse effect on MMC's
consolidated results of operations or its consolidated financial position.
10. Common Stock
In April 1999, MMC completed the sale of 4.1 million common shares
realizing approximately $300 million of net proceeds.
11. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard (as amended by SFAS No.
138), which establishes new accounting and reporting requirements for
derivative instruments, is effective (as amended by SFAS No. 137) for
fiscal years beginning after June 15, 2000. MMC does not expect the
adoption of this standard will have a material impact on its results of
operations or consolidated financial position.
MMC has reviewed the provisions of SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" and has determined that it is
in compliance with its provisions.
12. Reclassifications
Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
13. Segment Information
MMC, a professional services firm, is organized based on the different
services that it offers. Under this organizational structure, MMC operates
in three principal business segments: risk and insurance services,
investment management and consulting. The risk and insurance services
segment provides insurance broking, reinsurance broking and insurance and
program services for business, professional, institutional and
public-entity clients. It also provides services principally in connection
with originating, structuring and managing insurance and related industry
investments. The investment management segment primarily provides
securities investment advisory and management services and administrative
services for a group of publicly held investment companies as well as
institutional clients. The consulting segment provides advice and services
to the managements of organizations primarily in the areas of human
resources and employee benefit programs, general management consulting and
economic consulting and analysis.
MMC evaluates segment performance based on operating income, which is after
deductions for directly related expenses but before special charges. The
accounting policies of the segments are the same as those used for the
consolidated financial statements.
Selected information about MMC's operating segments for the six-month
periods ended June 30, 2000 and 1999 follow:
(In millions of dollars)
Revenue Segment
from External Operating
Customers Income
------------- ---------
2000-
Risk and Insurance Services $2,449 (a) $ 528
Investment Management 1,639 518
Consulting 1,058 149
------ ------
$5,146 $1,195
====== ======
1999-
Risk and Insurance Services $2,348 (a) $ 465
Investment Management 1,290 420
Consulting 958 120
------ ------
$4,596 $1,005
====== ======
(a) Includes interest income on fiduciary funds ($89 million in 2000 and $83
million in 1999).
A reconciliation of the total segment operating income to income before
income taxes in the consolidated financial statements is as follows:
2000 1999
------- -------
Total segment operating income $ 1,195 $ 1,005
Severance and related benefits (Note 7) -- (71)
Acquisition - related charges (Note 7) -- (13)
Corporate expense (64) (53)
Minority interest (13) (2)
------- -------
Operating income 1,118 866
Interest income 11 11
Interest expense (128) (115)
------- -------
Total income before income taxes $ 1,001 $ 762
======= =======
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Second Quarter and Six Months Ended June 30, 2000
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh, the world's leading risk and
insurance services firm; Putnam Investments, one of the largest investment
management companies in the United States; and Mercer Consulting Group, a major
global provider of consulting services. More than 50,000 employees worldwide
provide analysis, advice and transactional capabilities to clients in over 100
countries.
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which is
after deductions for directly related expenses but before special charges.
This management's discussion and analysis of financial condition and results of
operations contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Information Concerning Forward-Looking
Statements" on page one of this filing. This Form 10-Q should be read in
conjunction with MMC's latest annual report on Form 10-K.
The consolidated results of operations follow:
--------------------------------------------------------------------------------
Second Quarter Six Months
----------------- ------------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $1,155 $1,092 $2,449 $2,348
Investment Management 788 661 1,639 1,290
Consulting 538 492 1,058 958
------ ------ ------ ------
2,481 2,245 5,146 4,596
------ ------ ------ ------
Expense:
Compensation and Benefits 1,211 1,126 2,515 2,295
Amortization of Intangibles 44 34 88 69
Other Operating Expenses 720 654 1,425 1,282
Special Charge -- 84 -- 84
------ ------ ------ ------
1,975 1,898 4,028 3,730
------ ------ ------ ------
Operating Income $ 506 $ 347 $1,118 $ 866
====== ====== ====== ======
Operating Income Margin 20.4% 15.5% 21.7% 18.8%
====== ====== ====== ======
--------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, rose 11% from the second
quarter of 1999 and grew 12% for the six months. This performance was
principally driven by a higher volume of business in the investment management
and consulting segments.
Excluding the impact of acquisitions and the effect of foreign exchange, revenue
on a consolidated basis grew approximately 12% over the second quarter of 1999.
Revenue increased 19% in the investment management segment as average assets
under management increased significantly over the prior year. Consulting revenue
grew 12% for the quarter due to a higher volume of business in all practice
lines. Also, the risk and insurance services segment experienced underlying
revenue growth of approximately 8% primarily due to net new business
development. For the six months, consolidated revenue, excluding acquisitions
and the effect of foreign exchange, rose approximately 14%.
Operating expenses increased 4% from the second quarter of 1999 and grew 8% for
the six months. Excluding acquisitions, the effect of foreign exchange and the
impact of the 1999 special charge relating to costs resulting from the Sedgwick
Group plc ("Sedgwick") integration process, expenses rose 10% in the second
quarter of 2000 primarily due to costs associated with staff growth and higher
incentive compensation levels in the investment management and consulting
segments commensurate with strong operating performance. Partially offsetting
these increases was the realization of net integration savings related to the
Sedgwick transaction. For the six months, expenses rose approximately 11%,
excluding acquisitions, the effect of foreign exchange and the impact of the
1999 special charge.
Management believes the net annual savings associated with the Sedgwick
integration should approach $160 million when it is completed. Of the $160
million of net savings, approximately $30 million was realized in 1999.
Approximately two-thirds of the remaining estimated annual savings is expected
to be realized in 2000 with the remainder expected to be realized in 2001.
Through the first six months of 2000, MMC is on pace to achieve the expected
level of savings.
MMC recorded a special charge of $337 million in 1999, which included $266
million of Sedgwick merger-related costs associated with employees and offices
of MMC. Of the total charge, $84 million was recorded in the second quarter and
the balance was recorded in the fourth quarter. In addition to the special
charge, $285 million of costs for planned reductions of employees and offices of
Sedgwick were included in the cost of the acquisition. The utilization of the
charges is summarized in Note 8 to the consolidated financial statements in this
Form 10-Q filing. At June 30, 2000, the actions contemplated by the integration
plan were in progress and are expected to be completed by the end of 2000.
Of the combined merger-related costs totaling $551 million, cash payments of
approximately $220 million were made in 1999 and $103 million were made in the
first six months of 2000. Additional cash payments of approximately $100 million
are expected to be made over the remainder of 2000. Some accruals, primarily
representing future rent under noncancellable leases (net of anticipated
sublease income), are expected to be paid out over several years. Cash outlays
are expected to be funded through operating cash flows.
Risk and Insurance Services
--------------------------------------------------------------------------------
Second Quarter Six Months
------------------ -------------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue $1,155 $1,092 $2,449 $2,348
Expense (a) 951 921 1,921 1,883
------ ------ ------ ------
Operating Income $ 204 $ 171 $ 528 $ 465
====== ====== ====== ======
Operating Income Margin 17.7% 15.6% 21.6% 19.8%
====== ====== ====== ======
--------------------------------------------------------------------------------
(a) Excluding 1999 special charge.
Revenue
Revenue for the risk and insurance services segment grew 6% over the second
quarter of 1999. Excluding acquisitions, rationalized Sedgwick business and the
effect of foreign exchange, revenue for risk and insurance services operations
rose approximately 8% primarily reflecting the effect of net new business
development and higher fiduciary interest income partially offset by lower
revenue from MMC Capital. Each of the major operations within this segment
experienced underlying revenue growth of at least 7%. Excluding acquisitions,
rationalized Sedgwick business and the effect of foreign exchange, risk and
insurance services revenue rose approximately 7% during the first half of 2000.
Trends within the underlying marketplace indicate that U.S. commercial insurance
premium rates began to increase during the second quarter.
Expense
Risk and insurance services expenses increased 3% for the second quarter and 2%
for the first six months of 2000. Excluding acquisitions and the effect of
foreign exchange, expenses increased approximately 4% from the second quarter of
1999 primarily reflecting costs associated with a higher volume of business,
partially offset by the realization of net integration savings related to the
Sedgwick transaction. For the six months, expenses for risk and insurance
services, excluding acquisitions and the effect of foreign exchange, rose
approximately 2%.
Investment Management
--------------------------------------------------------------------------------
Second Quarter Six Months
------------------ -------------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue $ 788 $ 661 $1,639 $1,290
Expense 532 441 1,121 870
------ ------ ------ ------
Operating Income $ 256 $ 220 $ 518 $ 420
====== ====== ====== ======
Operating Income Margin 32.5% 33.2% 31.6% 32.5%
====== ====== ====== ======
--------------------------------------------------------------------------------
Revenue
Putnam's revenue increased 19% compared with the second quarter of 1999 and 27%
for the six months, reflecting strong growth in the level of average assets
under management on which management fees are earned. Assets under management
aggregated $407 billion at June 30, 2000 compared with $325 billion at June 30,
1999 and $422 billion at March 31, 2000. The decrease from the end of the first
quarter reflects $8 billion of net new fund sales and additional institutional
investments plus $1 billion of reinvested dividends, offset by a $24 billion
decrease resulting from a decrease in equity market levels during the quarter.
Expense
Expenses grew 21% in the second quarter of 2000 and 29% for the six months,
primarily reflecting higher incentive compensation commensurate with strong
operating performance and the increased amortization of deferred commissions
from increased sales and redemptions. In addition, the first half of 2000
included goodwill amortization arising from the July 1999 investment in Thomas
H. Lee Partners ("THL").
Quarter-end assets under management by business line and average assets in total
for the second quarter are presented below:
--------------------------------------------------------------------------------
(In billions of dollars) 2000 1999
--------------------------------------------------------------------------------
Domestic Retail Mutual Funds $245 $204
Domestic Defined Benefit 70 58
Domestic Defined Contribution 62 44
International 30 19
---- ----
Quarter-end Assets $407 $325
==== ====
Average Assets $394 $315
==== ====
--------------------------------------------------------------------------------
Assets under management and revenue levels are particularly 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. In recent years, U.S. equity markets have generally risen
substantially, in many cases to historical highs. This increase has contributed
significantly to the assets under management and, accordingly, to increases in
revenue. A substantial slowdown in the rise of markets or an actual decrease in
general market levels will reduce revenue growth or, in some circumstances,
could lead to a decline in revenue. Items affecting revenue include, but are not
limited to, 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 second quarter, assets held in equity securities represented
84% of assets under management, compared with 77% in 1999, while investments in
fixed income products represented 16%, compared with 23% last year.
Consulting
--------------------------------------------------------------------------------
Second Quarter Six Months
------------------ ------------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue $ 538 $ 492 $1,058 $ 958
Expense (a) 452 420 909 838
------ ------ ------ ------
Operating Income $ 86 $ 72 $ 149 $ 120
====== ====== ====== ======
Operating Income Margin 15.9% 14.7% 14.0 % 12.5%
====== ====== ====== ======
--------------------------------------------------------------------------------
(a) Excluding 1999 special charge.
Revenue
Consulting revenue increased 9% in 2000 compared with the second quarter of 1999
reflecting an increase in the level of services provided. Excluding the impact
of acquisitions and the effect of foreign exchange, consulting revenue increased
approximately 12% in the second quarter of 2000. Retirement consulting revenue,
which represented 41% of the consulting segment, grew 11% in the second quarter
primarily due to a higher amount of services provided. In addition, revenue rose
19% in general management consulting, 14% in compensation consulting, 9% in
economic consulting and 7% in health care consulting due to a higher volume of
business as well as rate increases in these practice lines during the second
quarter of 2000. Excluding the impact of acquisitions and the effect of foreign
exchange, revenue increased approximately 12% for the six months.
Expense
Consulting expenses increased 8% for the second quarter and six months of 2000.
Excluding the impact of acquisitions and the effect of foreign exchange,
expenses increased approximately 10% for the second quarter and approximately
10% for the six months reflecting the effect of staff growth to support new
business and higher incentive compensation commensurate with strong operating
performance. These increases were partially offset by realized consolidation
savings related to the Sedgwick transaction.
Corporate Expenses
Corporate expenses increased to $33 million in the second quarter of 2000 from
$30 million in 1999 and to $64 million for the first half of the year from $53
million for the same period in 1999. The increase was due, in part, to costs
associated with new corporate initiatives including MMC Enterprise Risk, as well
as nonrecurring consulting fees related to the integration of Sedgwick. MMC
Enterprise Risk focuses on MMC's growing activities in responding on an
integrated basis to the various risks faced by corporations.
Interest
Interest income earned on corporate funds was $6 million in the second quarter
of 2000 compared with $4 million in 1999. For the six months, interest income of
$11 million was unchanged from the prior year. Interest expense increased to $68
million in the second quarter of 2000 from $55 million in 1999 and increased to
$128 million for the six months ended June 30, 2000 from $115 million in 1999.
The increase in interest expense for the quarter and six months is primarily due
to higher average interest rates in 2000 compared with 1999.
Income Taxes
MMC's consolidated tax rate was 37.8% of income before income taxes in the
second quarter and 38.8% for the first half of 2000, compared with 40% in the
second quarter and first half of 1999. The reduction in the tax rate primarily
reflects the implementation of tax efficient structures relating to MMC's
non-U.S. operations. The overall tax rates are higher than the U.S. Federal
statutory rate primarily because of provisions for state and local income taxes.
Liquidity and Capital Resources
MMC's cash and cash equivalents aggregated $439 million on June 30, 2000, an
increase of $11 million from the end of 1999.
Included in the cash flows from operations are the net cash requirements related
to integration payments. Cash outlays of $103 million and $93 million were made
in the first half of 2000 and 1999, respectively.
Cash flows from operations also include the net cash flows associated with
Putnam's prepaid dealer commissions, which amounted to a $96 million cash
outflow for the six months compared with a $6 million outflow during the same
period of 1999.
During the first half of 2000, net commercial paper borrowings increased $241
million and other borrowings increased $60 million.
From time to time, MMC may repurchase shares of its common stock principally to
fund the needs of its employee benefit and other plans.
MMC's capital expenditures, which amounted to $184 million in the first six
months of 2000 and $164 million during the same period last year primarily
relate to computer equipment purchases and the refurbishing and modernizing of
office facilities.
MMC has committed to potential future investments of approximately $700 million
in connection with the formation of THL, MMC Capital's Trident II Fund, and
other MMC Capital investments. MMC expects to fund these commitments, in part,
with sales proceeds from existing investments. These commitments will be funded
over the next several years if certain investment levels and performance targets
are met.
As further explained in Note 9 to the consolidated financial statements, the
disclosure and advice given to clients regarding certain personal pension
transactions by certain present and former subsidiaries in the United Kingdom
are under review by the U.K. Personal Investment Authority. The contingent
exposure for pension redress and related cost is presently estimated to be
approximately $465 million of which $300 million is expected to be recovered
from insurers. Approximately two-thirds of the contingent exposure is associated
with the Sedgwick acquisition while the balance is associated with other current
and former subsidiaries of MMC. Such amounts in excess of anticipated insurance
recoveries have been provided for in the accompanying financial statements. The
timing of payments relating to the pension review process cannot be predicted
with certainty. Approximately $35 million was paid during the six months ended
June 30, 2000 and it is anticipated that approximately $100 million will be paid
in the second half of 2000.
Market Risk
Certain of MMC's revenues, expenses, assets and liabilities are exposed to the
impact of interest rate changes and fluctuations in foreign currency exchange
rates. MMC manages its net exposure to interest rate changes by utilizing a
mixture of variable and fixed rate borrowings to finance MMC's asset base.
Interest rate swaps are used on a very limited basis and are with counterparties
of high creditworthiness. MMC does not enter into foreign currency or interest
rate transactions for trading or other speculative purposes.
The translated values of revenue and expense from MMC's international risk and
insurance services and consulting operations are subject to fluctuations due to
changes in currency exchange rates. However, the net impact of these
fluctuations on MMC's results of operations or cash flows has not been material.
Other
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard (as amended by SFAS 138),
which establishes new accounting and reporting requirements for derivative
instruments, is effective (as amended by SFAS No. 137) for fiscal years
beginning after June 15, 2000. MMC does not expect the adoption of this standard
will have a material impact on its results of operations or consolidated
financial condition.
MMC has reviewed the provisions of SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" and has determined that it is in
compliance with its provisions.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
JUNE 30, 2000
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3. MMC's bylaws.
10. Consulting Agreement between A.J.C. Smith and MMC effective
as of June 1, 2000.
12. Statement Re: Computation of Ratio of Earnings to Fixed
Charges.
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, MMC has
duly caused this report to be signed this 14th day of August, 2000 on its behalf
by the undersigned, thereunto duly authorized and in the capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Sandra S. Wijnberg
-----------------------------------
Senior Vice President and
Chief Financial Officer
