================================================================================
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 March 31, 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 April 28, 2000, there were outstanding 269,576,779 shares of
common stock, par value $1.00 per share, of the registrant.
================================================================================
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report 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. Such statements 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 Marsh & McLennan Companies, Inc.
and subsidiaries ("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 failure
to successfully integrate 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 and lawsuits, 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
March 31,
-------------------------
2000 1999
-------- -------
Revenue $ 2,665 $ 2,351
Expense 2,053 1,832
------- -------
Operating Income 612 519
Interest Income 5 7
Interest Expense (60) (60)
------- -------
Income Before Income Taxes 557 466
Income Taxes 220 187
------- -------
Net Income $ 337 $ 279
======= =======
Basic Net Income Per Share $ 1.26 $ 1.08
======= =======
Diluted Net Income Per Share $ 1.19 $ 1.03
======= =======
Average Number of Shares
Outstanding - Basic 268 258
======= =======
Average Number of Shares
Outstanding - Diluted 280 266
======= =======
Dividends Declared $ .45 $ .40
======= =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
2000 1999
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 507 $ 428
-------- -------
Receivables-
Commissions and fees 2,188 1,949
Advanced premiums and claims 240 246
Other receivables 318 260
-------- --------
2,746 2,455
Less-allowance for doubtful accounts (135) (132)
--------- --------
Net receivables 2,611 2,323
--------- -------
Prepaid dealer commissions -
current portion 349 326
Other current assets 190 206
-------- -------
Total current assets 3,657 3,283
Intangible assets 5,480 5,542
Fixed assets, net 1,327 1,314
(net of accumulated depreciation and
amortization of $946 at March 31, 2000
and $898 at December 31, 1999)
Prepaid dealer commissions 811 760
Long-term securities 606 611
Other assets 1,538 1,511
-------- -------
$ 13,419 $ 13,021
======== =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
2000 1999
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,534 $ 1,131
Accounts payable and accrued liabilities 1,800 1,721
Accrued compensation and employee benefits 711 1,157
Accrued income taxes 290 188
Dividends payable 122 121
-------- --------
Total current liabilities 4,457 4,318
-------- --------
Fiduciary liabilities 3,869 3,333
Less - cash and investments held in
a fiduciary capacity (3,869) (3,333)
-------- --------
- -
-------- --------
Long-term debt 2,351 2,357
-------- --------
Other liabilities 2,162 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 270,144,170
shares at March 31, 2000 and 268,695,790
at December 31, 1999 270 269
Additional paid-in capital 1,492 1,411
Retained earnings 2,890 2,674
Accumulated other comprehensive income (119) (75)
-------- --------
4,533 4,279
Less - treasury shares, at cost,
1,230,792 shares at March 31, 2000 and
1,669,993 shares at December 31, 1999 (84) (109)
-------- --------
Total stockholders' equity 4,449 4,170
-------- --------
$ 13,419 $ 13,021
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Three Months Ended
March 31,
-------------------
2000 1999
--------- ------
Operating cash flows:
Net income $ 337 $ 279
Integration payments (57) (19)
Depreciation of fixed assets 56 55
Amortization of intangible assets 44 35
Provision for deferred income taxes 21 6
Other liabilities (14) 86
Prepaid dealer commissions (74) (4)
Other, net (5) 9
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (288) (126)
Other current assets 11 (10)
Accounts payable and accrued liabilities 136 29
Accrued compensation and employee benefits (446) (352)
Accrued income taxes 132 75
Effect of exchange rate changes (3) (15)
----- -----
Net cash (used for) generated from operations (150) 48
----- -----
Financing cash flows:
Net increase in commercial paper 406 98
Other borrowings 58 20
Other repayments (66) (35)
Purchase of treasury shares - (2)
Issuance of common stock 75 51
Dividends paid (120) (103)
----- -----
Net cash provided by financing activities 353 29
----- -----
Investing cash flows:
Additions to fixed assets (91) (81)
Acquisitions (5) (11)
Other, net (22) (4)
----- -----
Net cash used for investing activities (118) (96)
----- -----
Effect of exchange rate changes on cash
and cash equivalents (6) (1)
----- -----
Increase (decrease) in cash & cash equivalents 79 (20)
Cash & cash equivalents at beginning of period 428 610
----- -----
Cash & cash equivalents at end of period $ 507 $ 590
===== =====
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 month periods ended March 31, 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 $44 million and $43 million for the
three months ended March 31, 2000 and 1999, respectively.
Net uncollected premiums and claims and the related payables amounting to
$11.4 billion at March 31, 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-month periods
ended March 31, 2000 and 1999.
(In millions)
-----------
2000 1999
---- ----
Net income $ 337 $ 279
Less: Potential minority
interest associated
with the Putnam Equity
Partnership Plan (5) (4)
----- -----
Net income for diluted
earnings per share $ 332 $ 275
===== =====
Basic weighted average
common shares outstanding 268 258
Dilutive effect of stock options and stock units 12 8
----- -----
Diluted weighted average
common shares outstanding 280 266
===== =====
4. Comprehensive Income
The components of comprehensive income for the three-month periods ended
March 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Foreign currency translation adjustments $ (34) $ (73)
Unrealized securities holding gains (losses),
net of income taxes 16 (71)
Less: Reclassification adjustment for gains
included in net income,
net of income taxes (26) (5)
------ -----
Other comprehensive income (loss) (44) (149)
Net income 337 279
------ -----
Comprehensive income $ 293 $ 130
====== =====
5. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information concerning
acquisitions and interest and income taxes paid:
Three Months Ended
March 31,
------------------
(In millions of dollars) 2000 1999
- ------------------------ ---- ----
Purchase acquisitions:
Assets acquired, excluding cash $ 5 $ 11
Liabilities assumed - -
--- ----
Net cash outflow for acquisitions $ 5 $ 11
=== ====
Interest paid $ 63 $ 39
Income taxes paid $ 38 $ 84
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 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. Acquisitions
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 is being 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 has 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 $119 million and $101 million at March 31, 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 First Qtr. March 31,
(In millions of dollars) Balance in 1999 2000 2000
------- ------- ---------- ---------
Sedgwick Plan:
Termination payments to
employees $ 183 $ (93) $ (22) $ 68
Other employee-related costs 5 (2) - 3
Future rent under
noncancelable leases 48 (8) (3) 37
Leasehold termination costs 49 (10) (6) 33
------- -------- -------- -------
$ 285 $ (113) $ (31) $ 141
======= ======= ======== =======
Number of employee terminations 2,400 (1,700) (200) 500
Number of office consolidations 125 (50) (40) 35
Utilized in Balance
Initial Utilized First Qtr. March 31,
(In millions of dollars) Balance in 1999 2000 2000
------- ------- ----------- --------
MMC Plan:
Termination payments to
employees $ 194 $ (74) $ (21) $ 99
Future rent under
noncancelable leases 31 (5) (2) 24
Leasehold termination costs 16 (3) (3) 10
Other integration-related costs 25 (25) - -
------- ------- -------- -------
$ 266 $ (107) $ (26) $ 133
======= ======= ======== =======
Number of employee terminations 2,100 (1,300) (150) 650
Number of office consolidations 50 (20) (15) 15
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 March 31, 2000, the actions contemplated by this plan were in
progress and the remaining actions 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.
8. 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. Although
these two additional cases raise substantially similar issues as the three
previous actions, they also raise certain additional claims under ERISA and
state law relating to the plaintiffs' departure as J&H employees. A motion
to dismiss these additional cases is under consideration by the Court. The
parties are in the process of conducting discovery in all these 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 March 31, 2000, settlements and related costs previously
paid amount to approximately $135 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 $340
million. Sedgwick has recorded $180 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 $150 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
March 31, 2000, settlements and related costs previously paid total
approximately $35 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.
9. Common Stock
In April 1999, MMC completed the sale of 4.1 million common shares
realizing approximately $300 million of net proceeds.
10. 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, 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.
11. Reclassifications
Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
12. 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 three-month
periods ended March 31, 2000 and 1999 follow:
(In millions of dollars)
Revenue Segment
from External Operating
Customers Income
------------- --------
2000-
Risk and Insurance Services $1,294 (a) $ 324
Investment Management 851 262
Consulting 520 63
------ ------
$2,665 $ 649
====== ======
1999-
Risk and Insurance Services $1,256 (a) $ 294
Investment Management 629 200
Consulting 466 48
------ ------
$2,351 $ 542
====== ======
(a) Includes interest income on fiduciary funds ($44 million in 2000 and
$43 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 $ 649 $ 542
Corporate expense (31) (23)
Minority interest (6) -
----- -----
Operating income 612 519
Interest income 5 7
Interest expense (60) (60)
----- -----
Total income before income taxes $ 557 $ 466
===== =====
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
First Quarter Ended March 31, 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:
- --------------------------------------------------------------------------------
(In millions of dollars) 2000 1999
- --------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $1,294 $1,256
Investment Management 851 629
Consulting 520 466
------ ------
2,665 2,351
------ ------
Expense:
Compensation and Benefits 1,304 1,169
Amortization of Intangibles 44 35
Other Operating Expenses 705 628
------ ------
2,053 1,832
------ ------
Operating Income $ 612 $ 519
====== ======
Operating Income Margin 23.0% 22.1%
====== ======
- --------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, rose 13% from the first
quarter of 1999, while expenses increased 12%. 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 15% over 1999. Revenue increased 35%
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 organic revenue growth of
approximately 6% primarily due to net new business development and a gain
realized on the sale of Terra Nova Holdings Ltd. stock.
Operating expenses, excluding acquisitions and the effect of foreign exchange,
rose 12% in the first 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 Group plc ("Sedgwick") transaction.
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.
Anticipated savings in 2000 are expected to increase as the year progresses.
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. In addition, $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 7 to the consolidated financial
statements in this Form 10-Q filing. At March 31, 2000, the actions contemplated
by the integration plan were in progress and the remaining actions 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 $57 million were made in the
first quarter of 2000. Additional cash payments of approximately $140 million
are expected to be made in 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
- --------------------------------------------------------------------------------
(In millions of dollars) 2000 1999
- --------------------------------------------------------------------------------
Revenue $1,294 $1,256
Expense 970 962
------ ------
Operating Income $ 324 $ 294
====== ======
Operating Income Margin 25.0% 23.4%
====== ======
- --------------------------------------------------------------------------------
Revenue Revenue for the risk and insurance services segment grew 3% over the
first quarter of 1999. Excluding acquisitions, rationalized Sedgwick business
and the effect of foreign exchange, revenue for risk and insurance services
operations rose approximately 6% primarily reflecting the effect of net new
business development and a gain realized on the sale of Terra Nova Holdings Ltd.
stock. Each of the major operations within this segment experienced organic
revenue growth of between 4% and 7%. Overall, the rate of decline in commercial
insurance premium rates has lessened as compared with prior year.
Expense
Excluding acquisitions and the effect of foreign exchange, expenses increased
approximately 1% from the first quarter of 1999 reflecting costs associated with
a higher volume of business partially offset by the realization of net
integration savings related to the Sedgwick transaction.
Investment Management
- --------------------------------------------------------------------------------
(In millions of dollars) 2000 1999
- --------------------------------------------------------------------------------
Revenue $851 $629
Expense 589 429
---- ----
Operating Income $262 $200
==== ====
Operating Income Margin 30.8% 31.8%
==== ====
- --------------------------------------------------------------------------------
Revenue
Putnam's revenue increased 35% compared with the first quarter of 1999
reflecting strong growth in the level of average assets under management on
which management fees are earned. Assets under management aggregated $422
billion at March 31, 2000 compared with $306 billion at March 31, 1999 and $391
billion at December 31, 1999. The increase from December 31, 1999 reflects $8
billion of net new fund sales and additional institutional investments, $1
billion of reinvested dividends and a $22 billion increase resulting from both
higher securities market levels and strong portfolio performance.
Expense
Expenses grew 37% in the first quarter of 2000 over the same period of 1999
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 quarter of 2000
included goodwill amortization arising from the July 1999 investment in Thomas
H. Lee Partners ("THL").
Quarter-end and average assets under management by business line for the first
quarter are presented below:
- --------------------------------------------------------------------------------
(In billions of dollars) 2000 1999
- --------------------------------------------------------------------------------
Domestic Retail Mutual Funds $255 $192
Domestic Defined Benefit 77 60
Domestic Defined Contribution 65 40
International 25 14
---- ----
Quarter-end Assets $422 $306
==== ====
Average Assets $403 $300
==== ====
- --------------------------------------------------------------------------------
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 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. Revenues are also affected by, but 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 first quarter, assets held in equity securities represented
84% of assets under management, compared with 74% at March 31, 1999, while
investments in fixed income products represented 16%, compared with 26% at March
31, 1999.
Consulting
- --------------------------------------------------------------------------------
(In millions of dollars) 2000 1999
- --------------------------------------------------------------------------------
Revenue $520 $466
Expense 457 418
---- ----
Operating Income $ 63 $ 48
==== ====
Operating Income Margin 12.1% 10.3%
==== ====
- --------------------------------------------------------------------------------
Revenue
Excluding acquisitions and the effect of foreign exchange, consulting services
revenue increased 12% in 2000 compared with the first quarter of 1999 reflecting
an increase in the level of services provided. Retirement consulting revenue,
which represented 42% of the consulting segment, grew 13% in the first quarter
primarily due to a higher amount of services provided. In addition, revenue rose
21% in compensation consulting, 18% in economic consulting, 17% in general
management consulting and 12% in health care consulting due to a higher volume
of business in these practice lines during the first quarter of 2000.
Expense
Excluding the impact of acquisitions and the effect of foreign exchange,
expenses increased approximately 10% 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 $31 million in the first quarter of 2000 from
$23 million in 1999 due, in part, to costs associated with new corporate
initiatives including MMC Enterprise Risk. This new operating entity will focus
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 decreased to $5 million in the first
quarter of 2000 from $7 million in 1999. Interest expense of $60 million was
unchanged from the prior year as a slight decline in average outstanding debt
levels was offset by higher average interest rates.
Income Taxes
MMC's consolidated tax rate was 39.5% of income before income taxes in the first
quarter of 2000 compared with 40.0% in the first quarter of 1999. The reduction
in the tax rate primarily reflects the implementation of tax efficient
structures relating to MMC's non-US 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 $507 million on March 31, 2000, an
increase of $79 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 $57 million and $19 million were made
in the first quarter 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 $74 million cash
outflow for the three months compared with a $4 million outflow during the same
period of 1999.
During the first quarter of 2000, commercial paper borrowings increased $406
million and other borrowings increased $58 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 $91 million in the first three
months of 2000 and $81 million in the first quarter 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 Marsh & McLennan Capital's Trident II Fund,
THL and other Marsh & McLennan 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 8 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 $490 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; however, it is anticipated that approximately $175 million will
be paid in 2000. Approximately $10 million has been paid during the quarter
ended March 31, 2000. MMC may fund future payments by temporarily drawing upon
its existing credit lines.
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.
Year 2000 Issue
MMC had completed remediating its systems in preparation for the Year 2000 prior
to January 1, 2000 and experienced no meaningful system problems during the
roll-over period. MMC also continued to monitor its systems for Year 2000 errors
through the first quarter of 2000 without experiencing any meaningful problems.
For this purpose, the term "systems" includes computer equipment and software
that are commonly thought of as information technology ("IT") systems including
accounting, data processing, telephone and other miscellaneous systems, as well
as non-information technology ("non-IT") systems, such as embedded technology in
MMC's facilities and equipment. Costs associated with monitoring this issue were
insignificant in the first quarter of 2000 and all Year 2000 remediation and
monitoring efforts have now been concluded.
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, 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.
PART II, OTHER INFORMATION
--------------------------
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
MARCH 31, 2000
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12. Statement Re: Computation of Ratio of Earnings to Fixed
Charges.
27. Financial Data Schedule
(b) Reports on Form 8-K.
An amended report on Form 8-K/A dated March 27, 1999 was
filed by the registrant in order to restate certain pro
forma financial information related to the registrant's
acquisition of Sedgwick.
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 12th day of May, 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
Exhibit 12.1
Marsh & McLennan Companies, Inc. and Subsidiaries
Ratio of Earnings to Fixed Charges
(In millions, except ratios)
- --------------------------------------------------------------------------------
Qtr. Ended Years Ended December 31,
March 31, --------------------------------------------
2000 1999 (1) 1998 1997 (2) 1996 1995
- --------------------------------------------------------------------------------
Earnings
Income before income taxes $557 $1,247 $1,305 $715 $668 $650
Interest expense 60 233 140 107 61 63
Portion of rents
representative of the
interest factor 30 121 104 88 72 73
Amortization of capitalized
interest 0 1 1 1 1 1
- --------------------------------------------------------------------------------
$647 $1,602 $1,550 $911 $802 $787
- --------------------------------------------------------------------------------
Fixed Charges
Interest expense $ 60 $ 233 $ 140 $107 $ 61 $ 63
Portion of rents
representative of
the interest factor 30 121 104 88 72 73
- --------------------------------------------------------------------------------
$ 90 $ 354 $ 244 $195 $133 $136
- --------------------------------------------------------------------------------
Ratio of Earnings to
Fixed Charges 7.2 4.5 6.4 4.7 6.0 5.8
(1) For the year ended December 31, 1999, income before income taxes included
a $337 million special charge related to the acquisition and integration
of Sedgwick. Excluding that charge, the ratio of earnings to fixed
charges would have been 5.5.
(2) For the year ended December 31, 1997, income before income taxes included
a $244 million special charge related to the Johnson & Higgins
integration, London real estate and the disposal of certain assets.
Excluding that charge, the ratio of earnings to fixed charges would have
been 5.9.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Marsh & McLennan Companies, Inc. and subsidiaries March 31, 2000
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 507,000,000
<SECURITIES> 0
<RECEIVABLES> 2,746,000,000
<ALLOWANCES> 135,000,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,657,000,000
<PP&E> 2,273,000,000
<DEPRECIATION> 946,000,000
<TOTAL-ASSETS> 13,419,000,000
<CURRENT-LIABILITIES> 4,457,000,000
<BONDS> 2,351,000,000
0
0
<COMMON> 270,000,000
<OTHER-SE> 4,179,000,000
<TOTAL-LIABILITY-AND-EQUITY> 13,419,000,000
<SALES> 0
<TOTAL-REVENUES> 2,665,000,000
<CGS> 0
<TOTAL-COSTS> 2,053,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,700,000
<INTEREST-EXPENSE> 60,000,000
<INCOME-PRETAX> 557,000,000
<INCOME-TAX> 220,000,000
<INCOME-CONTINUING> 337,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 337,000,000
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.19
</TABLE>
