================================================================================
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, 2002
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, 2002, there were outstanding 273,830,476 shares of common
stock, par value $1.00 per share, of the registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS.
Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their
representatives may from time to time make verbal or written statements
(including certain statements contained in this report and in 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, 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 loss 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 service business are changes in competitive conditions,
movements in premium rate levels, difficulty transferring commercial risk, and
other changes in the global property and casualty insurance markets, the impact
of terrorist attacks and natural catastrophes and mergers between client
organizations, including insurance and reinsurance companies. 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 posting of updates of assets
under management at Putnam. Monthly updates of assets under management at Putnam
will be posted 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. Investors can link to MMC
and its operating company websites through www.mmc.com.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2001
------- ------
Revenue $ 2,635 $ 2,631
Expense 1,948 1,986
----- -----
Operating Income 687 645
Interest Income 5 5
Interest Expense (37) (52)
------ -----
Income Before Income Taxes and Minority Interest 655 598
Income Taxes 232 224
Minority Interest, Net of Tax 5 5
------- ------
Net Income $ 418 $ 369
------- -------
Basic Net Income Per Share $ 1.53 $ 1.33
------- -------
Diluted Net Income Per Share $ 1.47 $ 1.27
------- -------
Average Number of Shares
Outstanding - Basic 274 276
--- ---
Average Number of Shares
Outstanding - Diluted 284 288
--- ---
Dividends Declared $ .53 $ .50
------- -------
The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
2002 2001
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 543 $ 537
-------- --------
Receivables-
Commissions and fees 2,278 2,288
Advanced premiums and claims 173 188
Other receivables 333 355
----- ------
2,784 2,831
Less-allowance for doubtful accounts and cancellations (135) (139)
----- ------
Net receivables 2,649 2,692
----- -----
Prepaid dealer commissions -
current portion 280 308
Other current assets 254 255
----- -----
Total current assets 3,726 3,792
Goodwill and intangible assets 5,307 5,327
Fixed assets, net 1,239 1,235
(net of accumulated depreciation and
amortization of $1,106 at March 31, 2002
and $1,022 at December 31, 2001)
Long-term investments 816 826
Prepaid dealer commissions 477 528
Other assets 1,636 1,585
-------- --------
$ 13,201 $ 13,293
The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
2002 2001
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 794 $ 757
Accounts payable and accrued liabilities 1,332 1,347
Accrued compensation and employee benefits 530 1,088
Accrued income taxes 340 600
Dividends payable 147 146
------ ------
Total current liabilities 3,143 3,938
------ -------
Fiduciary liabilities 3,752 3,630
Less - cash and investments held in
a fiduciary capacity (3,752) (3,630)
------ ------
Long-term debt 2,826 2,334
----- -----
Other liabilities 1,890 1,848
----- -----
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
800,000,000 shares, issued 280,320,819
shares at March 31, 2002 and 280,320,819
at December 31, 2001 280 280
Additional paid-in capital 1,856 1,901
Retained earnings 3,996 3,723
Accumulated other comprehensive loss (276) (227)
------- -------
5,856 5,677
Less - treasury shares, at cost,
5,969,322 shares at March 31, 2002 and
5,994,048 shares at December 31, 2001 (514) (504)
--------- --- ---- -------- ---------
Total stockholders' equity 5,342 5,173
-------- ---------
$ 13,201 $ 13,293
-------- --------
The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Three Months Ended
March 31,
-----------------
2002 2001
------- -----
Operating cash flows:
Net income $ 418 $ 369
Adjustments to reconcile net income to cash used for
operations:
Depreciation of fixed assets and capitalized software 78 82
Amortization of intangible assets 8 49
Provision for deferred income taxes 43 42
Other, net (8) (26)
Changes in assets and liabilities:
Net receivables 43 98
Prepaid dealer commissions 79 50
Other current assets (8) 15
Other assets (29) (31)
Accounts payable and accrued liabilities 4 (9)
Accrued compensation and employee benefits (558) (844)
Accrued income taxes (276) 87
Other liabilities 43 (72)
---- -----
Net cash used for operations (163) (190)
---- ----
Financing cash flows:
Net (decrease) increase in commercial paper (213) 867
Other borrowings 747 7
Other repayments of debt (2) (2)
Purchase of treasury shares (217) (99)
Issuance of common stock 162 83
Dividends paid (145) (136)
---- ----
Net cash provided by financing activities 332 720
---- ---
Investing cash flows:
Additions to fixed assets and capitalized software (102) (124)
Proceeds from sale or disposal of fixed assets 3 9
Acquisitions (2) (41)
Other, net (57) (276)
---- -----
Net cash used for investing activities (158) (432)
---- -----
Effect of exchange rate changes on cash
and cash equivalents (5) (5)
---- -----
Increase in cash & cash equivalents 6 93
Cash & cash equivalents at beginning of period 537 240
----- -----
Cash & cash equivalents at end of period $ 543 $ 333
----- -----
The accompanying notes are an integral part of these consolidated statements.
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
insurance broking, reinsurance broking and insurance and 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 human
resources and employee benefit programs, investment consulting, general
management consulting, organizational design and economic consulting and
expert testimony.
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-month periods ended March 31, 2002 and
2001. Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
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
respective insurance underwriters. MMC also collects claims or refunds from
underwriters on behalf of insureds. Unremitted insurance premiums and
claims are held in a fiduciary capacity. Interest income on these fiduciary
funds, included in revenue, amounted to $27 million and $49 million for the
three months ended March 31, 2002 and 2001, respectively.
Net uncollected premiums and claims and the related payables amounting to
$10.8 billion at March 31, 2002 and December 31, 2001 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-month periods
ended March 31, 2002 and 2001.
(In millions of dollars) 2002 2001
---- ----
Net income $418 $369
Less: Potential minority interest associated
with the Putnam Equity Partnership Plan,
net of dividend equivalent expense related to
common stock equivalents (1) (4)
---- ----
Net income for diluted
earnings per share $417 $365
==== ====
Basic weighted average
common shares outstanding 274 276
Dilutive effect of potentially issuable common shares 10 12
---- ----
Diluted weighted average
common shares outstanding 284 288
=== ===
5. Comprehensive Income
--------------------
The components of comprehensive income for the three-month periods ended
March 31, 2002 and 2001 are as follows:
(In millions of dollars) 2002 2001
---- ----
Foreign currency translation adjustments $(31) $ (60)
Unrealized investment holding gains (losses),
net of income taxes 3 (93)
Less: Reclassification adjustment for gains
included in net income, net of income taxes (20) (24)
Deferred loss on cash flow hedges, net of income taxes (1) -
--- ---
Other comprehensive loss (49) (177)
Net income 418 369
--- ---
Comprehensive income $369 $192
==== ====
6. Supplemental Disclosure to the Consolidated Statements of Cash Flows
--------------------------------------------------------------------
The following schedule provides additional information concerning interest
and income taxes paid for the three-month periods ended March 31, 2002 and
2001:
(In millions of dollars) 2002 2001
---- ----
Interest paid $ 18 $42
Income taxes paid $399 $25
7. 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")
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")
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:
- --------------------------------------------------------------------------------
1999 Sedgwick Plan: Utilized Utilized Balance
(In millions of dollars) and changes in March 31,
in estimates First 2002
Initial through Qtr.
Balance 2001 2002
- --------------------------------------------------------------------------------
Termination payments to employees $183 $(180) $ - $ 3
Other employee-related costs 5 (5) - -
Future rent under noncancelable leases 48 (28) (1) 19
Leasehold termination and related costs 49 (30) - 19
- --------------------------------------------------------------------------------
$285 $(243) (1) $41
- -------------------------------------------------------------------------------
Number of employee terminations 2,400 (2,400) - -
Number of office consolidations 125 (125) - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1999 MMC Plan: Utilized Utilized Balance
(In millions of dollars) and changes in March 31,
in estimates First 2002
Initial through Qtr.
Balance 2001 2002
- --------------------------------------------------------------------------------
Termination payments to employees $194 $(187) $ (1) $ 6
Future rent under noncancelable leases 31 (19) (1) 11
Leasehold termination and related costs 16 (13) - 3
Other integration related costs 25 (25) - -
- --------------------------------------------------------------------------------
$266 $(244) (2) $20
- --------------------------------------------------------------------------------
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 and salary continuance arrangements, are
expected to be paid over several years.
- --------------------------------------------------------------------------------
2001 Plan: Utilized Balance
(In millions of dollars) in March 31,
First 2002
Initial Utilized Qtr.
Balance 2001 2002
- --------------------------------------------------------------------------------
Termination payments to employees $ 44 $(14) $ (9) $21
Future rent under noncancelable
leases 17 - (1) 16
- --------------------------------------------------------------------------------
$61 $(14) $(10) $37
- --------------------------------------------------------------------------------
Number of employee terminations 750 (506) (155) 89
Number of office consolidations 9 (2) (6) 1
- --------------------------------------------------------------------------------
Actions under the 2001 Plan are expected to be substantially complete by June
30, 2002.
8. Long-term Debt
--------------
In March 2002, MMC issued $500 million of 5.375% Senior Notes due 2007 and
$250 million of 6.25% Senior Notes due 2012 (the "Notes"). Interest is
payable semi-annually on March 15 and September 15 of each year commencing
September 15, 2002. The proceeds of these Notes were used to repay a
portion of commercial paper borrowings.
MMC entered into interest rate swap transactions to hedge its exposure to
changes in the fair value of the Notes. The swap transactions effectively
convert the fixed rate obligations into floating rate obligations. Under
the terms of the swaps, the swap counterparties will pay MMC a fixed rate
equal to the coupon rate on the Notes. MMC will pay the swap counterparties
a floating rate of 6-month Libor plus 9.25 bps for the five-year swap and
6-month Libor plus 25.45 bps for the ten year swap. The swaps qualify for
hedge accounting and meet all the criteria necessary to conclude that the
hedge will be perfectly effective under SFAS No. 133.
Commercial paper borrowings of $750 million at March 31, 2002 and $1.0
billion at December 31, 2001 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.
9. Claims, Lawsuits and Other Contingencies
----------------------------------------
MMC and its subsidiaries are subject to various claims, lawsuits and
proceedings consisting principally of alleged errors and omissions in
connection with the placement of insurance or reinsurance and in rendering
investment and consulting services. Some of these matters seek damages,
including punitive damages, in amounts which could, if assessed, be
significant. Insurance coverage applicable to such matters includes
elements of both risk retention and risk transfer.
Sedgwick Group plc, since prior to its acquisition, has been engaged in a
review of previously undertaken personal pension plan business as required
by United Kingdom regulators to determine whether redress should be made to
customers. Other present and former subsidiaries of MMC are engaged in a
comparable review of their personal pension plan businesses, although the
extent of their activity in this area, and consequently their financial
exposure, was proportionally much less than Sedgwick. As of March 31, 2002,
settlements and related costs previously paid amount to approximately $485
million, of which approximately $160 million is due from or has been paid
by insurers. The remaining contingent exposure for pension redress and
related costs is estimated to be $140 million, essentially all of which is
expected to be recovered from insurers.
MMC's ultimate exposure from the review by the Personal Investment
Authority (now part of the U.K. Financial Services Authority), as presently
calculated and including Sedgwick, is subject to a number of variable
factors including, among others, the interest rate established quarterly by
the U.K. regulators for calculating compensation, equity markets, and the
precise scope, duration, and methodology of the review as required by that
Authority.
Putnam Investment Management LLC and Putnam Retail Management, Limited
Partnership, two indirect subsidiaries of MMC, as well as entities from
approximately two dozen other mutual fund companies were named as
defendants in an action entitled Richard Nelson, et.al. v. AIM Advisors,
Inc. et. al., Civ. A. No. 01-CV-282, in the United States District Court
for the Southern District of Illinois. This purported nationwide class
action alleged that the distribution and advisor fees paid by the various
mutual funds from May 1, 1991 to the present were unlawful and excessive,
that each fund complex exercised a controlling influence over statutorily
independent directors of each fund and that these fees were thus not
properly approved. The complaint alleged that the defendants' actions
violated the Investment Company Act of 1940, as well as common law
fiduciary duties, and sought, among other things, actual and punitive
damages and declaratory relief. The Court, responding to motions by Putnam
and the other defendants, has ordered that the respective claims asserted
against the defendants be severed into separate actions and transferred to
a more convenient forum for each defendant. Following the Court's ruling on
the transfer motions, the plaintiffs voluntarily requested that the Court
dismiss the action, including all claims against the Putnam entities. The
Court dismissed the action on March 29, 2002, and there is no indication
that the claims will be reasserted against the Putnam entities in any
forum.
As part of the combination with Sedgwick, MMC acquired several insurance
underwriting businesses that were already in run-off, including River
Thames Insurance Company Limited. MMC has subsequently disposed of
substantially all of these insurance entities, however, guarantees issued
by Sedgwick with respect to certain liabilities of River Thames remain
open.
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.
10. Goodwill and Other Intangibles
------------------------------
Effective January 1, 2002, MMC adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," which addresses
the financial accounting and reporting standards for the acquisition of
intangible assets outside of a business combination and for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142
requires that goodwill be separately disclosed from other intangible assets
in the financial statements and no longer be amortized but tested for
impairment on a periodic basis. The provisions of this standard also
require the completion of a transitional impairment test within six months
of adoption.
In accordance with SFAS No. 142, MMC discontinued the amortization of
goodwill effective January 1, 2002. A reconciliation of previously reported
net income and earnings per share to the amounts adjusted for the exclusion
of goodwill amortization net of the pro-forma effect of directly related
expenses and income taxes for the three-month periods ended March 31, 2002
and 2001 follows:
(In million of dollars, except per share data) 2002 2001
------ ------
Reported Net Income $418 $369
Net amortization adjustment - 33
----- -----
Adjusted Net Income $418 $402
==== ====
Reported earnings per share - Basic $1.53 $1.33
===== =====
Adjusted earnings per share - Basic $1.53 $1.45
===== =====
Reported earnings per share - Diluted $1.47 $1.27
===== =====
Adjusted earnings per share - Diluted $1.47 $1.38
===== =====
Changes in the carrying amount of goodwill for the three-month period ended
March 31, 2002, are as follows:
Balance as of January 1, 2002 $5,069
Goodwill acquired -
Other adjustments (14)
------
Balance as of March 31, 2002 $5,055
======
The goodwill balance at March 31, 2002 includes approximately $115 million
of equity method goodwill.
Amortized intangible assets consist 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 that
are not amortized. The gross carrying amount and accumulated amortization
by major intangible asset class is as follows:
(In millions of dollars) Balance at March 31, 2002
-----------------------------------
Gross Accumulated Net Carrying
Cost Amortization Value
------ ------------ ------------
Client lists and client
relationships acquired $126 $ 42 $ 84
Future revenue streams related
to existing private equity funds 219 51 168
--- -- ---
Total Amortized Intangibles $345 $ 93 $252
==== ==== ====
Aggregate amortization expense for the quarter ended March 31, 2002 was $8
million and the estimated aggregate amortization expense is as follows:
Year Ending December 31, Estimated Expense
-------------------------- ---------------------------
2002 $31
2003 $31
2004 $31
2005 $31
2006 $22
11. 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-month
periods ended March 31, 2002 and 2001 follow:
(In millions of dollars)
Revenue Segment
from External Operating
Customers Income
--------- ------
2002
Risk and Insurance Services $1,476 (a) $462
Investment Management 594 175
Consulting 565 (b) 74
------ ----
$2,635 $711
====== ====
2001
Risk and Insurance Services $1,354 (a) $381
Investment Management 690 217
Consulting 587 (b) 70
------ ----
$2,631 $668
====== ====
(a) Includes interest income on fiduciary funds ($27 million in 2002 and $49
million in 2001).
(b) Revenue and expense for 2001 reflect the reclassification of reimbursed
(out-of-pocket) expenses. Effective January 1, 2002, expense reimbursements
received from clients within the Consulting segment are recorded as revenue
rather than an offset to expense, in compliance with guidance provided by
the Financial Accounting Standards Board (EITF Issue No. 01-14).
A reconciliation of the total segment operating income to income before
income taxes and minority interest in the consolidated financial statements
is as follows:
2002 2001
---- ----
Total segment operating income $711 $668
Corporate expense (29) (28)
Reclassification of minority interest 5 5
---- ----
Operating income 687 645
Interest income 5 5
Interest expense (37) (52)
---- ----
Total income before income taxes and
minority interest $655 $598
==== ====
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
First Quarter Ended March 31, 2002
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh, the world's leading risk and
insurance services firm; Putnam Investments, one of the largest investment
management companies in the United States; and Mercer, a major global provider
of consulting services. Approximately 58,000 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, 2001.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Information Concerning Forward-Looking
Statements" on page one of this filing. This Form 10-Q should be read in
conjunction with MMC's latest Annual Report on Form 10-K.
The consolidated results of operations follow:
- --------------------------------------------------------------------------------
(In millions of dollars) 2002 2001
- --------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $1,476 $1,354
Investment Management 594 690
Consulting (a) 565 587
----- ----
2,635 2,631
----- -----
Expense:
Compensation and Benefits 1,249 1,216
Other Operating Expenses 699 770
----- -----
1,948 1,986
----- -----
Operating Income $ 687 $ 645
------ ------
Operating Income Margin 26.1% 24.5%
==== ====
- --------------------------------------------------------------------------------
(a) Revenue and expense for 2001 reflect the reclassification of reimbursed
(out-of-pocket) expenses to conform with current year presentation.
Revenue, derived mainly from commissions and fees, was essentially unchanged
from the first quarter of 2001 and expenses decreased 2%. Revenue increased in
the risk and insurance services segment, principally driven by a higher volume
of business, offset by revenue declines in the investment management and
consulting segments. The 2002 expenses reflect the change in accounting for
goodwill discussed under New Accounting Pronouncements in this Management's
Discussion and Analysis.
On a consolidated basis, underlying revenue which excludes the effect of such
items as foreign exchange, acquisitions and dispositions, increased 2% as
compared with 2001. The risk and insurance services segment experienced
underlying revenue growth of approximately 12% primarily due to net new business
and the effect of higher commercial insurance premium rates partially offset by
lower fiduciary interest income. Revenue decreased 14% in the investment
management segment as average assets under management declined from the prior
year. Consulting revenue declined 3% for the quarter primarily reflecting a
decline in the general management consulting and compensation and communication
practices partially offset by increased levels of service provided by its
retirement consulting and administration practice and its economic consulting
practice.
Operating expenses, excluding the effect of foreign exchange, acquisitions and
dispositions, and the change in accounting for goodwill, increased approximately
1% in the first quarter of 2002 primarily due to increased compensation and
benefit costs in the risk and insurance services segment offset by lower
incentive compensation in the investment management segment and lower
discretionary expenses in the investment management and consulting segments.
Risk and Insurance Services
- --------------------------------------------------------------------------------
(In millions of dollars) 2002 2001
- --------------------------------------------------------------------------------
Revenue $1,476 $1,354
Expense 1,014 973
----- ------
Operating Income $ 462 $ 381
----- ------
Operating Income Margin 31.3% 28.1%
==== ====
- --------------------------------------------------------------------------------
Revenue Revenue for the risk and insurance services segment grew 9% over the
first quarter of 2001. On a comparable basis, underlying revenue for the risk
and insurance services segment rose approximately 12% primarily reflecting net
new business and higher premium rates. Underlying reveue for insurance broking
and risk management, which accounted for approximately 75% of the entire risk
and insurance services segment, grew approximately 11%. This increase includes
the impact of a 35% decrease in fiduciary interest income, resulting from a
decline in interest rates, partially offset by higher average funds invested.
Unerlying revenue for the reinsurance broking unit grew 22%, which includes the
impact of a 44% decline in fiduciary interest income. Beginning in 2000 and
continuing into 2001, the transfer of commercial risk has gradually become more
difficult and costly with proportionate increases in premiums. The terrorist
attacks in 2001 accelerated these trends. Insurance and reinsurance markets
worldwide have tightened, capacity is reduced and rates increased. The size of
the increases vary according to product line and clients' loss experience, which
reflects a dynamic and changing marketplace. These trends are continuing into
the second quarter of 2002.
Expense
Risk and insurance services expenses increased 4% over 2001. On a comparable
basis, excluding the effect of such items as acquisitions, foreign exchange, and
the change in accounting for goodwill, expenses increased approximately 9% from
the first quarter of 2001 primarily reflecting increased compensation and
benefit costs associated with staff growth and a higher volume of business.
Investment Management
- --------------------------------------------------------------------------------
(In millions of dollars) 2002 2001
- --------------------------------------------------------------------------------
Revenue $594 $690
Expense 419 473
--- ---
Operating Income $175 $217
---- ----
Operating Income Margin 29.5% 31.4%
==== ====
- --------------------------------------------------------------------------------
Revenue
Putnam's revenue decreased 14% compared with the first quarter of 2001
reflecting a decline in the level of average assets under management on which
fees are earned. Assets under management averaged $310 billion in the first
quarter of 2002, a 12% decline from the $352 billion managed in the first
quarter of 2001. Assets under management aggregated $314 billion at March 31,
2002 compared with $321 billion at March 31, 2001 and $315 billion at December
31, 2001. The change from December 31, 2001 results primarily from a decline in
equity market levels. Assets under management at April 30, 2002 aggregated $305
billion.
Expense
Putnam's expenses decreased 11% in the first quarter of 2002 from the same
period of 2001 primarily due to lower incentive compensation reflecting the
current operating environment, as well as a reduction in volume related
expenses.
Quarter-end and average assets under management are presented below:
- --------------------------------------------------------------------------------
(In billions of dollars) 2002 2001
- --------------------------------------------------------------------------------
Mutual Funds:
Core Equity $62 $59
Value Equity 54 55
Growth Equity 52 69
Fixed Income 49 48
- --------------------------------------------------------------------------------
217 231
- --------------------------------------------------------------------------------
Institutional Accounts:
Core Equity 46 42
Value Equity 7 6
Growth Equity 26 26
Fixed Income 18 16
- --------------------------------------------------------------------------------
97 90
- --------------------------------------------------------------------------------
Quarter-end Assets $314 $321
- --------------------------------------------------------------------------------
Assets from Non-US Investors $30 $27
- --------------------------------------------------------------------------------
Average Assets $310 $352
- --------------------------------------------------------------------------------
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 have recorded declines in each of the past two years after several years
of substantial growth prior to 2000. These market declines have contributed to
the decrease in assets under management and, accordingly, to the decrease in
revenue. 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 and 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 changes in stock and bond market
valuations.
Putnam provides individual and institutional investors with a broad range of
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 first quarter, assets held in equity securities represented
79% of assets under management, compared with 80% at March 31, 2001, while
investments in fixed income products represented 21%, compared with 20% at March
31, 2001.
Consulting
- --------------------------------------------------------------------------------
(In millions of dollars) 2002 2001(a)
- -------------------------------------------------------------------------------
Revenue $565 $587
Expense 491 517
--- ---
Operating Income $ 74 $ 70
---- ----
Operating Income Margin 13.1% 11.9%
==== ====
- --------------------------------------------------------------------------------
(a) Revenue and expense for 2001 reflect the reclassification of reimbursed
(out-of-pocket) expenses to conform with current year presentation.
Revenue
Consulting revenue declined 4% in the first quarter of 2002 compared with the
same period of 2001. Excluding items such as foreign exchange, acquisitions and
dispositions, underlying consulting revenue decreased 3% in the first quarter of
2002. General management consulting declined 26% and compensation and
communications consulting revenue declined 17% due to reduced demand for these
services. Retirement consulting and administration revenue, which represented
47% of the consulting segment, grew 7% in the first quarter and economic
consulting revenue rose 22%.
Expense
Consulting expenses declined 5% in 2002 compared with the first quarter of 2001.
On a comparable basis, excluding the effect of such items as foreign exchange,
acquisitions and dispositions, and the change in accounting for goodwill,
expenses declined approximately 3% reflecting lower discretionary spending and a
lower volume of business.
New Accounting Pronouncements
In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", MMC
discontinued amortization of goodwill on a prospective basis, effective January
1, 2002. Although results of prior periods are not to be restated, SFAS No. 142
requires disclosure of the effect of the accounting change on all prior periods
presented. The impact of this change on 2001 results, after the effect of taxes
and directly related expenses, is an increase in diluted earnings per share as
follows for the quarter ended: March 31 - $0.11; June 30 - $0.11; September 30 -
$0.12; and December 31 - $0.11. Approximately 70% of the impact of this change
is related to the Risk and Insurance Services segment.
Effective January 1, 2002, expense reimbursements received from clients within
the consulting segment are recorded as revenue, rather than an offset to
expense, in accordance with guidance provided in EITF Issue 01-14, "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred." Revenue and expense for prior periods reflect the
reclassification of reimbursed expenses as follows:
Reclassification of Consulting Reimbursed Expenses
2001
-----------------------------------------------
1Q 2Q 3Q 4Q YR
------ ------- ------ ------- -------
Revenue:
As Previously Reported $ 550 $ 558 $ 536 $ 516 $2,160
Reimbursements 37 36 36 39 148
------ ------ ------ ------ ------
After Reclassification $ 587 $ 594 $ 572 $ 555 $2,308
------ ------ ------ ------ ------
Expense:
As Previously Reported $ 480 $ 467 $ 455 $ 445 $1,847
Reimbursements 37 36 36 39 148
------ ------ ------ ------ ------
After Reclassification $ 517 $ 503 $ 491 $ 484 $1,995
------ ------ ------ ------ ------
Operating Income $ 70 $ 91 $ 81 $ 71 $ 313
====== ====== ====== ====== ======
Operating Margin:
As Previously Reported 12.7% 16.3% 15.1% 13.8% 14.5%
After Reclassification 11.9% 15.3% 14.2% 12.8% 13.6%
Interest
Interest income earned on corporate funds amounted to $5 million in the first
quarter of 2002, the same as the first quarter of 2001. Interest expense of $37
million decreased from $52 million in the first quarter of 2002 due to lower
average interest rates in 2002 partially offset by an increase in the average
outstanding debt in the first quarter of 2002.
Income Taxes
MMC's consolidated effective tax rate was 35.5% of income before income taxes
and minority interest in the first quarter of 2002 compared with 37.5% in the
first quarter of 2001. The reduction in the effective tax rate results from the
implementation of SFAS No. 142, as a significant portion of the goodwill
amortization expense recorded in prior years was not deductible for tax
purposes.
Liquidity and Capital Resources
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 used $163 million of cash for
operations for the period ended March 31, 2002 compared with a use of cash of
$190 million for the same period in 2001. These amounts reflect the net income
earned by MMC during those periods adjusted for non-cash charges and working
capital changes. MMC's use of cash for operations in the quarter ended March 31
in each year primarily results from seasonal cash demands related to incentive
compensation payments.
MMC's cash and cash equivalents aggregated $543 million on March 31, 2002, an
increase of $6 million from the end of 2001.
Financing Activity
In March 2002, MMC issued $500 million of 5.375% Senior Notes due in 2007 and
$250 million of 6.25% Senior Notes due in 2012 (the "Notes"). The net proceeds
from the Notes were used to pay down commercial paper borrowings. Commercial
paper outstanding decreased $213 million during the first quarter of 2002 as a
result of these repayments partially offset by seasonal demands related to
incentive compensation payments.
MMC entered into interest rate swap transactions to hedge its exposure to
changes in the fair value of the Notes. The swap transactions effectively
convert the fixed rate obligations into floating rate obligations. Under the
terms of the swaps, the swap counterparties will pay MMC a fixed rate equal to
the coupon rate on the bonds. MMC will pay the swap counterparties a floating
rate of 6-month Libor plus 9.25 bps for the five year swap and 6 month Libor
plus 25.45 bps for the ten year swap. The swaps qualify for hedge accounting and
meet all criteria necessary to conclude that the hedge will be perfectly
effective under SFAS No. 133.
During the first quarter of 2002, MMC repurchased approximately 2.2 million
shares of its common stock at a cost of approximately $235 million. MMC
currently plans to continue to repurchase shares throughout 2002, subject to
market conditions.
Investment Activity
MMC's additions to fixed assets and capitalized software, which amounted to $102
million in the first three months of 2002 and $124 million in the first quarter
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 $530 million
in connection with various MMC Capital funds and other MMC investments.
Approximately $200 million is expected to be invested during the remainder of
2002. 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 to hedge the fair value of
fixed rate debt, 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. However, the net impact of these
fluctuations on MMC's results of operations or cash flows has not been material.
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 has both "available for sale" investments which are carried at market value
under SFAS No. 115 and investments which are accounted for using the equity
method under APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The investments are subject to risk of changes in
market value, which if determined to be other than temporary, could result in
impairment losses. MMC reviews the carrying value of such investments to
determine if any valuation adjustments are appropriate under the applicable
accounting pronouncements.
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
As further explained in Note 9 to the consolidated financial statements, the
disclosure and advice given to clients regarding certain personal pension
transactions by certain present and former subsidiaries in the United Kingdom
are under review by the Financial Services Authority. At current rates of
exchange, the contingent exposure for pension redress and related cost is
presently estimated to be approximately $140 million, essentially all of which
is expected to be recovered from insurers. Approximately two-thirds of the
contingent exposure is associated with the Sedgwick acquisition while the
balance is associated with other current and former subsidiaries of MMC. Such
amounts in excess of anticipated insurance recoveries have been provided for in
the accompanying financial statements.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMTION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
MARCH 31, 2002
Item 1. Legal Proceedings
Putnam Investment Management LLC and Putnam Retail Management,
Limited Partnership, two indirect subsidiaries of MMC, as well as
entities from approximately two dozen other mutual fund companies
were named as defendants in an action entitled Richard Nelson,
et.al. v. AIM Advisors, Inc. et. al., Civ. A. No. 01-CV-282, in
the United States District Court for the Southern District of
Illinois. This purported nationwide class action alleged that the
distribution and advisor fees paid by the various mutual funds
from May 1, 1991 to the present were unlawful and excessive, that
each fund complex exercised a controlling influence over
statutorily independent directors of each fund and that these
fees were thus not properly approved. The complaint alleged that
the defendants' actions violated the Investment Company Act of
1940, as well as common law fiduciary duties, and sought, among
other things, actual and punitive damages and declaratory relief.
The Court, responding to the motions by Putnam and the other
defendants, has ordered that the respective claims asserted
against the defendants be severed into separate actions and
transferred to a more convenient forum for each defendant.
Following the Court's ruling on the transfer motions, the
plaintiffs voluntarily requested that the Court dismiss the
action, including all claims against the Putnam entities. The
Court dismissed the action on March 29, 2002, and there is no
indication that the claims will be reasserted against the Putnam
entities in any forum.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
4. Indenture dated as of March 19, 2002 between MMC and
State Street Bank and Trust Company, as trustee
(incorporated by reference to the registrant's
Registration Statement on Form S-4, Registration No.
333-87510).
12. Statement Re: Computation of Ratios of Earnings to
Fixed Charges.
(b) Reports on Form 8-K.
None.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, MMC has
duly caused this report to be signed this 14th day of May, 2002 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