================================================================================
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 the quarter ended March 31,June 30, 2003
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 30,July 31, 2003 there were outstanding 535,412,029532,637,345 shares of common
stock, par value $1.00 per share, of the registrant.
1
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Marsh & McLennan Companies,Inc. and its subsidiaries ("MMC") and their
representatives may from time to time make verbal or written statements
(including certain statements contained in this report and other MMC filings
with the Securities and Exchange Commission and in our reports to stockholders)
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 revenues, expenses,
earnings, cash flow, capital structure, pension funding, financial losses and
expected insurance recoveries resulting from the September 11, 2001 attack on
the World Trade Center in New York City, as well as market and industry
conditions, premium rates, financial markets, interest rates, foreign exchange
rates, contingencies and matters relating to MMC's operations and income taxes.
Such forward-looking statements are based on available current market and
industry materials, experts' reports and opinions and long-term trends, 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 or incorporated or
referred to herein include, in the case of MMC's risk and insurance services and
consulting businesses, the amount of actual insurance recoveries and financial
losses from the September 11 attack on the World Trade Center, or other adverse
consequences from that incident. Other factors that should be considered in the
case of MMC's risk and insurance serviceservices business are changes in competitive
conditions, movements in premium rate levels, the continuation of difficult
conditions for the transfer of commercial risk and other changes in the global
property and casualty insurance markets, the impact of terrorist attacks,
natural catastrophes, and mergers between client organizations, including
insurance and reinsurance companies.companies insolvencies. Factors to be considered in
the case of MMC's investment management business include changes in worldwide
and national equity and fixed income markets, actual and relative investment
performance, the level of sales and redemptions, and the ability to maintain
investment management and administrative fees at appropriate levels; and with
respect to all of MMC's activities, changes in general worldwide and national
economic conditions, changes in the value of investments made in individual
companies and investment funds, fluctuations in foreign currencies, actions of
competitors or regulators, changes in interest rates or in the ability to access
financial markets, developments relating to claims, lawsuits and contingencies,
prospective and retrospective 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.
Forward-looking statements speak only as of the date on which they are made, and
MMC undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to reflect the
occurrence of unanticipated events.
MMC is committed to providing timely and materially accurate information to the
investing public, consistent with our legal and regulatory obligations. To that
end, MMC and its operating companies use their websites to convey meaningful
information about their businesses, including the anticipated release of
quarterly financial results, and the posting of updates of assets under
management at Putnam. Monthly updates of total assets under management at Putnam
will be posted to the MMC website on the first business day following the end of
each month, except at the end of March, June, September and December, when such
information will be released with MMC's quarterly earnings announcement. Putnam
posts mutual fund and performance data to its website regularly. Assets for most
Putnam retail mutual funds are posted approximately two weeks after each
month-end. Mutual fund net asset value (NAV) is posted daily. Historical
performance and Lipper rankings are also provided. Investors can link to MMC and
its operating company websites through www.mmc.com.
2
PART I, FINANCIAL INFORMATION
-----------------------------
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- ---------------------------------------------------- -------------------------
For the--------------------------------------------------------------------------------
Three Months Ended March 31,Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------
(In millions, except per share figures) 2003 2002 2003 2002
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Revenue:
Service revenue $2,841 $2,603$2,840 $2,607 $5,681 $5,210
Investment income (loss) 11 3225 5 36 37
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Operating revenue 2,852 2,6352,865 2,612 5,717 5,247
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Expense:
Compensation and benefits 1,378 1,2491,475 1,281 2,853 2,530
Other operating expenses 757 699791 766 1,548 1,465
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Operating expenses 2,135 1,9482,266 2,047 4,401 3,995
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Operating income 717 687599 565 1,316 1,252
Interest income 6 57 4 13 9
Interest expense (43) (37)(46) (38) (89) (75)
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 680 655560 531 1,240 1,186
Income taxes 232 232189 189 421 421
Minority interest, net of tax 5 56 6 11 11
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Net income $443 $ 418365 $ 336 $ 808 $ 754
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Basic net income per share $ .83.68 $ .76.62 $ 1.51 $ 1.38
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Diluted net income per share $ .81.66 $ .73.60 $ 1.47 $ 1.33
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Average number of shares outstanding-Basic 536 548534 545 535 546
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Average number of shares outstanding-Diluted 547 569552 562 550 565
- ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------
Dividends Declared $ 0.31 $ 0.28 $ 0.59 0.55
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
3
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
Unaudited
March 31,--------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
(In millions of dollars) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 566618 $ 546
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Receivables
Commissions and fees 2,2512,403 2,178
Advanced premiums and claims 121115 119
Other 304308 305
- -----------------------------------------------------------------------------
2,676--------------------------------------------------------------------------------
2,826 2,602
Less-allowance for doubtful accounts and cancellations (126)(132) (124)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Net receivables 2,5502,694 2,478
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Prepaid dealer commissions - current portion 201181 226
Other current assets 289270 414
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current assets 3,6063,763 3,664
Goodwill and intangible assets 5,4125,741 5,404
Fixed assets, net 1,3221,386 1,308
(net of accumulated depreciation and
amortization of $1,299$1,354 at March 31,June 30, 2003
and $1,275 at December 31, 2002)
Long-term investments 517567 578
Prepaid dealer commissions 248210 292
Prepaid pension 1,135 1,071
Other assets 2,752 2,6091,655 1,538
- -----------------------------------------------------------------------------
$13,857--------------------------------------------------------------------------------
$14,457 $13,855
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
4
MARSH & MCLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Unaudited
March 31,(Unaudited)
June 30, December 31,
(In millions of dollars) 2003 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 772369 $ 543
Accounts payable and accrued liabilities 1,5121,561 1,406
Accrued compensation and employee benefits 9741,271 1,568
Accrued income taxes 282491 194
Dividends payable 151167 152
- --------------------------------------------------------------------------------
Total current liabilities 3,6913,859 3,863
- --------------------------------------------------------------------------------
Fiduciary liabilities 4,3784,554 4,010
Less - cash and investments held in
a fiduciary capacity (4,378)(4,554) (4,010)
- --------------------------------------------------------------------------------
- -
Long-term debt 2,8812,877 2,891
- --------------------------------------------------------------------------------
Other liabilities 2,1312,274 2,083
- --------------------------------------------------------------------------------
Commitments and contingencies - -
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
800,000,0001,600,000,000 shares, issued 560,641,640
shares at March 31,June 30, 2003 and December 31, 2002 561 561
Additional paid-in capital 1,3411,321 1,426
Retained earnings 4,7844,982 4,490
Accumulated other comprehensive loss (453)(264) (452)
- --------------------------------------------------------------------------------
6,2336,600 6,025
Less - treasury shares, at cost,
24,879,84626,464,681 shares at March 31,June 30, 2003 and
22,441,817 shares at December 31, 2002 (1,079)(1,153) (1,007)
- --------------------------------------------------------------------------------
Total stockholders' equity 5,1545,447 5,018
- --------------------------------------------------------------------------------
$13,857$14,457 $13,855
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
5
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
For ThreeSix Months ended March 31,Ended June 30, 2003 2002
(In millions of dollars)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating cash flows:
Net income $ 443808 $ 418754
Adjustments to reconcile net income to cash generated from
(used for) operations:
Depreciation of fixed assets and amortization,
capitalized software and other intangible assets 95 86194 175
Provision for deferred income taxes 45 4373 14
(Gains) losses on investments (11) (32)(36) (37)
Changes in assets and liabilities:
Net receivables (72) 43(189) (25)
Prepaid dealer commissions 69 79127 159
Other current assets 7 (8)36 (24)
Other assets (30) (89)(105) (111)
Accounts payable and accrued liabilities 97 480 54
Accrued compensation and employee benefits (594) (505)(297) (296)
Accrued income taxes 88 (276)298 (151)
Other liabilities 46 4417 (17)
Effect of exchange rate changes (6) (5)50 24
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash generated from (used for) operations 177 (198)1,056 519
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Financing cash flows:
Net decrease in commercial paper (236) (213)(640) (357)
Proceeds from issuance of debt 501 747502 748
Other repayments of debt (38) (2)(44) (6)
Purchase of treasury shares (311) (217)(492) (802)
Issuance of common stock 164 162253 235
Dividends paid (151) (145)(301) (291)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided byused for financing activities (71) 332(722) (473)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Investing cash flows:
Capital expenditures (110) (102)(240) (187)
Proceeds from sales related to fixed assets
and capitalized software 6 39 12
Acquisitions - (2)(101) (21)
Other, net 8 (22)42 79
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (96) (123)(290) (117)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 10 (5)28 5
- -------------------------------------------------------------------------------
Increase--------------------------------------------------------------------------------
Increase/(Decrease) in cash & cash equivalents 20 672 (66)
Cash & cash equivalents at beginning of period 546 537
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 566618 $ 543471
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
6
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
--------------------
MMC, a professional services firm, is organized based on the different
services that it offers. Under this organization structure, MMC operates in
three principal business segments: risk and insurance services, investment
management and consulting. The risk and insurance services segment provides
risk management and insurance broking, reinsurance broking and insurance
program management services for businesses, public entities, insurance
companies, associations, professional services organizations and private
clients. It also provides services principally in connection with
originating, structuring and managing insurance, financial services and
other industry-focused investments. The investment management segment
primarily provides securities investment advisory and management services
and administrative services for a group of publicly held investment
companies and institutional accounts. The consulting segment provides
advice and services to the managements of organizations primarily in the
areas of retirement services, human capital, health care and group benefit
programs, management consulting, organizational change and organizational
design, economic consulting and corporate identity.
2. Principles of Consolidation
---------------------------
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 accounting principles
generally accepted in the United States of America, 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-monthsix-month periods ended March 31,June 30, 2003 and
2002. Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
The caption "Investment income (loss)" in the consolidated statements of
income comprises realized and unrealized gains and losses from investments
recognized in income. It includes other than temporary declines in the
value of available for sale securities, the change in value of trading
securities and the change in value of MMC's holdings in certain private
equity funds. MMC's investments may include seed shares for mutual funds,
direct investments in insurance, consulting or investment management
companies and investments in private equity funds.
3. 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
7
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 service revenue, amounted to $31$61 million and $27$56 million
for the three-monthsix-month periods ended March 31,June 30, 2003 and 2002, respectively. Since
fiduciary assets are not available for corporate use, they are shown in the
balance sheet as an offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to
$12.0 billion at March 31,June 30, 2003 and $11.7 billion at December 31, 2002,
respectively. MMC is not a principal to the contracts under which the right
to receive premiums or the right to receive reimbursement of insured losses
arises. Net uncollected premiums and claims and the related payables are,
therefore, not assets and liabilities of MMC and are not included in the
accompanying Consolidated Balance Sheets.
4. Per Share Data
--------------
Basic net income per share is calculated by dividing net income by the
weighted 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 and adding back dividend equivalent
expense related to common stock equivalents. This result is then divided by
the weighted 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-monththree- and six-month
periods ended March 31,June 30, 2003 and 2002.
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In millions of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income $443 $418$365 $336 $808 $754
Less: Potential minority interest
associated with the Putnam Class B Common
Shares net of dividend equivalent expense
related to common stock equivalents - - - (1)
- --------------------------------------------------------------------------------
Net income for diluted earnings per share $443 $417$365 $336 $808 $753
- --------------------------------------------------------------------------------
Basic weighted average common shares outstanding 536 548534 545 535 546
Dilutive effect of potentially issuable
common shares 11 2118 17 15 19
- --------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 547 569552 562 550 565
- --------------------------------------------------------------------------------
5.8
5 Supplemental DisclosureDisclosures to the Consolidated Statements of Cash FlowsFlow
--------------------------------------------------------------------
The following schedule provides additional information concerning interest
and income taxes paid for the three-monthsix-month periods ended March 31,June 30, 2003 and
2002.
- ------------------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------------
Interest paid $ 1981 $ 1862
Income taxes paid $ 5741 $ 399
468
6. Comprehensive Income
--------------------
The components of comprehensive income for the three-monthsix-month periods ended March
31,June
30, 2003 and 2002 are as follows:
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $ 18 $(31)172 $ 60
Unrealized investment holding gains (losses)gains,,
net of income taxes (14) 326 (33)
Less: Reclassification adjustment for realized
gains included in net income, net of income taxes (5) (20)(7) (18)
Deferred (loss) gain on cash flow hedges,
net of income taxes - (1)
- --------------------------------------------------------------------------------(3) 4
---------------------------------------------------------------------------
Other comprehensive loss (1) (49)income 188 13
Net income 443 418
- --------------------------------------------------------------------------------808 754
---------------------------------------------------------------------------
Comprehensive income $442 $369
- --------------------------------------------------------------------------------$996 $767
---------------------------------------------------------------------------
7. Acquisitions
------------
In April 2003, MMC acquired Oliver, Wyman & Company ("OWC") for $265
million, $159 million in cash, which will be paid over 4 years, and $106
million in MMC stock. Substantially all former employees of OWC are now
employees of MMC. Approximately $35 million of the purchase consideration
is subject to continued employment of the selling shareholders and is being
recorded as compensation expense over four years.
9
8. Goodwill and Other Intangibles
------------------------------
Changes in the carrying amount of goodwill for the three-monthsix-month period ended
March 31,June 30, 2003, are as follows:
- --------------------------------------------------- ----------
(in--------------------------------------------------------------------------
(In millions of dollars) 2003
- --------------------------------------------------- -------------------------------------------------------------------------------------
Balance as of January 1, $5,151
Goodwill acquired -221
Other adjustments (primarily foreign exchange) 12
- --------------------------------------------------- ----------61
---------------------------------------------------------------------------
Balance as of March 31, $5,163
- --------------------------------------------------- ----------June 30, $5,433
---------------------------------------------------------------------------
The goodwill balance at March 31,June 30, 2003 and December 31, 2002 includes
approximately $121 million of equity method goodwill.
Amortized intangible assets consist primarily of the cost of client lists
and client relationships acquired and the rights to future revenue streams
from certain existing private equity funds. MMC has no intangible assets
with indefinite lives. The gross carrying amount and accumulated
amortization by major intangible asset class is as follows:
- ----------------------------------------- -----------------------------------------------------------------------
March 31,------------------------------------------------------------------------------------------------------------------------
June 30, 2003 December 31, 2002
-----------------------------------------------------------------------------------------------------------------------------------------------------
Net Net
Gross Accumulated Carrying Gross Accumulated Carrying
(In millions of dollars) Cost Amortization Amount Cost Amortization Amount
- ----------------------------------------- ---------- -------------- --------------------- -------------- --------------------------------------------------------------------------------------------------------------------------------
Client lists and client relationships $153$226 $ 52 $10159 $167 $148 $ 50 $ 98
acquired
Future revenue streams related to 216 77 13983 133 216 70 146
existing private equity funds
- ----------------------------------------- ---------- -------------- --------------------- -------------- --------------------------------------------------------------------------------------------------------------------------------
Total amortized intangibles $369 $129 $240$442 $142 $300 $364 $120 $244
- ----------------------------------------- ---------- -------------- --------------------- -------------- --------------------------------------------------------------------------------------------------------------------------------
Aggregate amortization expense for the quartersix-month periods ended March 31,June 30,
2003 and 2002 was $9$20 million and $8$16 million, respectively and the
estimated future aggregate amortization expense is as follows:
- ----------------------------------- ---------- -----------------------------------------------------------------------------------------------------------
For the Years
Ending December 31, Estimated
(in(In millions of dollars) Expense
- ----------------------------------- ---------- -----------------------------------------------------------------------------------------------------------
2003 $35$42
2004 $35$44
2005 $32$40
2006 $26$33
2007 $24
- ----------------------------------- ---------- --------------------------------
8.$31
---------------------------------------------------------------------------
9. Stock Benefit Plans
-------------------
MMC has stock-based benefit plans under which employees are awarded grants
of restricted stock, stock options and other forms of awards. As provided
under SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
10
MMC has elected to continue to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and has provided the required
additional pro forma disclosures.
Pro Forma Information: In accordance with the intrinsic value method
allowed by APB 25, no compensation cost has been recognized in the
Consolidated Statements of Income for MMC's stock option and stock purchase
plans and the stock options awarded under the Putnam Investments Equity
Partnership Plan. If compensation cost for MMC's stock-based compensation
plans had been determined consistent with the fair value method prescribed
by SFAS No. 123, MMC's net income and net income per share for the three-monththree-
and six-month periods ended March 31,June 30, 2003 and 2002 would have been reduced
to the pro forma amounts indicated in the table below.
- --------------------------------------------------------------------------------
(In millions of dollars, except per share figures) 2003 2002
- --------------------------------------------------------------------------------
Net Income:
As reported $443 $418
Adjustment for fair value method, net of tax (47) (35)
- --------------------------------------------------------------------------------
Pro forma net income $396 $383
- --------------------------------------------------------------------------------
Net Income Per Share:
Basic:
As reported $.83 $.76
Pro forma $.74 $.70
Diluted:
As reported $.81 $.73
Pro forma $.72 $.67
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share figures) Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net Income:
As reported $365 $336 $808 $754
Adjustment for fair value method, net of tax (41) (39) (88) (74)
- ----------------------------------------------------------------------------------------------------------------------
Pro forma net income $324 $297 $720 $680
- ----------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
Basic:
As reported $0.68 $0.62 $1.51 $1.38
Pro forma $0.61 $0.55 $1.35 $1.24
Diluted:
As reported $0.66 $0.60 $1.47 $1.33
Pro forma $0.59 $0.53 $1.32 $1.21
- ----------------------------------------------------------------------------------------------------------------------
The pro forma information reflected above includes the cost of stock options issued
under MMC incentive and stock award plans and the Putnam Investments Equity
Partnership Plan and stock issued under MMC stock purchase plans. MMC stock
purchase plans allow eligible employees to purchase MMC shares at prices
not less than 85% of the less of the fair market value of the stock at the
beginning or end of the offering period. The stock purchase plans represent
approximately 20% of the increment from applying the fair value method in
2003 and 2002.
The estimated fair value of options granted was calculated using the
Black-Scholes option pricing valuation model. The weighted average
assumptions used in the valuation models are evaluated and revised, as
necessary, to reflect market conditions and experience.
9.10. Long-term Debt
--------------
In February 2003, MMC issued $250 million of 3.625% Senior Notes due 2008
and $250 million of 4.85% Senior Notes due 2013. The net proceeds from the
notes were used to pay down commercial paper borrowings.
In January 2003, MMC terminated and settled interest rate swaps that had
hedged the fair value of senior notes issued in 2002. The cumulative amount
of previously recognized adjustments of the fair value of the hedged notes
is being amortized over the remaining life of those notes in accordance
11
with SFAS No. 133. As a result, the effective interest rate over the
remaining life of the notes, including the amortization of the fair value
adjustments, is 4.0% for the $500 million Senior Notes due in 2007 (5.375%
coupon rate) and 5.1% for the $250 million Senior Notes due in 2012 (6.25%
coupon rate).
Commercial paper borrowings of $250 million and $750 million respectively,
at March 31,June 30, 2003 and December 31, 2002, have been classified as long-term
debt based on MMC's intent and ability to maintain or refinance these
obligations on a long-term basis.
10.In July 2003, MMC issued $300 million of 5.875% Senior Notes due 2033.
11. Integration and Restructuring Costs
-----------------------------------
In 1999, as part of the 1998 combination with Sedgwick Group, plc
("Sedgwick") and 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 ("1999 Sedgwick Plan)Plan")
amounted to $285 million and was included in the cost of the acquisition.
Merger-related costs for employees and offices of MMC ("1999 MMC Plan)Plan")
amounted to $266 million and were recorded as part of a 1999 special
charge.
In the third quarter of 2001, as a result of weakening business conditions,
which were exacerbated by the events of September 11, MMC adopted a plan to
provide for staff reductions and office consolidations, primarily in the
consulting segment ("2001 Plan"). The charge of $61 million related to this
Plan is comprised of $44 million for severance and related benefits
affecting 750 people and $17 million for future rent under non-cancelable
leases.
The utilization of these charges is summarized as follows:
------------------------------------------------------------------------------------------------------------
Utilized and
1999 Sedgwick Plan: changes in
Utilized in Balance March
(In millions of dollars) Initial estimates First Qtr. 2003 31, 2003Utilized in Balance
Balance through 2002 - ---------------------------------------------- ----------- ---------------- ---------------- ----------------Six Months 2003 June30, 2003
------------------------------------------------------------------------------------------------------------
Termination payments to employees $ 183 $ (181) $ - $ 2
Other employee-related costs 5 (5) - -
Future rent under noncancelable leases 48 (33) (1) 14(2) 13
Leasehold termination and related costs 49 (32) - 17
- ---------------------------------------------- ----------- ---------------- ---------------- ----------------------------------------------------------------------------------------------------------------------------
$ 285 $ (251) $(1)$(2) $ 33
- ---------------------------------------------- ----------- ---------------- ---------------- ----------------32
------------------------------------------------------------------------------------------------------------
Number of employee terminations 2,400 (2,400) - -
Number of office consolidations 125 (125) - -
- ---------------------------------------------- ----------- ---------------- ---------------- ----------------------------------------------------------------------------------------- ----------------------------------
12
------------------------------------------------------------------------------------------------------------
Utilized and
1999 MMC Plan: changes in
Utilized in Balance March
(In millions of dollars) Initial estimates First Qtr. 2003 31, 2003Utilized in Balance
Balance through 2002 - ---------------------------------------------- ----------- ---------------- ---------------- ----------------Six Months 2003 June 30, 2003
------------------------------------------------------------------------------------------------------------
Termination payments to employees $ 194 $ (190) $ - $ 4
Future rent under noncancelable leases 31 (21) - 10(1) 9
Leasehold termination and related costs 16 (13) - 3
Other integration related costs 25 (25) - -
- ---------------------------------------------- ----------- ---------------- ---------------- ----------------------------------------------------------------------------------------------------------------------------
$ 266 $ (249) $ -(1) $ 17
- ---------------------------------------------- ----------- ---------------- ---------------- ----------------16
------------------------------------------------------------------------------------------------------------
Number of employee terminations 2,100 (2,100) - -
Number of office consolidations 50 (50) - -
- ---------------------------------------------- ----------- ---------------- ---------------- ----------------------------------------------------------------------------------------------------------------------------
The actions contemplated by the 1999 Sedgwick Plan and the 1999 MMC Plan
were substantially complete by year-end 2000. Some accruals, primarily for
future rent under noncancelable leases, costs to restore leased properties
to contractually agreed upon condition and salary continuance arrangements,
are expected to be paid over several years.
- -----------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Utilized Utilized in Balance March
2001 Plan Initial through First Qtr. 2003 31, 2003Utilized in Balance
(In millions of dollars) Balance 2002 - -----------------------------------------------------------------------------------------------------Six Months 2003 June 30, 2003
------------------------------------------------------------------------------------------------------------
Termination payments to employees $ 44 $ (39) $ (1) $ 4
Future rent under noncancelable leases 17 (4) (1) 12
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$ 61 $ (43) $ (2) $ 16
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Number of employee terminations 750 (750) - -
Number of office consolidations 9 (9) - -
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Actions under the 2001 Plan were completed by September 30, 2002. Some
accruals, primarily for future rent under noncancelable leases and salary
continuance arrangements, are expected to be paid over several years.
11.12. Common Stock
------------
In 2003, MMC repurchased shares of its common stock for treasury as well as
to meet requirements for issuance of shares for its various stock
compensation and benefit programs. During the first three months ofsix-month period ended June
30, 2003, MMC repurchased 7.811.5 million shares for total consideration of
$321$503 million.
MMC repurchases shares subject to market conditions, including from time to
time pursuant to the terms of a 10b5-1 plan. A 10b5-1 plan allows a company
to purchase shares during a blackout period, provided the company
communicates its share purchase instructions to the broker prior to the
blackout period, pursuant to a written plan that may not be changed.
MMC currently plans to continue to
repurchaseApproximately 1.8 million shares in 2003, subject to market conditions.
12.of the repurchases discussed above were
made under the 10b5-1 plan.
13. 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
13
investment and consulting services. Some of these matters seek damages,
including punitive damages, in amounts that could, if assessed, be
significant. Insurance coverage applicable to such matters includes
elements of both risk retention and risk transfer.
As part of the combination with Sedgwick, MMC acquired River Thames
Insurance Company Limited ("River Thames"), an insurance underwriting
business that was already in run-off, which was sold in 2001. Sedgwick
guaranteed payment of claims on certain policies underwritten through the
Institute of London Underwriters by River Thames ("ILU Guarantee"). The
policies covered by the ILU Guarantee are reinsured up to (pound)40 million
by a related party of River Thames. Payment of claims under the reinsurance
agreement is collateralized by segregated assets held in a trust. As of
March 31,June 30, 2003, the reinsurance coverage exceeded the best estimate of the
projected liability of the policies covered by the ILU Guarantee. To the
extent River Thames or the reinsurer are unable to meet their obligations
under those policies, a claimant may seek to recover from MMC under the
guarantee. MMC does not expect any material net impact on its consolidated
financial position or results of operations related to this guarantee.
Although the ultimate outcome of all matters referred to above cannot be
ascertained and liabilities in indeterminate amounts may be imposed on MMC
and its subsidiaries, on the basis of present information, 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.
13.14. Segment Information
-------------------
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 and minority interest 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-monthsix-month
periods ended March 31,June 30, 2003 and 2002 follow:follows:
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Segment Operating
(In millions of dollars) Revenue Income
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
2003
Risk and Insurance Services $ 1,7733,453 (a) $ 560963
Investment Management 445 103940 228
Consulting 634 831,324 182
- -----------------------------------------------------------------------------
$ 2,852 $ 746--------------------------------------------------------------------------------
$5,717 $1,373
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
2002
Risk and Insurance Services $1,476$ 2,912 (a) $ 462791
Investment Management 594 1751,175 344
Consulting 565 741,160 164
- -----------------------------------------------------------------------------
$2,635 $ 711--------------------------------------------------------------------------------
$5,247 $1,299
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
(a)Includes interest income on fiduciary funds ($3161 million in 2003 and $27$56
million in 2002).
14
A reconciliation of the total segment operating income to income before
income taxes and minority interest in the consolidated financial statements
is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
Total segment operating income $746 $711$ 1,373 $1,299
Corporate expense (34) (29)(68) (58)
Reclassification of minority interest 5 5
- --------------------------------------------------------------------------------11 11
---------------------------------------------------------------------------
Operating income 717 6871,316 1,252
Interest income 6 513 9
Interest expense (43) (37)
- --------------------------------------------------------------------------------(89) (75)
---------------------------------------------------------------------------
Total income before income taxes and
minority interest $680 $655
- --------------------------------------------------------------------------------
$ 1,240 $1,186
---------------------------------------------------------------------------
Operating segment revenue by product for the three-monthsix-month periods ended March 31,June
30, 2003 and 2002 is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
Risk &and Insurance Services
Risk Management and Insurance Broking $1,323 $1,076$2,593 $2,158
Reinsurance Broking and Services 234 185423 334
Related Insurance Services 216 215
- --------------------------------------------------------------------------------437 420
---------------------------------------------------------------------------
Total Risk &and Insurance Services 1,773 1,476
- --------------------------------------------------------------------------------3,453 2,912
---------------------------------------------------------------------------
Investment Management 445 594
- --------------------------------------------------------------------------------940 1,175
---------------------------------------------------------------------------
Consulting
Retirement Services 300 270612 549
Health Care & Group Benefits 98 84201 176
Human Capital 86 78175 163
Management and Organizational Change 81 68198 139
Economic 37 33
- --------------------------------------------------------------------------------
602 53371 65
---------------------------------------------------------------------------
1,257 1,092
Reimbursed Expenses 32 32
- --------------------------------------------------------------------------------67 68
---------------------------------------------------------------------------
Total Consulting 634 565
- --------------------------------------------------------------------------------1,324 1,160
---------------------------------------------------------------------------
Total $2,852 $ 2,635
- --------------------------------------------------------------------------------
14.$5,717 $5,247
---------------------------------------------------------------------------
15. New Accounting Pronouncements
-----------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 interprets Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" and addresses
consolidation by business enterprises qualifying as variable interest
entities ("VIE"). FIN 46 defines a VIE as a corporation, partnership, trust
or other legal structure used for business purposes that either (a) does
not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to
support its activities. FIN 46 applies immediately to VIEs created after
January 31, 2003 in which the company obtains an interest after that date.
FIN 46 applies to the first fiscal year or interim period beginning after
June 15, 2003 for VIEs in which MMC holds a variable interest that it
acquired before February 1, 2003.
15
MMC through Putnam, manages $2.3$3.3 billion in the form of Collateralized Debt
Obligations ("CDO") and Collateralized Bond Obligations ("CBO"). The CDOs
and CBOs were created prior to January 31, 2003. Separate limited liability
companies were established to issue the notes and to hold the underlying
collateral, which consists of high-yield bonds and other securities. Putnam
serves as the collateral manager for the CDOs and CBOs. The maximum loss
exposure related to the CDOs and CBOs is limited to Putnam's investment
totaling $4.0 million, reflected in Long-term investments in the
Consolidated Balance Sheets at March 31,June 30, 2003. MMC is assessing the overall impact of this
pronouncement and does not expect theThe implementation of FIN 46
towill not have a significant impact on itsMMC's consolidated results of
operations.operations, financial position or cash flows. The FASB may issue future
interpretive guidance to FIN 46.
16
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FirstSecond Quarter and Six Months Ended March 31,June 30, 2003
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh, the world's largest risk and
insurance services firm; Putnam Investments, one of the largest investment
management companies in the United States; and Mercer, a major global provider
of consulting services. Approximately 59,00060,000 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 and minority interest.
For a description of critical accounting policies, including those which involve
significant management judgment, see Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 1 to the consolidated
financial statements in MMC's Annual Report on Form 10-K for the year ended
December 31, 2002.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Information Concerning Forward-Looking
Statements" on page one of this filing. This Form 10-Q should be read in
conjunction with MMC's latest Annual Report on Form 10-K.
The consolidated results of operations follow:
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Second Quarter Six Months
(In millions of dollars) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Revenue:
Service Revenue $2,841 $2,603$2,840 $2,607 $5,681 $5,210
Investment Income (Loss) 11 3225 5 36 37
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Operating Revenue 2,852 2,6352,865 2,612 5,717 5,247
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Expense:
Compensation and Benefits 1,378 1,2491,475 1,281 2,853 2,530
Other Operating Expenses 757 699791 766 1,548 1,465
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses 2,135 1,9482,266 2,047 4,401 3,995
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 717599 $ 687565 $1,316 $1,252
- -----------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income Margin 25.1% 26.1%20.9% 21.6% 23.0% 23.9%
- ---------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, increased 8%10% from the firstsecond
quarter of 2002. Revenue increased 4%5% on a constant currency basis which
measures the change in revenue using consistent current exchange rates, before
acquisitions.the impact of acquisitions and dispositions. Revenue increases in the risk and
insurance services and consulting segments were partially offset by a revenue
decline in the investment management segment.
17
The impact of foreign currency translation and acquisitions on MMC's reported
revenue is as follows:
- -------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended % Change Currency/
March 31,June 30, GAAP Constant Acquisitions
2003 2002 Revenue Currency (b) Impact
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Risk &and Insurance Services
Risk Management and Insurance Broking $1,323 $1,076 23%$1,270 $1,082 17% 6%13% 4%
Reinsurance Broking and Services 234 185 26% 23%189 149 27% 24% 3%
Related Insurance Services (a) 216 215221 205 8% 7% 1
- - -
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Risk &and Insurance Services 1,773 1,476 20% 15% 5%1,680 1,436 17% 14% 3%
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Investment Management 445 594 (25)495 581 (15)% (25)(15)% -
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services 300 270 11% 4% 7%312 279 12% 3% 9%
Health Care & Group Benefits 98 84 17% 13% 4%103 92 12% 6% 6%
Human Capital 86 78 10%89 85 5% 5%2% 3%
Management and Organizational Change 81 68 19% (5)117 71 65% (1)% 24%66%
Economic 37 33 12% 11% 1%34 32 6% (1)% 7%
- -------------------------------------------------------------------------------------------
602 533 13% 5% 8%----------------------------------------------------------------------------------------------------------------------------
655 559 17% 2% 15%
Reimbursed Expenses 32 3235 36 (3)% (3)% -
- -
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Consulting 634 565 12%690 595 16% 2% 14%
- ----------------------------------------------------------------------------------------------------------------------------
Total $2,865 $2,612 10% 5% 7%5%
- -------------------------------------------------------------------------------------------
Total $2,852 $2,635 8%----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Six Months Ended % Change Currency/
June 30, GAAP Constant Acquisitions
2003 2002 Revenue Currency (b) Impact
- ----------------------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $2,593 $2,158 20% 15% 5%
Reinsurance Broking and Services 423 334 27% 23% 4%
Related Insurance Services (a) 437 420 4% 4% -
-------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services 3,453 2,912 19% 15% 4%
- ----------------------------------------------------------------------------------------------------------------------------
Investment Management 940 1,175 (20)% (20)% -
- ----------------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services 612 549 11% 3% 8%
Health Care & Group Benefits 201 176 14% 9% 5%
Human Capital 175 163 7% 3% 4%
Management and Organizational Change 198 139 42% (3)% 45%
Economic 71 65 9% 5% 4%
- ----------------------------------------------------------------------------------------------------------------------------
1,257 1,092 15% 3% 12%
Reimbursed Expenses 67 68 (1)% (1)% -
- ----------------------------------------------------------------------------------------------------------------------------
Total Consulting 1,324 1,160 14% 3% 11%
- ----------------------------------------------------------------------------------------------------------------------------
Total $5,717 $5,247 9% 4% 5%
- ----------------------------------------------------------------------------------------------------------------------------
(a) Includes U.S. affinity, claims management, underwriting management and MMC
Capital businesses.
(b) Constant currency measures the change in revenue using consistent currency
exchange rates, before the impact of acquisitions and dispositions.
Revenue growth on a constant currency basis in the risk and insurance services
segment was 15%,14% in the second quarter of 2003, reflecting strong growth across
all geographies in both insurance and reinsurance broking. Consulting revenue on
a constant currency basis grew 5%2% primarily resulting from a higher volume of
business in retirement services and health care and& group benefits, human capital, economic and organizational
change consulting, partially offset by a decline in management consulting.benefits. Revenue
18
decreased 25%15% in the investment management segment as average assets under
management declined 21%14% from the firstsecond quarter of 2002. For the six months,
revenue growth was 9%, 4% on a constant currency basis.
Operating expenses increased 10%11% in the firstsecond quarter of 2003 (5% on a constant
currency basis) primarily due to increased compensation and benefit costs in the
risk and insurance services and consulting segmentssegment partially offset by lower
incentive compensation and volume related expenses in the
investment management segment. Operating expenses also reflect an increase in
costs for office space and insurance. For the six months, operating expenses
increased 10%, 5% on a constant currency basis.
Risk and Insurance Services
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Second Quarter Six Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue $1,773 $1,476$1,680 $1,436 $3,453 $2,912
Expense 1,213 1,0141,277 1,107 2,490 2,121
- --------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 560403 $ 462329 $ 963 $ 791
- --------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income Margin 31.6% 31.3%24.0% 22.9% 27.9% 27.2%
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue
Revenue for the risk and insurance services segment grew 20%17% over the firstsecond
quarter of 2002 and on a constant currency basis grew 15%14%. The revenue growth
was due to an increase in netreflects continued strong demand for Marsh's services as clients face new,
business, higher renewalsexpanding and themore complex risks. The effect of higher premium rates.rates and an
increase in placement service activities also contributed to the increase in
revenue. In the firstsecond quarter, constant currency revenues grew 17% in risk management
and insurance broking, which accounts for approximately three quarters of the
risk and insurance services segment and grew 23%13% with strong growth across all
geographies. Constant currency revenue in reinsurance broking and services.services grew
24%. Related insurance services revenues which includes
affinity, claims management and MMC Capital were unchanged,increased 7% on a constant currency
basis, with revenue increases in claims management and underwriting management
partially offset by declines in the U.S. affinity business.
Within risk managementbusiness and insurance broking,MMC Capital. For
the six months, revenue growth was strong across
all geographies withgrew 19% over 2002 and 15% on a constant currency basis.
Pricing for commercial property risks has stabilized, however clients continue
to face rate increases of 19% in the United States, 13% in Europemost casualty lines, and
25% in other geographies measured in constant currency.
Although price increases for certain coverages are beginning to moderate,
particularly property, the difficult market continued, with clients facing restricted terms and
conditions and coverage exclusions and higher prices for
commercial liability coverages.in all lines.
Expense
Risk and insurance services expenses increased 20%15% over the second quarter of
2002, 15%11% on a constant currency basis,basis. Expense growth primarily reflectingreflects
increased headcount due to higher volumes of business along with increased
incentive compensation commensurate with the current operating environment along with higher
compensation and benefit costs associated with staff growth due to a higher
volume of business.environment.
Operating expenses also reflect an increase in costs for office space and
insurance. For the six months, operating expenses increased 17% over 2002, 13%
on a constant currency basis.
19
Investment Management
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Second Quarter Six Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue $445 $594$ 495 $ 581 $ 940 $1,175
Expense 342 419370 412 712 831
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income $103 $175$ 125 $ 169 $ 228 $ 344
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income Margin 23.1% 29.5%25.3% 29.1% 24.3% 29.3%
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue
Putnam's revenue decreased 25%15% compared with the firstsecond quarter of 2002
reflecting a decline in the level of average assets under management on which
fees are earned along with a write-down in value of Putnam's investments,
including start-up funds.earned. Assets under management averaged $244$260 billion in the firstsecond
quarter of 2003, a 21%14% decline from the $310$301 billion managed in the firstsecond
quarter of 2002. Assets under management aggregated $241$267 billion at March 31,June 30,
2003 compared with $314$284 billion at March 31,June 30, 2002 and $251 billion at December
31, 2002. The change from December 31, 2002 results primarily from a declinean increase
in equity market levels. In addition, Putnam experiencedlevels partially offset by net redemptions of $1.3$4.3 billion,
including reinvested dividends, as positivedividends. Positive flows from institutional
and international business were
more than offset by net outflows in retail mutual funds. Assets under management
at April 30,July 31, 2003 aggregated $255$267 billion.
Expense
Putnam's expenses decreased 18%10% in the firstsecond quarter of 2003 from the same
period of 2002 primarily due to lower incentive compensation reflecting the
current operating environment, as well as a reductionreductions in volume related expenses.expenses, including
amortization of prepaid dealer commissions and incentive compensation.
Quarter-end and average assets under management are presented below:
- ----------------------------------- ---------------- ------------------------------------------------------------------------------------------------
(In billions of dollars) 2003 2002
- ----------------------------------- ---------------- ------------------------------------------------------------------------------------------------
Mutual Funds:
Growth Equity $ 43 $ 73$48 $58
Value Equity 36 5542 49
Blend Equity 30 4635 40
Fixed Income 46 4344
- ----------------------------------- ---------------- ----------------
155 217--------------------------------------------------------------------------------
171 191
- ----------------------------------- ---------------- ------------------------------------------------------------------------------------------------
Institutional:
Equity 64 7972 74
Fixed Income 22 1824 19
- ----------------------------------- ---------------- ----------------
86 97--------------------------------------------------------------------------------
96 93
- ----------------------------------- ---------------- ------------------------------------------------------------------------------------------------
Quarter-end Assets $241 $314$267 $284
- ----------------------------------- ---------------- ------------------------------------------------------------------------------------------------
Assets from Non-US Investors $33$ 37 $30
- ----------------------------------- ---------------- ------------------------------------------------------------------------------------------------
Average Assets $244 $310$260 $301
- ----------------------------------- ---------------- ------------------------------------------------------------------------------------------------
The categories of mutual fund assets reflect style designations aligned with
each fund's prospectus. All prior year amounts have been reclassified to conform
with the current investment mandate for each product.
20
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international stock and bond market prices, the
composition of assets under management and by the level of investments and
withdrawals for current and new fund shareholders and clients. U.S. equity
markets, which declined in 2002 for the third consecutive year after several
years of substantial growth prior to 2000, and declined againincreased in the firstsecond quarter of
2003. Items affecting revenue also include, but are not limited to, actual and
relative 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 the ability to maintain investment management and
administrative fees at appropriate levels. Revenue levels are sensitive to all
of the factors above, but in particular, to significant changes in stock and
bond market valuations.
Putnam provides individual and institutional investors with a broad range of
both equity and fixed income investment products and services, invested
domestically and globally, designed to meet varying investment objectives and
which afford its clients the opportunity to allocate their investment resources
among various investment products as changing worldwide economic and market
conditions warrant.
At the end of the firstsecond quarter, assets held in equity securities represented
72%74% of assets under management, compared with 81%78% at March 31,June 30, 2002, while
investments in fixed income products represented 28%26%, compared with 19%22% at March
31,June
30, 2002.
Consulting
- ------------------------------------ -------------------- -----------------------------------------------------------------------------------------------------
Second Quarter Six Months
- -------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- ------------------------------------ -------------------- --------------------------------------------------------------------------------------------=-------
Revenue $634 $ 565690 $ 595 $1,324 $1,160
Expense 551 491591 505 1,142 996
- ------------------------------------ -------------------- ----------------------------------------------------------------------------------------------------
Operating Income $83 $ 7499 $ 90 $ 182 $ 164
- ------------------------------------ -------------------- ----------------------------------------------------------------------------------------------------
Operating Income Margin 13.1% 13.1%14.3% 15.1% 13.7% 14.1%
- ------------------------------------ -------------------- -----------------------------------------------------------------------------------------------------
Revenue
Consulting revenue increased 12%16% over 2002 and onprimarily due to the effect
of foreign currency exchange rates, as well as acquisitions including Oliver,
Wyman & Company ("OWC"), which is included in the management consulting
practice. On a constant currency basis revenue increased 5% reflecting growth in almost all practices.2%. Retirement services
revenue, which represented approximately 50% of the consulting segment revenue,
increased 4%3% on a constant currency basis due to an increased demand for advice
on retirement issues. Constant currency revenue increased 13% forand health care & group benefits
consulting 5% for human capital consulting, and 11% for economic
consulting partially offset bygrew 6%. For the six months, revenue grew 14% over 2002, 3% on a
13% decline in management consulting.constant currency basis.
Expense
Consulting expenses increased 12%17% over 2002.2002 reflecting the impact of foreign
exchange as well as the acquisition of OWC. As described in Note 7 to the
financial statements, a portion of the OWC purchase consideration is contingent
upon future employment. This amount has been accounted for as deferred
compensation and is being recognized as compensation expense over four years.
Expenses grew 5%increased 2% on a constant currency basis over 2002. For the six
months, expenses increased 15% over 2002, reflecting increased compensation and benefits costs,
including an increase in incentive compensation reflecting improved operating
results.3% on a constant currency basis.
Interest
Interest income earned on corporate funds amounted to $6$7 million in the firstsecond
quarter of 2003, an increase of $1$3 million from the firstsecond quarter of 2002.
21
Interest expense of $43$46 million in 2003 increased from $37$38 million in the firstsecond
quarter of 2002 primarily due to an increase in the average outstanding debt and in the average interest rates on
outstanding debt in the firstsecond quarter of 2003. Over
the past twelve months,Since March 2002, MMC has
improved liquidity and extended the average maturity of its debt through the
issuance of $1.3 billion of long-term senior notes discussed in
the Liquidity and Capital Resources section of this MD&A.through June 30, 2003. The
net proceeds from the notes were used to pay down outstanding commercial paper
balances. The increase in the average interest rate results from the conversion
of a significant portion of the company's debt from floating to fixed rates.
Income Taxes
MMC's consolidated effective tax rate was 34% of income before income taxes and
minority interest in the firstsecond quarter of 2003 compared with 35.5% in the
firstsecond quarter of 2002. As a result of the geographic mix of MMC's businesses,
the effective tax rate for 2003 should remain at 34%.
Liquidity and Capital Resources
Operating Cash Flows
MMC anticipates that funds generated from operations will be sufficient to meet
its foreseeable recurring operating cash requirements as well as to fund
dividends, capital expenditures and scheduled repayments of long-term debt.
MMC's ability to generate cash flow from operations is subject to the business
risks inherent in each operating segment.
MMC generated $177 million$1.1 billion of cash from operations for the six-month period
ended March
31,June 30, 2003 compared with a use of cash of $198$519 million for the same period in 2002.
These amounts reflect the net income earned by MMC during those periods adjusted
for non-cash charges and working capital changes. In 2003, MMC's tax payments
decreased as compared to the first quarter of 2002. MMC's estimated tax payments related to the third
quarter of 2001 were paid in the first quarter of 2002 due to the events of
September 11, 2001 and the government's subsequent directives. In addition,
current year tax payments reflect a refund of overpayment of prior year taxes.
Other current assets at June 30, 2003 declined from the prior year end balance
primarily due to lower deferred tax assets in the current period as well as a
decrease in insurance recoveries receivable related to personal pension plan
settlements in the United Kingdom.
MMC's cash and cash equivalents aggregated $566$618 million on March 31,June 30, 2003, an
increase of $20$72 million from the end of 2002.
MMC increased its quarterly dividend by 11% to $.31 per share effective with the
dividend to be paid on August 15, 2003.
Financing Cash Flows
In February 2003, MMC issued $250 million of 3.625% Senior Notes due in 2008 and
$250 million of 4.85% Senior Notes due in 2013 (the "2003 Notes"). The net
proceeds from the 2003 Notes were used to pay down commercial paper borrowings.
Commercial paper outstanding decreased $236$640 million during the first quartersix months
of 2003 as a result of these repayments partially offset by seasonal demands
related to incentive compensation payments.repayments.
In January 2003, MMC terminated and settled interest rate swaps that had hedged
the fair value of senior notes issued in 2002. The cumulative amount of
previously recognized adjustments of the fair value of the hedged notes is being
amortized over the remaining life of those notes in accordance with SFAS No.
133. As a result, the effective interest rate over the remaining life of the
notes, including the amortization of the fair value adjustments, is 4.0% for the
$500 million Senior Notes due in 2007 (5.375% coupon rate) and 5.1% for the $250
million Senior Notes due in 2012 (6.25% coupon rate).
22
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033.
During the first quartersix months of 2003, MMC repurchased 7.811.5 million shares of its
common stock at a cost of $321$503 million. MMC repurchases shares subject to market
conditions, including from time to time pursuant to the terms of a 10b5-1 plan.
A 10b5-1 plan allows a company to purchase shares during a blackout period,
provided the company communicates its share purchase instructions to the broker
prior to the blackout period, pursuant to a written plan that may not be
changed.
Investing Cash Flows
MMC's additions to fixed assets and capitalized software, which amounted to $110$240
million in the first threesix months of 2003 and $102$187 million in the first quartersix months
last year, primarily relate to computer equipment purchases and the refurbishing
and modernizing of office facilities and software development costs.
MMC has committed to potential future investments of approximately $455$440 million
in connection with various MMC Capital funds and other MMC investments.
Approximately $70$35 million is expected to be invested during the remainder of
2003. MMC expects to fund future commitments, in part, with sales proceeds from
existing investments.
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 and equity markets.
Interest Rate Risk
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 limited basis to manage MMC's exposure to interest rate
movements on its cash and investments, as well as interest expense on
borrowings, and are only executed with counterparties of high creditworthiness.
Foreign Currency Risk
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. Forward contracts and options are
periodically utilized by MMC to limit foreign currency exchange rate exposure on
net income and cash flows for specific, clearly defined transactions arising in
the ordinary course of its business.
Equity Price Risk
MMC hasholds investments whichin both public and private companies as well as certain
private equity funds managed by MMC Capital including Trident II. Publicly
traded investments of $346 million are carried at market valueclassified as available for sale under
SFAS No. 115115. Non-publicly traded investments of $155 million and investments which$311 million
are accounted for using the equity method under APB Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock."using the cost method and the equity
method, respectively. The investments are subject to risk of changes in market
value, which if determined to be other than temporary, could result in realized
impairment losses. MMC periodically reviews the carrying value of such
investments to determine if any valuation adjustments are appropriate under the
applicable accounting pronouncements.
23
MMC Capital helped develop an additional source of insurance and reinsurance
capacity after September 11 through the formation of AXIS Specialty Holdings
("AXIS"), a Bermuda domiciled insurance company. AXIS had an initial
capitalization of $1.6 billion, which included a $250 million investment by
Trident II and a $100 million direct investment by MMC. AXIS completed an
initial public offering on July 1, 2003. MMC's direct investment is currently
carried at cost and will be classified as an available for sale security, as
restrictions on the sale of AXIS shares expire, with changes in fair value
recorded in other comprehensive income until realized. Trident II's investments
are carried at fair value, in accordance with investment company accounting.
MMC's proportionate share of the change in value of its investment in Trident II
is recorded as part of investment income (loss) in the Consolidated Income
Statement.
MMC utilizes option contracts to hedge the variability of cash flows from
forecasted sales of certain available for sale investments. The hedge is
achieved through the use of European style put and call options, which mature on
the dates of the forecasted sales. The hedges are only executed with
counterparties of high creditworthiness.
Other
The insurance coverage for potential liability resulting from alleged errors and
omissions in the professional services provided by MMC includes elements of both
risk retention and risk transfer. MMC believes it has adequately reserved for
the self-insurance portion of the contingencies. Payments related to the
respective self-insured layers are made as legal fees are incurred and claims
are resolved and generally extend over a considerable number of years. The
amounts paid in that regard vary in relation to the severity of the claims and
the number of claims active in any particular year. The long-term portion of
this liability is included in Other liabilities in the Consolidated Balance
Sheets.
New Accounting Pronouncements
New accounting pronouncements are discussed in Note 1415 to the consolidated
financial statements.Consolidated
Financial Statements.
24
Part I - Item 4. Controls & Procedures
- ---------------------------------------
a. Evaluation of Disclosure Controls and Procedures
Based on their evaluation, as of a date within 90 daysthe end of the period for the filing of this
Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-14 and 15d-1413a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) are
effective in timely alerting them to material information relating to the
Company required to be included in our reports filed under the Exchange Act.
b. Changes in Internal Controls over Financial Reporting
There have been no significant changes in the Company's internal controls over financial
reporting during the period covered by this report that have materially
affected, or in other factors
that could significantlyare reasonably likely to materially affect, these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.Company's internal
control over financial reporting.
25
PART II. OTHER INFORMATION
--------------------------
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
MarchJune 30, 2003
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of MMC was held on May 15,
2003. Represented at the meeting, at which stockholders took the
following actions, were 460,647,321 shares, or 87 percent, of
MMC's 528,696,095 shares of common stock outstanding and entitled
to vote:
1. MMC's stockholders elected the five director nominees named
below with each receiving the following votes:
Number of Number of Shares
Shares Voted Voted to be
For Withheld
Peter Coster 443,927,171 16,720,150
----------- ----------
Charles A. Davis 444,000,428 16,646,893
----------- ----------
Gwendolyn S. King 446,564,657 14,082,664
----------- ----------
Lawrence J. Lasser 435,329,928 25,317,393
----------- ----------
David A. Olsen 345,367,039 115,280,282
----------- -----------
2. MMC's stockholders adopted an amendment to MMC's Restated
Certificate of Incorporation increasing the number of
authorized shares of common stock from 800,000,000 to
1,600,000,000, with a favorable vote of 426,263,910 of the
shares represented (30,764,982 against and 3,618,228
abstaining).
3. Deloitte & Touche LLP was ratified as MMC's independent
auditors for the year ending December 31, 2003, with a
favorable vote of 430,132,915 of the shares represented
(27,212,518 against and 3,300,488 abstaining).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. MMC's by-laws
4. Second4.1 Third Supplemental Indenture dated as of February 19,July 30, 2003
between MMC and U.S. National Bank National Association (as
successor to State Street Bank and Trust Company), as
trustee 10. Amendment to Marsh & McLennan Companies Supplemental
Retirement Plan(includes the form of senior note due 2033).
10.1 Renewal of Consulting Agreement between A.J.C. Smith
and MMC dated as of May 16, 2003.
26
12. Statement re:Re: Computation of Ratio of Earnings to Fixed
Charges
99. Certification of CEO and CFO pursuant toCharges.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32. Section 906 of the
Sarbanes-Oxley Act1350 Certifications.
(b) Reports on Form 8-K
A current reportCurrent Report on Form 8-K dated January 29,April 23, 2003 was filed
by the registrant to report its issuance of a press release
announcing its unaudited fourthfirst quarter and year-end financial results for
the yearquarter ended DecemberMarch 31, 2002.2003.
27
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 13th day14th of May,August, 2003 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
CERTIFICATIONS
I, Jeffrey W. Greenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marsh & McLennan
Companies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Jeffrey W. Greenberg
------------------------
Chief Executive Officer
CERTIFICATIONS
I, Sandra S. Wijnberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marsh & McLennan
Companies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Sandra W. Wijnberg
----------------------
Senior Vice President & Chief Financial Officer28