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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ___
As of October 31, 2003 there were outstanding 530,241,472 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 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, regulatory proceedings, securities litigation, 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
services 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, natural catastrophes, and mergers between client organizations,
including insurance and reinsurance 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 including investor
reaction to regulatory proceedings and securities litigation, 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, the impact of terrorist attacks, 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)
- -------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------
(In millions, except per share figures) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
Revenue:
Service revenue $2,809 $2,538 $8,490 $7,748
Investment income (loss) 28 15 64 52
- -------------------------------------------------------------------------------------------------------
Operating revenue 2,837 2,553 8,554 7,800
- --------------------------------------------------------------------------------------------------------
Expense:
Compensation and benefits 1,486 1,299 4,339 3,829
Other operating expenses 758 742 2,306 2,207
- --------------------------------------------------------------------------------------------------------
Operating expenses 2,244 2,041 6,645 6,036
- --------------------------------------------------------------------------------------------------------
Operating income 593 512 1,909 1,764
Interest income 6 5 19 14
Interest expense (48) (43) (137) (118)
- --------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 551 474 1,791 1,660
Income taxes 188 168 609 589
Minority interest, net of tax 6 7 17 18
- ---------------------------------------------------------------------------------------------------------
Net income $ 357 $ 299 $1,165 $1,053
- ---------------------------------------------------------------------------------------------------------
Basic net income per share $ .67 $ .56 $2.18 $ 1.94
- ----------------------------------------------------------------------------------------------------------
Diluted net income per share $ .65 $ .55 $2.12 $ 1.88
- ----------------------------------------------------------------------------------------------------------
Average number of shares outstanding-Basic 531 535 534 542
- ----------------------------------------------------------------------------------------------------------
Average number of shares outstanding-Diluted 550 548 550 559
- ----------------------------------------------------------------------------------------------------------
Dividends Declared $ 0.31 $ 0.28 $ 0.90 $ 0.83
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
3
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------
(Unaudited)
September 30, December 31,
(In millions of dollars) 2003 2002
- -------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 691 $ 546
- -------------------------------------------------------------------------------------------
Receivables
Commissions and fees 2,318 2,178
Advanced premiums and claims 102 119
Other 363 305
- -------------------------------------------------------------------------------------------
2,783 2,602
Less-allowance for doubtful accounts and cancellations (127) (124)
- -------------------------------------------------------------------------------------------
Net receivables 2,656 2,478
- -------------------------------------------------------------------------------------------
Prepaid dealer commissions - current portion 166 226
Other current assets 276 414
- -------------------------------------------------------------------------------------------
Total current assets 3,789 3,664
Goodwill and intangible assets 5,712 5,404
Fixed assets, net 1,378 1,308
(net of accumulated depreciation and
amortization of $1,373 at September 30, 2003
and $1,275 at December 31, 2002)
Long-term investments 600 578
Prepaid dealer commissions 172 292
Prepaid pension 1,148 1,071
Other assets 1,690 1,538
- -------------------------------------------------------------------------------------------
$14,489 $13,855
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
4
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------
(Unaudited)
September 30, December 31,
(In millions of dollars) 2003 2002
- ----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 203 $ 543
Accounts payable and accrued liabilities 1,559 1,406
Accrued compensation and employee benefits 1,420 1,568
Accrued income taxes 505 194
Dividends payable 166 152
- ----------------------------------------------------------------------------------------
Total current liabilities 3,853 3,863
- ----------------------------------------------------------------------------------------
Fiduciary liabilities 4,110 4,010
Less - cash and investments held in
a fiduciary capacity (4,110) (4,010)
- ----------------------------------------------------------------------------------------
- -
Long-term debt 2,919 2,891
- ----------------------------------------------------------------------------------------
Other liabilities 2,245 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
1,600,000,000 shares, issued 560,641,640
shares at September 30, 2003 and December 31, 2002 561 561
Additional paid-in capital 1,265 1,426
Retained earnings 5,174 4,490
Accumulated other comprehensive loss (252) (452)
- ----------------------------------------------------------------------------------------
6,748 6,025
Less - treasury shares, at cost,
28,600,270 shares at September 30, 2003 and
22,441,817 shares at December 31, 2002 (1,276) (1,007)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 5,472 5,018
- ----------------------------------------------------------------------------------------
$14,489 $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 Nine Months Ended September 30, 2003 2002
(In millions of dollars)
- --------------------------------------------------------------------------------
Operating cash flows:
Net income $1,165 $1,053
Adjustments to reconcile net income to cash generated from
operations:
Depreciation of fixed assets and amortization
of capitalized software and other intangible assets 292 265
Provision for deferred income taxes 34 (119)
Gains on investments (64) (52)
Changes in assets and liabilities:
Net receivables (151) 230
Prepaid dealer commissions 181 242
Other current assets 32 (9)
Other assets (122) (125)
Accounts payable and accrued liabilities 53 70
Accrued compensation and employee benefits (148) (250)
Accrued income taxes 312 22
Other liabilities (8) (130)
Effect of exchange rate changes 49 36
- --------------------------------------------------------------------------------
Net cash generated from operations 1,625 1,233
- --------------------------------------------------------------------------------
Financing cash flows:
Net decrease in commercial paper (1,057) (515)
Proceeds from issuance of debt 798 750
Other repayments of debt (49) (8)
Purchase of treasury shares (886) (1,167)
Issuance of common stock 481 436
Dividends paid (466) (442)
- --------------------------------------------------------------------------------
Net cash used for financing activities (1,179) (946)
- --------------------------------------------------------------------------------
Investing cash flows:
Capital expenditures (335) (288)
Proceeds from sales related to fixed assets
and capitalized software 12 21
Acquisitions (99) (49)
Other, net 89 171
- --------------------------------------------------------------------------------
Net cash used for investing activities (333) (145)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 32 (4)
- --------------------------------------------------------------------------------
Increase in cash & cash equivalents 145 138
Cash & cash equivalents at beginning of period 546 537
- --------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 691 $ 675
- --------------------------------------------------------------------------------
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 nine-month periods ended September 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 current earnings. 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.
7
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 service revenue, amounted to $91 million and $90 million for the nine-month
periods ended September 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 $11.3
billion at September 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- and nine-month periods ended September
30, 2003 and 2002.
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(In millions of dollars) September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
Net income $ 357 $ 299 $1,165 $1,053
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 $ 357 $299 $1,165 $1,052
- ---------------------------------------------------------------------------------------------
Basic weighted average common shares outstanding 531 535 534 542
Dilutive effect of potentially issuable common shares 19 13 16 17
- ---------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 550 548 550 559
- ---------------------------------------------------------------------------------------------
8
5. Supplemental Disclosure to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning interest
and income taxes paid for the nine-month periods ended September 30, 2003 and
2002.
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002
- --------------------------------------------------------------------------------
Interest paid $123 $ 91
Income taxes paid $233 $612
6. Comprehensive Income
The components of comprehensive income for the nine-month periods ended
September 30, 2003 and 2002 are as follows:
- ------------------------------------------------------------------------------
(In millions of dollars) 2003 2002
- ------------------------------------------------------------------------------
Foreign currency translation adjustments $159 $ 71
Unrealized investment holding gains (losses),
net of income taxes 55 (79)
Less: Reclassification adjustment for realized gains
included in net income, net of income taxes (12) (36)
Deferred (loss) gain on cash flow hedges,
net of income taxes (2) 8
- --------------------------------------------------------------------------------
Other comprehensive income (loss) 200 (36)
Net income 1,165 1,053
- --------------------------------------------------------------------------------
Comprehensive income $1,365 $1,017
- --------------------------------------------------------------------------------
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 nine-month period ended
September 30, 2003 are as follows:
- ------------------------------------------------------------
(In millions of dollars) 2003
- ------------------------------------------------------------
Balance as of January 1, $5,151
Goodwill acquired 233
Other adjustments (primarily foreign exchange) 51
- ------------------------------------------------------------
Balance as of September 30, $5,435
- ------------------------------------------------------------
The goodwill balance at September 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:
- -------------------------------------------------------------------------------------------------------------------------
September 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 $221 $ 64 $157 $148 $ 50 $ 98
acquired
Future revenue streams related to
existing private equity funds 199 88 111 216 70 146
- -------------------------------------------------------------------------------------------------------------------------
Total amortized intangibles $420 $152 $268 $364 $120 $244
- -------------------------------------------------------------------------------------------------------------------------
Aggregate amortization expense for the nine-month periods ended September 30,
2003 and 2002 was $30 million and $25 million, respectively and the estimated
aggregate amortization expense is as follows:
- ----------------------------------- ---------- --------------------------------
For the Years
Ending December 31, Estimated
(In millions of dollars) Expense
- ----------------------------------- ---------- --------------------------------
2003 $38
2004 $33
2005 $33
2006 $32
2007 $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") 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").
10
In accordance with the intrinsic value method under 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- and nine-month periods ended September 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) Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- ------------------------------------------------------------------------------
Net Income:
As reported $357 $299 $1,165 $1,053
Adjustment for fair value method,
net of tax (40) (38) (128) (113)
- ------------------------------------------------------------------------------
Pro forma net income $317 $261 $1,037 $ 940
- ------------------------------------------------------------------------------
Net Income Per Share:
Basic:
As reported $0.67 $0.56 $2.18 $1.94
Pro forma $0.60 $0.49 $1.94 $1.73
Diluted:
As reported $0.65 $0.55 $2.12 $1.88
Pro forma $0.58 $0.48 $1.90 $1.68
- ------------------------------------------------------------------------------
The pro forma information 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 lesser 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. Approximately 5 million and 4.6 million shares were issued under the
employee stock plans on September 30, 2003 and 2002, respectively.
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.
10. Long-term Debt
In July 2003, MMC issued $300 million of 5.875% Senior Notes due 2033. 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 these 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 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).
11
At December 31, 2002, commercial paper borrowings of $750 million 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.
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 ("Sedgwick Plan") amounted to $285 million and
was included in the cost of the acquisition. The initial liability comprises
termination payments to employees and other employer related costs of $188
million, leasehold termination costs and future rent under noncancelable leases
of $97 million. During 2003, MMC paid $3 million of costs related to the
Sedgwick Plan and the remaining liability at September 30, 2003 was $31 million.
Merger-related costs for employees and offices of MMC ("MMC Plan") amounted to
$266 million and were recorded as part of a 1999 special charge. The initial
liability related to termination payments to employees of $194 million, lease
termination costs and future rent under noncancelable leases of $47 million,
and other integration costs of $25 million. During 2003, MMC paid $2 million of
costs related to the MMC Plan and the remaining liability at September 30, 2003
was $15 million.
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
comprises $44 million for severance related benefits and $17 million for future
rent under noncancelable leases. During 2003, MMC paid $3 million of costs
related to the 2001 Plan and the remaining liability at September 30, 2003 was
$15 million.
Activities under each of the plans are substantially complete. The remaining
accruals, primarily for future rent under noncancelable leases, costs to
restore leased properties to contractually agreed upon conditions and salary
continuance arrangements, are expected to be paid over several years.
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 nine-month period ended September 30, 2003, MMC
repurchased 19.6 million shares for total consideration of $910 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. Approximately 3.7 million shares of
the repurchases discussed above were made under the 10b5-1 plan.
12
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 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.
On October 28, 2003 the Securities and Exchange Commission (the "SEC") commenced
a civil administrative and cease and desist proceeding against Putnam under the
Investment Advisors Act of 1940 and the Investment Company Act of 1940. On
November 13, 2003, pursuant to an agreement with Putnam, the SEC entered an
order making findings, which Putnam neither admitted nor denied, of certain
facts and that Putnam violated the Investment Advisors Act of 1940 and the
Investment Company Act of 1940. The order imposed partial relief, including
final censure, remedial undertakings, and a cease and desist order. The SEC's
order finds that since 1998 at least six Putnam investment management
professionals engaged in excessive short-term trading of Putnam mutual funds in
their personal accounts. The order also finds that four of these employees
engaged in trading in funds over which they had investment decision making
responsibilities and access to non-public information regarding their funds'
portfolios. The SEC further finds that Putnam failed to disclose this
potentially self-dealing securities trading to the boards or shareholders of the
mutual funds it manages, failed to take adequate steps to detect and deter such
trading activity through internal controls and failed in its supervision of
these investment management professionals. Under the terms of the order, Putnam
will institute a number of remedial actions, including new employee trading
restrictions, enhanced employee trading compliance, oversight by an independent
third party and the SEC of the calculation of the amount of restitution to be
made by Putnam for losses attributable to excessive short-term trading by Putnam
employees, the retention of an independent compliance consultant, the
undertaking of periodic compliance reviews, and certification of compliance with
the SEC. The order also contemplates civil monetary penalties to be determined
at a later date. Certain changes in governance provisions are also contemplated
for the Putnam funds. In a separate action, the SEC is seeking an injunction
against two of the six investment management employees. All six such employees
have been removed from investment management responsibilities at Putnam.
On October 28, 2003, the Massachusetts Secretary of the Commonwealth commenced a
civil administrative proceeding alleging violations of the state's securities
law anti-fraud provisions. These violations are alleged to be based on material
misstatements in Putnam mutual fund prospectuses because Putnam allegedly
permitted fund managers to engage in activities contrary to Putnam's stated
policy against market timing and short-term trading. Putnam is also alleged to
have breached its fiduciary duty to Putnam fund shareholders by allowing such
employee conduct. In addition, the Massachusetts action alleges that Putnam
permitted certain non-employee shareholders of Putnam funds to engage in
excessive market timing activities in violation of policies allegedly disclosed
by Putnam in its mutual fund prospectuses. The Massachusetts action seeks to
have Putnam permanently cease and desist from violating the Massachusetts
securities law, and to pay restitution to the funds and administrative fines in
an undetermined amount.
13
Putnam is fully cooperating with the regulatory authorities and has undertaken,
among other things, to make appropriate restitution for losses to any Putnam
fund resulting from improper market timing activities.
MMC and Putnam have also been named as defendants in a number of private
lawsuits based on similar factual allegations. As of November 12, 2003 there
were 16 purported class actions and two direct shareholder actions. In addition,
MMC is aware of one shareholder derivative action naming MMC and its directors
as defendants, and one derivative action naming MMC, Putnam and the members of
the Putnam Board of Trustees as defendants, and one purported ERISA class action
naming MMC, Putnam and the Trustees and/or alleged fiduciaries of the Putnam
Investments Profit Sharing Retirement Plan as defendants.
A previously announced document subpoena that Putnam received from the United
States Attorney in New York has been withdrawn and replaced with a document
subpoena from the United States Attorney in Boston inquiring into, among other
things, matters that are the subject of the SEC and Massachusetts actions.
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 40 GBP 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 September 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.
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 financial position or cash flows but may be material to MMC's
operating results in any particular period.
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.
14
Selected information about MMC's operating segments for the nine-month periods
ended September 30, 2003 and 2002 follows:
- ------------------------------------------------------------------------
Segment Operating
(In millions of dollars) Revenue Income
- ------------------------------------------------------------------------
2003
Risk and Insurance Services $ 5,093(a) $ 1,351
Investment Management 1,447 364
Consulting 2,014 278
- ------------------------------------------------------------------------
$ 8,554 $ 1,993
- ------------------------------------------------------------------------
2002
Risk and Insurance Services $ 4,343(a) $ 1,125
Investment Management 1,697 460
Consulting 1,760 250
- ------------------------------------------------------------------------
$ 7,800 $ 1,835
- ------------------------------------------------------------------------
(a) Includes interest income on fiduciary funds ($91 million in 2003 and $90
million in 2002).
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 $1,993 $1,835
Corporate expense (101) (89)
Reclassification of minority interest 17 18
- --------------------------------------------------------------------------------
Operating income 1,909 1,764
Interest income 19 14
Interest expense (137) (118)
- --------------------------------------------------------------------------------
Total income before income taxes and
minority interest $1,791 $1,660
- --------------------------------------------------------------------------------
15
Operating segment revenue by product for the nine-month periods ended September
30, 2003 and 2002 is as follows:
- ---------------------------------------------------------------------------
(In millions of dollars) 2003 2002
- ---------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $3,800 $3,210
Reinsurance Broking and Services 627 502
Related Insurance Services 666 631
- ---------------------------------------------------------------------------
Total Risk and Insurance Services 5,093 4,343
- ---------------------------------------------------------------------------
Investment Management 1,447 1,697
- ---------------------------------------------------------------------------
Consulting
Retirement Services 912 832
Health Care & Group Benefits 300 269
Human Capital 275 255
Management and Organizational Change 315 204
Economic 109 98
- ---------------------------------------------------------------------------
1,911 1,658
Reimbursed Expenses 103 102
- ---------------------------------------------------------------------------
Total Consulting 2,014 1,760
- ---------------------------------------------------------------------------
Total $8,554 $7,800
- ---------------------------------------------------------------------------
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. The
FASB deferred the effective date for applying FIN 46 so that the guidance is
effective for interim or fiscal periods ending after December 15, 2003.
MMC, through Putnam, manages $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 million, reflected in Long-term investments in the Consolidated Balance
Sheets at September 30, 2003. The implementation of FIN 46 will not have a
significant impact on MMC's consolidated results of 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
Third Quarter and Nine Months Ended September 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 60,000 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:
- ------------------------------------------------------- ------------------------
Third Quarter Nine Months
(In millions of dollars) 2003 2002 2003 2002
- ----------------------------------------- ------------- ------------ -----------
Revenue:
Service Revenue $2,809 $2,538 $8,490 $7,748
Investment Income (Loss) 28 15 64 52
- ----------------------------------------- ------------- ------------ -----------
Operating Revenue 2,837 2,553 8,554 7,800
- ----------------------------------------- ------------- ------------ -----------
Expense:
Compensation and Benefits 1,486 1,299 4,339 3,829
Other Operating Expenses 758 742 2,306 2,207
- ----------------------------------------- ------------- ------------ -----------
Operating Expenses 2,244 2,041 6,645 6,036
- ----------------------------------------- ------------- ------------ -----------
Operating Income $593 $ 512 $1,909 $1,764
- ----------------------------------------- ------------- ------------ -----------
Operating Income Margin 20.9% 20.1% 22.3% 22.6%
- ----------------------------------------- ------------- ------------ -----------
Revenue, derived mainly from commissions and fees, increased 11% from the third
quarter of 2002. Revenue increased 7% on a constant currency basis, which
measures the change in revenue, before the impact of acquisitions and
dispositions, using consistent currency exchange rates. Revenue increases in the
risk and insurance services and consulting segments were partially offset by a
revenue decline in the investment management segment.
The impact of foreign currency translation, acquisitions and dispositions on
MMC's reported revenue by segment is as follows:
17
- --------------------------------------------------------------------------------------------------------------
Three Months Ended % Change Currency/
September 30, GAAP Constant Acquisitions
2003 2002 Revenue Currency (b) Impact
- --------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $1,207 $1,052 15% 12% 3%
Reinsurance Broking and Services 204 168 21% 20% 1%
Related Insurance Services (a) 229 211 9% 9% -
- --------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services 1,640 1,431 15% 13% 2%
- --------------------------------------------------------------------------------------------------------------
Investment Management 507 522 (3)% (3)% -
- --------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services 300 283 6% 1% 5%
Health Care & Group Benefits 99 93 7% 3% 4%
Human Capital 100 92 8% (1)% 9%
Management and Organizational Change 117 65 76% 3% 73%
Economic 38 33 18% 16% 2%
- --------------------------------------------------------------------------------------------------------------
654 566 15% 2% 13%
Reimbursed Expenses 36 34 7% 7% -
- --------------------------------------------------------------------------------------------------------------
Total Consulting 690 600 15% 3% 12%
- --------------------------------------------------------------------------------------------------------------
Total $2,837 $2,553 11% 7% 4%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Nine Months Ended % Change Currency/
September 30, GAAP Constant Acquisitions
2003 2002 Revenue Currency (b) Impact
- --------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $3,800 $3,210 18% 14% 4%
Reinsurance Broking and Services 627 502 25% 23% 2%
Related Insurance Services (a) 666 631 6% 5% 1%
- --------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services 5,093 4,343 17% 14% 3%
- --------------------------------------------------------------------------------------------------------------
Investment Management 1,447 1,697 (15)% (15)% -
- --------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services 912 832 10% 3% 7%
Health Care & Group Benefits 300 269 12% 7% 5%
Human Capital 275 255 8% 2% 6%
Management and Organizational Change 315 204 54% (1)% 55%
Economic 109 98 12% 9% 3%
- --------------------------------------------------------------------------------------------------------------
1,911 1,658 15% 3% 12%
Reimbursed Expenses 103 102 1% 1% -
- --------------------------------------------------------------------------------------------------------------
Total Consulting 2,014 1,760 14% 3% 11%
- --------------------------------------------------------------------------------------------------------------
Total $8,554 $7,800 10% 5% 5%
- --------------------------------------------------------------------------------------------------------------
(a) Includes U.S. affinity, claims management, underwriting management and MMC
Capital businesses.
(b) Constant currency measures the change in revenue, before the impact of
acquisitions and dispositions, using consistent currency exchange rates.
Revenue growth on a constant currency basis in the risk and insurance services
segment was 13% in the third quarter of 2003, with growth of 12% in risk
management and insurance broking and 20% in reinsurance broking and services.
Revenue decreased 3% in the investment management segment. Consulting revenue on
a constant currency basis grew 3%, primarily resulting from strong growth in
Management Consulting and Economic Consulting partially offset by declines in
Organizational Change Consulting. For the nine months, consolidated revenue grew
10%, 5% on a constant currency basis.
18
Operating expenses increased 10% in both the third quarter and the nine month
period of 2003 (4% on a constant currency basis). The third quarter increase is
primarily due to increased compensation and benefit costs in the risk and
insurance services and consulting segments, partially offset by lower expenses
in the investment management segment. Operating expenses also reflect an
increase in costs for office space and insurance.
Risk and Insurance Services
- --------------------------------------------------------------------------------
Third Quarter Nine Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenue $1,640 $1,431 $5,093 $4,343
Expense 1,252 1,097 3,742 3,218
- --------------------------------------------------------------------------------
Operating Income $ 388 $ 334 $1,351 $1,125
- --------------------------------------------------------------------------------
Operating Income Margin 23.7% 23.3% 26.5% 25.9%
- ----------------------------------------- ------------------------ -------------
Revenue
Revenue for the risk and insurance services segment grew 15% over the third
quarter of 2002 and 13% on a constant currency basis, reflecting the effect of
higher premium rates and increased placement service revenues. Demand for
Marsh's services remains strong as clients face risks that have grown in number,
complexity and severity. Premium rates have continued to increase in most
casualty lines, although the rate of increase has moderated somewhat over the
past two quarters. Premium rates for property coverages have declined modestly.
Clients continue to encounter restricted terms and conditions, and coverage
exclusions. In the third quarter constant currency revenue in risk management
and insurance broking, which accounts for approximately three quarters of the
risk and insurance services segment grew 12%, with double digit growth across
all major geographic regions. Revenue in reinsurance broking and services grew
21%, 20% on a constant currency basis. Related insurance services revenues
increased 9% on a constant currency basis, primarily resulting from strong
growth in claims management and underwriting management and a modest revenue
increase at MMC Capital, partially offset by a slight decline in the U.S.
affinity business. For the nine months, total risk and insurance services
revenue grew 17% over 2002, 14% on a constant currency basis.
Expense
Risk and insurance services expenses increased 14% over the third quarter of
2002, 9% on a constant currency basis. Expense growth primarily reflects higher
compensation and benefit costs and an increase in costs for office space and
insurance. For the nine months, operating expenses increased 16% over 2002, 11%
on a constant currency basis.
Investment Management
- --------------------------------------------------------------------------------
Third Quarter Nine Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenue $ 507 $ 522 $1,447 $1,697
Expense 371 406 1,083 1,237
- --------------------------------------------------------------------------------
Operating Income $ 136 $ 116 $ 364 $ 460
- --------------------------------------------------------------------------------
Operating Income Margin 26.8% 22.2% 25.2% 27.1%
- --------------------------------------------------------------------------------
19
Revenue
Putnam's revenue decreased 3% in the third quarter, which reflects the effect of
increased assets under management offset by a decline in underwriting and
distribution fees and a one-time contractual payment from Putnam's Italian joint
venture partner, received in the third quarter of 2002. Assets under management
averaged $270 billion in the third quarter of 2003, a 5% increase from the $257
billion managed in the third quarter of 2002. Assets under management aggregated
$272 billion at September 30, 2003 compared with $238 billion at September 30,
2002 and $251 billion at December 31, 2002. The change from December 31, 2002
results primarily from an increase in equity market levels partially offset by
net redemptions of $7 billion, including reinvested dividends. Positive flows
from the institutional business were more than offset by net outflows in the
retail mutual operations. Assets under management at October 31, 2003 aggregated
$277 billion and at November 7, 2003 were $263 billion. The decrease from
September 30, 2003 to November 7, 2003 reflects net redemptions in both the
retail and institutional business. Assets under management, as of the dates
indicated, do not reflect pending investments or redemptions based on client
decisions communicated to Putnam but not yet implemented.
Expense
Putnam's expenses decreased 9% in the third quarter of 2003 from the same period
of 2002 primarily due to lower amortization of prepaid dealer commissions, and
lower impairments of intangible assets related to T.H. Lee Equity Fund IV, L.P.
("Fund IV"). Expenses in the third quarter of 2002 include an impairment of
assets related to Fund IV which reduced net operating income by approximately
$32 million. In the third quarter of 2003, the remaining intangible asset
related to Fund IV was written off and had a net impact of approximately $10
million.
Quarter-end and average assets under management are presented below:
- ------------------------------------------------------
(In billions of dollars) 2003 2002
- ------------------------------------------------------
Mutual Funds:
Growth Equity $48 $ 45
Value Equity 42 38
Blend Equity 36 32
Fixed Income 45 46
- ------------------------------------------------------
171 161
- ------------------------------------------------------
Institutional:
Equity 76 59
Fixed Income 25 18
- ------------------------------------------------------
101 77
- ------------------------------------------------------
Quarter-end Assets $272 $238
- ------------------------------------------------------
Assets from Non-US Investors $39 $27
- ------------------------------------------------------
Average Assets $270 $257
- ------------------------------------------------------
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.
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 increased in 2003, after three consecutive years of declines.
Assets under management have also been, and may in the future continue to be,
adversely affected by increased redemptions in response to the administrative
proceedings by the SEC and the Massachusetts Secretary of State described in
Note 13 to the Consolidated Financial Statements. 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.
20
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 third quarter, assets held in equity securities represented
74% of assets under management, compared with 73% at September 30, 2002, while
investments in fixed income products represented 26%, compared with 27% at
September 30, 2002.
Consulting
- --------------------------------------------------------------------------------
Third Quarter Nine Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenue $690 $ 600 $2,014 $1,760
Expense 594 514 1,736 1,510
- --------------------------------------------------------------------------------
Operating Income $ 96 $ 86 $ 278 $ 250
- --------------------------------------------------------------------------------
Operating Income Margin 13.9% 14.3% 13.8% 14.2%
- --------------------------------------------------------------------------------
Revenue
Consulting revenue increased 15% over the third quarter of 2002 primarily due to
the impact of foreign exchange and acquisitions, including Oliver Wyman &
Company ("OWC") which is included in the management consulting practice. On a
constant currency basis revenue increased 3% with strong growth in Management
Consulting, reflecting new business growth of recently acquired OWC, and
Economic Consulting. Mercer's human resources practices - Retirement Services,
Healthcare & Group benefits and Human Capital - reported strong growth in Europe
and Asia, partially offset by modest declines in North America. Revenue for the
organization change consulting practice declined 15% on a constant currency
basis. For the nine months total consulting revenue grew 14% over 2002, 3% on a
constant currency basis.
Expense
Consulting expenses increased 16% over the third quarter of 2002 reflecting the
impact of foreign exchange and the acquisition of OWC. As described in Note 7 to
the consolidated 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 increased 2% on a constant currency basis over
2002. For the nine months, expenses increased 15% over 2002, 3% on a constant
currency basis.
Interest
Interest income earned on corporate funds amounted to $6 million in the third
quarter of 2003, an increase of $1 million from the third quarter of 2002.
Interest expense of $48 million in 2003 increased $5 million from the third
quarter of 2002 primarily due to an increase in the average interest rates on
outstanding debt. 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. Since March 2002, MMC has improved liquidity and extended the average
maturity of its debt through the issuance of $1.6 billion of long-term senior
notes. The net proceeds from the notes were used to pay down outstanding
commercial paper balances.
21
Income Taxes
MMC's consolidated effective tax rate of 34% of income before income taxes and
minority interest declined from 35.5% in the third
quarter of 2002 primarily as a result of the geographic mix of MMC's businesses.
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 and 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 approximately $1.6 billion of cash from operations for the
nine-month period ended September 30, 2003, compared with $1.2 billion 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 compared to 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 September 30, 2003
declined from the prior year end balance primarily due to lower deferred tax
assets in the current period as well as collection of insurance recoveries
receivable related to personal pension plan settlements in the United Kingdom.
MMC's cash and cash equivalents aggregated approximately $691 million on
September 30, 2003, an increase of $145 million from the end of 2002.
In the third quarter, MMC increased its quarterly dividend by 11% and has paid
$466 million in dividends to shareholders during the first nine months of 2003.
Financing Cash Flows
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033. 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 (collectively, the "2003 Notes").
The net proceeds from the 2003 Notes were used to pay down commercial paper
borrowings. Commercial paper outstanding decreased approximately $1.1 billion
during the first nine months of 2003 as a result of these repayments and cash
from operations. At September 30, 2003 commercial paper outstanding was
approximately $200 million.
In June 2003, MMC arranged a $1.4 billion revolving credit facility. The new
facility, which will expire in June 2004, replaces a similar facility that
expired in 2003. In addition, MMC maintains a $1.0 billion revolving credit
facility established in June 2002 which expires in June 2007. Borrowings under
these noncancellable facilities are at market rates of interest and support
MMC's commercial paper borrowings. No amounts were outstanding under these
facilities as of September 30, 2003.
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
During the first nine months of 2003, MMC repurchased 19.6 million shares of its
common stock at a cost of $910 million, recorded on a trade date basis. 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 $335
million in the first nine months of 2003 and $288 million in the first nine
months last year, primarily relate to leasehold improvements and software
development costs.
MMC has committed to potential future investments of approximately $435 million
in connection with various MMC Capital funds and other MMC investments.
Approximately $25 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 credit
worthiness.
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 holds investments in both public and private companies as well as certain
private equity funds managed by MMC Capital, including Trident II. Publicly
traded investments of $402 million are classified as available for sale under
SFAS No. 115. Non-publicly traded investments of $128 million and $329 million
are accounted for under APB Opinion No. 18 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. The sale of AXIS shares held by MMC and
by Trident II is temporarily restricted by standard lock-up agreements and by
rule 144 of the Securities and Exchange Commission. When MMC's directly held
shares are no longer subject to restrictions (as defined by SFAS 115), MMC will
classify the investment as an available for sale security, carried at fair
value, with changes in fair value recorded in other comprehensive income until
realized. At September 30, 2003, approximately 40% of MMC's direct investment
was considered unrestricted under SFAS 115. 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
Statements. Future changes in the fair value of Trident II's investment in AXIS
may result in quarterly fluctuations in MMC's investment income or loss.
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 credit worthiness.
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.
As further discussed in Note 13 to the consolidated financial statements,
administrative proceedings and a number of lawsuits have commenced against
Putnam and MMC. They seek, among other things, that Putnam pay restitution to
the funds and administrative fines in an undetermined amount. Putnam expects to
incur legal fees and other costs related to these proceedings and may incur
severance related costs. 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 or proceedings will not have a material adverse effect
on MMC's consolidated financial position or cash flows, but may be material to
MMC's operating results in any particular period.
In addition to the direct costs discussed in the preceding paragraph, the level
of assets under management may also be adversely affected by increased
redemptions in response to these proceedings, which may result in reduced
revenue levels in the future.
New Accounting Pronouncements
New accounting pronouncements are discussed in Note 15 to the Consolidated
Financial Statements.
24
Part I - Item 4. Controls & Procedures
Controls and Procedures
Based on their evaluation, as of the 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-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.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company's internal controls over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the 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
September 30, 2003
Item 1. Legal Proceedings.
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 that could, if assessed, be significant. Insurance coverage applicable
to such matters includes elements of both risk retention and risk transfer.
On October 28, 2003 the Securities and Exchange Commission (the "SEC") commenced
a civil administrative and cease and desist proceeding against Putnam under the
Investment Advisors Act of 1940 and the Investment Company Act of 1940. On
November 13, 2003, pursuant to an agreement with Putnam, the SEC entered an
order making findings, which Putnam neither admitted nor denied, of certain
facts and that Putnam violated the Investment Advisors Act of 1940 and the
Investment Company Act of 1940. The order imposed partial relief, including
final censure, remedial undertakings, and a cease and desist order. The SEC's
order finds that since 1998 at least six Putnam investment management
professionals engaged in excessive short-term trading of Putnam mutual funds in
their personal accounts. The order also finds that four of these employees
engaged in trading in funds over which they had investment decision making
responsibilities and access to non-public information regarding their funds'
portfolios. The SEC further finds that Putnam failed to disclose this
potentially self-dealing securities trading to the boards or shareholders of the
mutual funds it manages, failed to take adequate steps to detect and deter such
trading activity through internal controls and failed in its supervision of
these investment management professionals. Under the terms of the order, Putnam
will institute a number of remedial actions, including new employee trading
restrictions, enhanced employee trading compliance, oversight by an independent
third party and the SEC of the calculation of the amount of restitution to be
made by Putnam employees, the retention of an independent compliance consultant,
the undertaking of periodic compliance reviews, and certification of compliance
with the SEC. The order also contemplates civil monetary penalties to be
determined at a later date. Certain changes in governance provisions are also
contemplated for the Putnam funds. In a separate action, the SEC is seeking an
injunction against two of the six investment management employees. All six such
employees have been removed from investment management responsibilities at
Putnam.
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On October 28, 2003, the Massachusetts Secretary of the Commonwealth commenced a
civil administrative proceeding alleging violations of the state's securities
law anti-fraud provisions. These violations are alleged to be based on material
misstatements in Putnam mutual fund prospectuses because Putnam allegedly
permitted fund managers to engage in activities contrary to Putnam's stated
policy against market timing and short-term trading. Putnam is also alleged to
have breached its fiduciary duty to Putnam fund shareholders by allowing such
employee conduct. In addition, the Massachusetts action alleges that Putnam
permitted certain non-employee shareholders of Putnam funds to engage in
excessive market timing activities in violation of policies allegedly disclosed
by Putnam in its mutual fund prospectuses. The Massachusetts action seeks to
have Putnam permanently cease and desist from violating the Massachusetts
securities law, and to pay restitution to the funds and administrative fines in
an undetermined amount.
Putnam is fully cooperating with the regulatory authorities and has undertaken,
among other things, to make appropriate restitution for losses to any Putnam
fund resulting from improper market timing activities.
MMC and Putnam have also been named as defendants in a number of private
lawsuits based on similar factual allegations. As of November 12, 2003 there
were 16 purported class actions and two direct shareholder actions. In addition,
MMC is aware of one shareholder derivative action naming MMC and its directors
as defendants, and one derivative action naming MMC, Putnam and the members of
the Putnam Board of Trustees as defendants, and one purported ERISA class action
naming MMC, Putnam and the Trustees and/or alleged fiduciaries of the Putnam
Investments Profit Sharing Retirement Plan as defendants.
A previously announced document subpoena that Putnam received from the United
States Attorney in New York has been withdrawn and replaced with a document
subpoena from the United States Attorney in Boston inquiring into, among other
things, matters that are the subject of the SEC and Massachusetts actions.
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 or proceedings will not have a material adverse effect on MMC's
consolidated financial position or cash flows, but may be material to MMC's
operating results in any particular period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Statement Re: Computation of Ratio of Earnings to Fixed Charges.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32. Section 1350 Certifications.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated July 22, 2003 was filed by the registrant to
report its issuance of a press release announcing its unaudited second quarter
financial results for the quarter ended June 30, 2003.
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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 of November, 2003 on its behalf
by the undersigned, thereunto duly authorized and in the capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Sandra S. Wijnberg
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Senior Vice President and
Chief Financial Officer
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