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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 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 October 31, 2000, there were outstanding 275,085,721 shares of
common stock, par value $1.00 per share, of the registrant.
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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, movements in 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 Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
------ ------ ------- ------
Revenue $ 2,535 $ 2,227 $ 7,681 $ 6,823
Expense 2,019 1,802 6,047 5,532
------- ------- ------- -------
Operating Income 516 425 1,634 1,291
Interest Income 7 6 18 17
Interest Expense (63) (59) (191) (174)
------- ------- ------- -------
Income Before Income Taxes 460 372 1,461 1,134
Income Taxes 178 149 566 455
------- ------- ------- -------
Net Income $ 282 $ 223 $ 895 $ 679
======= ======= ======= =======
Basic Net Income
Per Share $ 1.04 $ .84 $ 3.32 $ 2.60
======= ======= ======= =======
Diluted Net Income
Per Share $ .97 $ .81 $ 3.12 $ 2.47
======= ======= ======= =======
Average Number of Shares
Outstanding - Basic 272 264 270 262
======= ======= ======= =======
Average Number of Shares
Outstanding - Diluted 286 273 283 270
======= ======= ======= =======
Dividends Declared $ .50 $ .45 $ 1.45 $ 1.30
======= ======= ======= =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
2000 1999
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 341 $ 428
-------- --------
Receivables-
Commissions and fees 2,370 1,949
Advanced premiums and claims 274 246
Other receivables 326 260
-------- --------
2,970 2,455
Less-allowance for doubtful accounts (127) (132)
-------- --------
Net receivables 2,843 2,323
-------- --------
Prepaid dealer commissions -
current portion 369 326
Other current assets 134 206
-------- --------
Total current assets 3,687 3,283
Intangible assets 5,564 5,542
Fixed assets, net 1,325 1,314
(net of accumulated depreciation and
amortization of $982 at September 30, 2000
and $898 at December 31, 1999)
Prepaid dealer commissions 806 760
Long-term securities 694 611
Other assets 1,540 1,511
-------- --------
$ 13,616 $ 13,021
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 780 $ 1,131
Accounts payable and accrued liabilities 1,830 1,721
Accrued compensation and employee benefits 1,120 1,157
Accrued income taxes 193 188
Dividends payable 139 121
-------- --------
Total current liabilities 4,062 4,318
-------- --------
Fiduciary liabilities 3,911 3,333
Less - cash and investments held in
a fiduciary capacity (3,911) (3,333)
-------- --------
- -
-------- --------
Long-term debt 2,350 2,357
-------- --------
Other liabilities 2,201 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 275,622,036
shares at September 30, 2000 and
268,695,790 at December 31, 1999 276 269
Additional paid-in capital 1,797 1,411
Retained earnings 3,175 2,674
Accumulated other comprehensive income (162) (75)
-------- --------
5,086 4,279
Less - treasury shares, at cost,
1,064,607 shares at September 30, 2000 and
1,669,993 shares at December 31, 1999 (83) (109)
-------- --------
Total stockholders' equity 5,003 4,170
-------- --------
$ 13,616 $ 13,021
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MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
-------------------
2000 1999
----- -----
Operating cash flows:
Net income $ 895 $ 679
Special charge - 84
Integration payments (136) (150)
Depreciation of fixed assets 169 165
Amortization of intangible assets 134 112
Provision for deferred income taxes 217 114
Other liabilities (62) 21
Prepaid dealer commissions (89) 11
Other, net (92) 45
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (508) (244)
Other current assets 1 135
Accounts payable and accrued liabilities 212 (229)
Accrued compensation and employee benefits (37) 78
Accrued income taxes 92 37
Effect of exchange rate changes (10) (24)
------- -------
Net cash generated from operations 786 834
------- -------
Financing cash flows:
Net decrease in commercial paper (254) (868)
Other borrowings 67 1,137
Other repayments (168) (523)
Purchase of treasury shares - (13)
Issuance of common stock 304 482
Dividends paid (376) (327)
------- -------
Net cash used for financing activities (427) (112)
------- -------
Investing cash flows:
Additions to fixed assets (275) (276)
Acquisitions (83) (357)
Other, net (67) (56)
------- -------
Net cash used for investing activities (425) (689)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (21) (2)
------- -------
(Decrease) increase in cash & cash equivalents (87) 31
Cash & cash equivalents at beginning of period 428 610
------- -------
Cash & cash equivalents at end of period $ 341 $ 641
======= =======
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 nine-month periods ended September
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 $142 million and $129 million for
the nine months ended September 30, 2000 and 1999, respectively.
Net uncollected premiums and claims and the related payables amounting to
$11.4 billion at September 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 nine-month
periods ended September 30, 2000 and 1999.
(In millions)
------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- -----------------
2000 1999 2000 1999
------- ------ ------ ------
Net income $ 282 $ 223 $ 895 $ 679
Less: Potential minority
interest associated
with Putnam Equity
Partnership Plan (5) (4) (14) (12)
----- ----- ----- -----
Net income for diluted
earnings per share $ 277 $ 219 $ 881 $ 667
===== ===== ===== =====
Basic weighted average
common shares outstanding 272 264 270 262
Dilutive effect of stock options
and stock units 14 9 13 8
----- ----- ----- -----
Diluted weighted average
common shares outstanding 286 273 283 270
===== ===== ===== =====
4. Comprehensive Income
The components of comprehensive income for the nine-month periods ended
September 30, 2000 and 1999 are as follows:
2000 1999
---- ----
Foreign currency translation adjustments $(142) $ (76)
Unrealized securities holding gains (losses),
net of income taxes 109 (139)
Less: Reclassification adjustment for gains
included in net income,
net of income taxes (54) (21)
----- -----
Other comprehensive income (loss) (87) (236)
Net income 895 679
----- -----
Comprehensive income $ 808 $ 443
===== =====
5. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information concerning
acquisitions and interest and income taxes paid:
Nine Months Ended
September 30,
-------------------
(In millions of dollars) 2000 1999
---- ----
Purchase acquisitions:
Assets acquired, excluding cash $ 176 $ 357
Liabilities assumed (81) -
Shares issued (12)
----- -----
Net cash outflow for acquisitions $ 83 $ 357
===== =====
Interest paid $ 172 $ 144
===== =====
Income taxes paid $ 206 $ 274
===== =====
6. Income Taxes
The balance sheet classification of deferred income tax assets and
liabilities is as follows:
September 30, December 31,
(In millions of dollars) 2000 1999
------------ ------------
Current assets $ - $ 71
Other assets 361 518
Accrued income taxes (13) -
The utilization of deferred income tax assets primarily relates to payments
of Sedgwick integration costs discussed in Note 8.
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. This challenge has been
resolved upon the publication of Revenue Procedure 2000-38. In this
Procedure, the IRS announced it will accept a mutual fund manager's current
12b-1 tax treatment through 2000 provided that mutual fund manager elects
to adjust its tax treatment prospectively beginning in 2001 to any of the
proscribed methods the IRS identified in this Procedure, all of which will
require amortization of distributor's fees rather than the current
deduction of those fees. Putnam intends to make such an affirmative
election and such election will resolve the current issue with the IRS.
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 September 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 Nine Mos. Sept. 30,
(In millions of dollars) Balance in 1999 2000 2000
------- ------- -------- --------
Sedgwick Plan:
Termination payments to
employees $ 183 $ (93) $ (47) $ 43
Other employee-related costs 5 (2) - 3
Future rent under
noncancelable leases 48 (8) (9) 31
Leasehold termination costs 49 (10) (10) 29
------- ------- ------- --------
$ 285 $ (113) $ (66) $ 106
======= ======= ======= ========
Number of employee terminations 2,400 (1,700) (400) 300
Number of office consolidations 125 (50) (65) 10
Utilized in Balance
Initial Utilized Nine Mos. Sept. 30,
(In millions of dollars) Balance in 1999 2000 2000
------- ------- --------- ---------
MMC Plan:
Termination payments to
employees $ 194 $ (74) $ (61) $ 59
Future rent under
noncancelable leases 31 (5) (3) 23
Leasehold termination costs 16 (3) (6) 7
Other integration-related costs 25 (25) - -
------- ------- ------- --------
$ 266 $ (107) $ (70) $ 89
======= ======= ======= ========
Number of employee terminations 2,100 (1,300) (400) 400
Number of office consolidations 50 (20) (25) 5
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 September 30, 2000, the actions contemplated by this plan were
substantially complete and are expected to be finalized 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 challenged 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. 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 raised substantially similar issues as the three
previous actions. In October 2000, the respective plaintiffs and defendants
agreed to settle these actions and discontinue the litigations.
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 September 30, 2000, settlements and related costs
previously paid amount to approximately $180 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 $295 million. Sedgwick has recorded $135 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 $140 million, essentially
all of which is expected to be recovered from insurers. As of September 30,
2000, net settlements and related costs previously paid total approximately
$45 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. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." In June 2000, the FASB
issued SFAS No. 138, which amends certain provisions of SFAS 133. MMC has
appointed a team to implement SFAS 133 on a global basis. This team has
been implementing a SFAS 133 compliant risk management information system,
inventorying embedded derivatives and addressing various other SFAS 133
related issues. MMC will adopt SFAS 133 and the corresponding amendments
under SFAS 138 on January 1, 2001. MMC's SFAS 133 team is currently
determining the impact of SFAS 133 on the consolidated results of
operations and financial position. This Statement should have no impact on
consolidated cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" which MMC will implement in
the fourth quarter of 2000. MMC does not expect the implementation of SAB
101 to 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 nine-month
periods ended September 30, 2000 and 1999 follow:
(In millions of dollars)
Revenue Segment
from External Operating
Customers Income
------------- ---------
2000-
Risk and Insurance Services $3,581 (a) $ 728
Investment Management 2,502 793
Consulting 1,598 233
------ ------
$7,681 $1,754
====== ======
1999-
Risk and Insurance Services $3,403 (a) $ 630
Investment Management 1,963 630
Consulting 1,457 192
------ ------
$6,823 $1,452
====== ======
(a) Includes interest income on fiduciary funds ($142 million in 2000 and $129
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 $ 1,754 $ 1,452
Severance and related benefits (Note 7) -- (71)
Acquisition - related charges (Note 7) -- (13)
Corporate expense (98) (73)
Minority interest (22) (4)
------- -------
Operating income 1,634 1,291
Interest income 18 17
Interest expense (191) (174)
------- -------
Total income before income taxes $ 1,461 $ 1,134
======= =======
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Third Quarter and Nine Months Ended September 30, 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 55,000 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 and discussion and analysis thereof
follow:
--------------------------------------------------------------------------------
Third Quarter Nine Months
---------------- ---------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $1,132 $1,055 $3,581 $3,403
Investment Management 863 673 2,502 1,963
Consulting 540 499 1,598 1,457
------ ------ ------ ------
2,535 2,227 7,681 6,823
------ ------ ------ ------
Expense:
Compensation and Benefits 1,267 1,118 3,782 3,413
Amortization of Intangibles 46 43 134 112
Other Operating Expenses 706 641 2,131 1,923
Special Charge - - - 84
------ ------ ------ ------
2,019 1,802 6,047 5,532
------ ------ ------ ------
Operating Income $ 516 $ 425 $1,634 $1,291
====== ====== ====== ======
Operating Income Margin 20.4 % 19.1% 21.3 % 18.9%
====== ====== ====== ======
--------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, rose 14% from the third
quarter of 1999 and grew 13% for the nine months. This performance was driven by
a higher volume of business in all operating segments.
Excluding the impact of acquisitions and the effect of foreign exchange, revenue
on a consolidated basis grew approximately 15% over the third quarter of 1999.
Revenue increased 28% in the investment management segment primarily due to
significant growth in average assets under management over the prior year.
Consulting revenue grew 10% 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 9% primarily due to net new business
development, higher fiduciary interest income and an increase in net investment
gains realized by MMC Capital. For the nine months, consolidated revenue,
excluding acquisitions and the effect of foreign exchange, rose approximately
14%.
Operating expenses increased 12% from the third quarter of 1999 and grew 9% for
the nine months. Excluding acquisitions and the effect of foreign exchange,
expenses rose approximately 14% in the third quarter of 2000 primarily due to
costs associated with staff growth and higher incentive compensation levels in
all operating 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. For the nine months,
expenses rose approximately 12%, 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 nine 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 September 30, 2000, the actions contemplated by the
integration plan were substantially complete and are expected to be finalized 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 $136 million were made in the
first nine months of 2000. Additional cash payments of approximately $70 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
--------------------------------------------------------------------------------
Third Quarter Nine Months
------------------- -------------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue $1,132 $1,055 $3,581 $3,403
Expense 932 890 2,853 2,773(a)
------ ------ ------ ------
Operating Income $ 200 $ 165 $ 728 $ 630
====== ====== ====== ======
Operating Income Margin 17.7% 15.6% 20.3% 18.5%
====== ====== ====== ======
--------------------------------------------------------------------------------
(a) Excluding 1999 special charge.
Revenue
Revenue for the risk and insurance services segment grew 7% over the third
quarter of 1999. Excluding acquisitions and the effect of foreign exchange,
revenue for risk and insurance services operations rose approximately 9%
primarily reflecting the effect of net new business development, higher
fiduciary interest income and an increase in net investment gains realized by
MMC Capital. Trends within the underlying marketplace indicate that U.S.
commercial insurance premium rates began to increase during the second quarter
of 2000, and were approximately 10% higher in the third quarter of 2000 compared
with last year. Excluding acquisitions, rationalized Sedgwick business and the
effect of foreign exchange, risk and insurance services revenue rose
approximately 7% during the first nine months of 2000.
Expense
Risk and insurance services expenses increased 5% for the third quarter and 3%
for the first nine months of 2000 compared with the same periods of 1999.
Excluding acquisitions and the effect of foreign exchange, expenses increased
approximately 7% from the third 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 nine
months, expenses for risk and insurance services, excluding acquisitions and the
effect of foreign exchange, rose approximately 4%. Through the first nine months
of 2000 approximately $60 million of incremental net integration savings related
to the Sedgwick transaction has been realized.
Investment Management
--------------------------------------------------------------------------------
Third Quarter Nine Months
------------------- -------------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue $ 863 $ 673 $2,502 $1,963
Expense 588 463 1,709 1,333
------ ------ ------ ------
Operating Income $ 275 $ 210 $ 793 $ 630
====== ====== ====== ======
Operating Income Margin 31.9% 31.2% 31.7% 32.1%
====== ====== ====== ======
--------------------------------------------------------------------------------
Revenue
Putnam's revenue increased 28% compared with the third quarter of 1999 and 27%
for the nine months, reflecting strong growth in the level of average assets
under management on which management fees are earned, along with the recognition
of equity earnings associated with the Thomas H. Lee Partners ("THL")
investment. Assets under management aggregated $406 billion at September 30,
2000 compared with $318 billion at September 30, 1999 and $407 billion at June
30, 2000. The slight decline in assets under management from the end of the
second quarter resulted from $5 billion of net new fund sales and net additional
institutional investments, including reinvested dividends, offset by a $6
billion decrease resulting from a reduction in equity market levels during the
quarter.
Expense
Expenses grew 27% in the third quarter of 2000 compared with 1999 and 28% for
the nine months, primarily reflecting higher incentive compensation commensurate
with strong operating performance and the increased amortization of deferred
commissions from higher sales and redemptions. Goodwill amortization arising
from the July 1999 investment in THL is included in the nine months results of
2000, compared with only three months included in the comparable prior year
period.
Quarter-end assets under management by business line and average assets under
management in total for the third quarter are presented below:
--------------------------------------------------------------------------------
(In billions of dollars) 2000 1999
--------------------------------------------------------------------------------
Retail Mutual Funds $246 $197
Defined Benefit 67 57
Defined Contribution 63 44
International 30 20
---- ----
Quarter-end $406 $318
==== ====
Average $412 $323
==== ====
--------------------------------------------------------------------------------
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, changes in the investment
patterns of clients and equity earnings associated with the THL investment.
Revenue levels are sensitive to all of the factors above, but in particular, to
significant changes in bond and stock market valuations.
Putnam provides individual and institutional investors with a broad range of
equity and fixed income investment products and services designed to meet
varying investment objectives and which affords its clients the opportunity to
allocate their investment resources among various alternative investment
products as changing worldwide economic and market conditions warrant.
At the end of the third quarter, assets held in equity securities represented
85% of assets under management, compared with 77% in 1999, while investments in
fixed income products represented 15%, compared with 23% last year.
Consulting
--------------------------------------------------------------------------------
Third Quarter Nine Months
----------------- ------------------
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenue $ 540 $ 499 $1,598 $1,457
Expense 456 427 1,365 1,265(a)
------ ------ ------ ------
Operating Income $ 84 $ 72 $ 233 $ 192
====== ====== ====== ======
Operating Income Margin 15.6% 14.5% 14.6% 13.2%
====== ====== ====== ======
--------------------------------------------------------------------------------
(a) Excluding 1999 special charge.
Revenue Consulting revenue increased 8% in 2000 compared with the third 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 10% in the third quarter of 2000. Retirement consulting
revenue, which represented 40% of the consulting segment, grew 8% in the third
quarter primarily due to a higher amount of services provided. In addition,
revenue rose 26% in compensation consulting, 12% in economic consulting, 9% in
general management consulting and 8% in health care consulting due to a higher
volume of business as well as rate increases. Excluding the impact of
acquisitions and the effect of foreign exchange, revenue increased approximately
11% for the nine months.
Expense
Consulting expenses increased 7% for the third quarter and 8% for the nine
months of 2000 compared with 1999. Excluding the impact of acquisitions and the
effect of foreign exchange, expenses increased approximately 9% for the third
quarter and approximately 10% for the nine months reflecting the effect of staff
growth to support new business and higher incentive compensation commensurate
with strong operating performance. Through the first nine months of 2000,
approximately $4 million of incremental net integration savings related to the
Sedgwick transaction have been realized.
Corporate Expenses
Corporate expenses increased to $34 million in the third quarter of 2000 from
$20 million in 1999. For the first nine months of the year, corporate expense
amounted to $98 million compared with $73 million for the same period in 1999
due, in part, to costs associated with new corporate initiatives including MMC
Enterprise Risk, as well as certain nonrecurring consulting fees, a portion of
which 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 $7 million in the third quarter of
2000 compared with $6 million in 1999. For the nine months, interest income of
$18 million was $1 million greater than the prior year. Interest expense
increased to $63 million in the third quarter of 2000 from $59 million in 1999
and increased to $191 million for the nine months ended September 30, 2000 from
$174 million in 1999. Interest expense of $63 million in the third quarter of
2000 decreased from $68 million in the second quarter of 2000, as MMC used
positive cash flows to pay down approximately $500 million of debt during the
quarter. The increase in interest expense for the quarter and nine months, as
compared with the prior year, is primarily due to higher average interest rates
in 2000 compared with 1999.
Income Taxes
MMC's consolidated tax rate was 38.75% of income before income taxes in the
third quarter and first nine months of 2000, compared with 40.00% for the
comparable periods in the prior year. 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 $341 million on September 30, 2000, a
decrease of $87 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 $136 million and $150 million were made
in the first nine months 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 an $89 million cash
outflow for the nine months compared with an $11 million inflow during the same
period of 1999.
During the first nine months of 2000, cash used to reduce commercial paper
borrowings and other borrowings amounted to $254 million and $101 million,
respectively.
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 $275 million in the first nine
months of 2000 and $276 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 $600 million
in connection with the formation of THL, MMC Capital's Trident II Fund, and
other MMC investments. MMC expects to fund these commitments, in part, with
sales proceeds from existing investments. Some of 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 $435 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 $70 million was paid during the nine months ended
September 30, 2000 and it is anticipated that approximately $60 million will be
paid in the fourth quarter 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 ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
which amends certain provisions of SFAS 133. MMC has appointed a team to
implement SFAS 133 on a global basis. This team has been implementing a SFAS 133
compliant risk management information system, inventorying embedded derivatives
and addressing various other SFAS 133 related issues. MMC will adopt SFAS 133
and the corresponding amendments under SFAS 138 on January 1, 2001. MMC's SFAS
133 team is currently determining the impact of SFAS 133 on the consolidated
results of operations and financial position. This Statement should have no
impact on consolidated cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" which MMC will implement in the
fourth quarter of 2000. MMC does not expect the implementation of SAB 101 to
have a material impact on its results of operations or consolidated financial
position.
PART II, OTHER INFORMATION
--------------------------
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
SEPTEMBER 30, 2000
Item 1. Legal Proceedings.
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 challenged 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. 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 raised substantially similar issues as
the three previous actions. In October 2000, the respective
plaintiffs and defendants agreed to settle these actions and
discontinue the litigations.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of MMC was held on May 18,
2000. Represented at the Meeting, at which stockholders took the
following actions, were 228,178,412 shares or 85.76 percent of
MMC's 266,077,665 shares of common stock outstanding and entitled
to vote:
1. Each of the seven nominees for election as directors
received at least 224,131,066 or 98.2 percent of the shares
represented and entitled to vote at the meeting. They are
Mathis Cabiallavetta, Peter Coster, Charles A. Davis,
Gwendolyn S. King, Lawrence J. Lasser, David A. Olsen, and
John T. Sinnott.
2. Stockholders approved the Marsh & McLennan Companies 2000
Senior Executive Incentive and Stock Award Plan with a vote
of 156,544,150 or 68.6 percent of the shares represented and
entitled to vote (69,647,019 opposing and 1,987,245
abstaining).
3. Stockholders approved an amendment to the Marsh & McLennan
Companies Stock Investment Plan to eliminate the requirement
of submitting certain plan amendments to stockholders for
approval with a vote of 199,362,559 or 94.0 percent of the
shares represented and entitled to vote (11,010,792
opposing, 1,660,258 abstaining and 16,144,803 broker
nonvotes).
4. Deloitte & Touche LLP was ratified as MMC's independent
public accountants for the year ending December 31, 2000,
with a vote of 226,648,565 or 99.3 percent of the shares
represented and entitled to vote (618,283 opposing and
911,564 abstaining).
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
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 November, 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
