8-K: Current report filing
Published on July 16, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 16, 2002
- --------------------------------------------------------------------------------
Merrill Lynch & Co., Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-7182 13-2740599
- --------------------------------- --------------------------- ------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
4 World Financial Center, New York, New York 10080
- ----------------------------------------------------- --------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report.)
Item 5. Other Events
- ---------------------
Filed herewith is the Preliminary Unaudited Earnings Summary for the three- and
six-month periods ended June 28, 2002 and supplemental quarterly information for
Merrill Lynch & Co., Inc. ("Merrill Lynch"), as contained in a press release
dated July 16, 2002. The results of operations set forth therein for such
periods are unaudited. All adjustments, consisting only of normal recurring
accruals that are, in the opinion of management, necessary for a fair
presentation of the results of operations for the periods presented, have been
included. The nature of Merrill Lynch's business is such that the results for
any interim period are not necessarily indicative of the results for a full
year.
On July 16, Merrill Lynch reported second quarter net earnings of $634 million,
17% higher than the second quarter of 2001. Earnings per common share were $0.72
basic and $0.66 diluted, compared with $0.63 basic and $0.56 diluted in the 2001
second quarter.
The second quarter pre-tax margin rose to 19.1%, an increase of nearly four
percentage points from the year-ago quarter, despite a year-over-year decline in
net revenues of 11%. These results include a provision for the $100 million
payment related to the previously-announced settlement agreement with the New
York State Attorney General. Excluding this provision and related costs of $11
million, the second quarter pre-tax margin was 21.4%.
"These results demonstrate our continued progress in improving profitability
while enhancing our ability to serve clients, and maintaining profitable market
share," said Merrill Lynch chairman and chief executive officer David H.
Komansky and Stan O'Neal, president and chief operating officer. "While we
remain cautious on the revenue outlook for the remainder of 2002, Merrill Lynch
is appropriately sized and positioned to benefit from significant operating
leverage as the environment improves. We are focused on growing our businesses
and further enhancing operating discipline."
First half net earnings were $1.3 billion, 9% lower than the first six months of
2001, on net revenues which were 16% lower, at $10.0 billion. The impact of
declining net revenues on earnings was limited by reduced compensation costs and
a 19%, or nearly $700 million, reduction in year-to-date non-compensation
expenses. The first half pre-tax margin was 19.5%, up from 18.4% in the first
six months of 2001. Annualized year-to-date ROE was 12.3%.
2
BUSINESS SEGMENT REVIEW:
GLOBAL MARKETS AND INVESTMENT BANKING (GMI)
- -------------------------------------------
Market conditions continued to be difficult during the second quarter for the
industry as a whole. Most equity indices worldwide declined by double digit
percentages from the end of the 2002 first quarter, and global merger and
acquisition and origination volumes continued to be subdued amid market and
issuer uncertainty. However, fixed income trading conditions remained strong,
benefiting from low interest rates and a favorable U.S. dollar yield curve
environment.
GMI's second quarter results reflect its focus on increasing the contribution of
higher margin activities, diversifying sources of revenue, and continued
management discipline in improving productivity and reducing expenses.
o GMI's second quarter pre-tax earnings were $647 million, 5% below the 2001
second quarter, on net revenues that were 13% lower, at $2.3 billion. GMI's
pre-tax margin increased to 27.8%, more than two percentage points above
the year-ago quarter and one percentage point higher than the 2002 first
quarter. These solid improvements are due in part to a 25% reduction in
non-compensation expenses from the 2001 second quarter and an 8% reduction
from the first quarter of this year.
o Despite generally weaker market conditions, GMI's second quarter net
revenues were only 3% below first quarter 2002 levels, while pre-tax
earnings and margins both increased sequentially. This strong performance
was driven largely by the debt markets business, in particular the trading
of interest rate and other products. Equity markets, although operating in
a challenging environment, maintained solid results. Equity markets net
revenues were lower than year-ago and sequential quarters due to reduced
trading and origination volumes, and lower volatility. Investment banking
revenues were higher than in the first quarter of 2002, due to increased
debt origination and merger and acquisition revenues.
o GMI's year-to-date pre-tax earnings were $1.3 billion, 26% lower than the
2001 first half. Year-to-date net revenues were $4.7 billion, a decline of
21% from the year-ago period. GMI's year-to-date pre-tax margin was 27.2%,
compared with 28.9% in the same period last year.
o GMI continues to develop its growth initiatives, remaining focused on
extending its foreign exchange, mortgage, derivative and prime brokerage
product offerings. GMI also continues to enhance its leading secondary
equity franchise through selective investments in people and technology.
3
PRIVATE CLIENT
- --------------
The current challenging market environment underscores the importance of the
professional investment advice provided by Merrill Lynch Financial Advisors.
Merrill Lynch clients also benefit from access to an extensive range of products
from proprietary and third party sources with which to address their individual
financial needs. In particular, clients recognize the value of Merrill Lynch's
professionally managed account services.
Actions taken in the 2001 fourth quarter to re-size Private Client's global
footprint, combined with an ongoing focus on improving efficiency, reducing
expenses, and building diversified, fee-based sources of revenue, has
significantly increased margins.
o Private Client's second quarter pre-tax earnings were $339 million, 97%
higher than the 2001 second quarter, on net revenues that were down 8%, at
$2.3 billion. Private Client's pre-tax margin was 14.9%, compared with 7.0%
in the year-ago quarter. These results reflect significantly improved
performance both inside and outside the United States.
o Private Client's business in the United States generated a pre-tax margin
of 16.7% in the second quarter. This represents an increase of more than
seven percentage points from the same period last year, and is also higher
than the 2002 first quarter. These improvements were driven primarily by
reduced operating expenses and increased fee-based and recurring revenues.
Also contributing to the year-over-year improvement was the absence of
severance and other expenses associated with businesses that were
outsourced or exited in the 2001 second quarter.
o Private Client continued to focus on diversifying revenues during the
second quarter, as sales of annuity products and the volume of mortgage
originations set new records.
o The operating environment for the Private Client business outside the
United States is challenging, given more limited economies of scale and a
greater historical dependence on transaction revenues. The business model
continues to be evaluated to leverage Merrill Lynch's strengths in serving
high- and ultra-high net worth clients outside the United States.
o The Private Client business in Japan had its best-ever quarter, growing
both revenues and earnings from first quarter 2002 levels. Excluding the
previously-announced transition costs associated with the re-focusing of
this business, Private Client in Japan generated profitable results for the
second consecutive quarter. Transition costs were still being incurred in
Japan in the 2002 second quarter, albeit at a slower pace than in the first
quarter, and are expected to continue to decline further in the second half
of the year.
4
o Global net new money into Private Client accounts totaled $4 billion during
the second quarter, including the usual seasonal outflows associated with
client tax payments. Total assets in Private Client accounts declined 6%
during the quarter, to $1.2 trillion, due primarily to market depreciation.
o Assets in asset-priced accounts totaled $197 billion, or 16% of total
Private Client assets for the second quarter, up from 14% in the year-ago
quarter. More than $20 billion of assets have flowed into annuitized
products year-to-date from both new and existing clients, reflecting the
high demand for managed accounts and other value-added, fee-based services.
o Year-to-date, Private Client's pre-tax earnings were $606 million, 32%
higher than for the first six months of 2001 on net revenues that were
11% lower, at $4.6 billion. Private Client's year-to-date pre-tax
margin was 13.3%, compared with 8.9% for the same period last year.
o Product innovation and service enhancements are important growth drivers in
Private Client, which is leveraging its scale advantages through its
multi-channel strategy to increase Merrill Lynch's share of clients'
business. Private Client continues to expand its small business lending
capabilities in the United States, and is also increasing the range of
banking services it offers globally.
MERRILL LYNCH INVESTMENT MANAGERS (MLIM)
- ----------------------------------------
MLIM increased its earnings from the year-ago quarter, despite lower revenues,
while continuing to generate strong investment performance. The 2002 second
quarter represented one of MLIM's strongest quarters ever. This improvement in
profitability underscores the benefit of actions taken in the past year to
streamline MLIM's investment management platform, and strengthen its product
range and performance.
o Investment performance continued to be strong, and remains MLIM's primary
focus. For the 1- and 3-year periods ending May 2002, nearly 80% of MLIM's
U.S. retail equity assets under management were above their relevant
benchmark or category median. Globally, 69% of MLIM's assets under
management were ahead of their benchmark or median for the same periods.
o MLIM's pre-tax earnings were $96 million, 19% higher than the 2001 second
quarter on net revenues which were 16% lower, at $419 million. The pre-tax
margin increased nearly seven percentage points from the year-ago quarter,
to 22.9% as the year-over-year decline in revenues was more than offset by
reduced expenses.
5
o Assets under management totaled $499 billion at the end of the second
quarter, 6% lower than year-ago levels, due primarily to market
depreciation.
o Year-to-date, MLIM's pre-tax earnings were $215 million, 25% higher than
for the first six months of 2001 on net revenues that were 15% lower, at
$867 million. MLIM's year-to-date pre-tax margin was 24.8%, compared with
16.8% for the same period last year.
o MLIM continues to leverage its strong investment performance and extensive
distribution network to drive growth globally. Sales of MLIM products
through the Private Client channel have benefited from MLIM's enhanced
product offering in the Merrill Lynch Consults(R) program. Third party
distribution of MLIM retail products is growing in Europe, while in the
United States, MLIM is focused on growing its institutional business.
SECOND QUARTER INCOME STATEMENT REVIEW:
REVENUES
- --------
Net revenues were $5.0 billion, 11% lower than the 2001 second quarter and 3%
below the first quarter of this year.
Commission revenues were $1.2 billion, 12% below the 2001 second quarter and 2%
lower than the first quarter of 2002, due primarily to a global decline in
client transaction volumes, particularly in listed equities and mutual funds.
Commission revenues associated with trading of Nasdaq stocks were higher than in
the year-ago quarter as institutional clients traded these stocks increasingly
on an agency, rather than a principal, basis.
Principal transactions revenues decreased 18% from the second quarter of 2001
and 17% from the 2002 first quarter, to $728 million. These decreases are due
primarily to lower revenues from equity derivatives, which were adversely
impacted by reduced customer flow and lower volatility during much of the
quarter. Principal transactions revenues in the 2002 second quarter include $70
million related to the sale of certain energy trading assets in 2001, which was
offset by write-downs of credit positions, principally in the telecommunications
sector.
6
Underwriting revenues were $511 million, 25% lower than the 2001 second quarter
but 7% above the first quarter of 2002. Strategic advisory revenues declined 38%
from the 2001 second quarter, to $194 million, but increased 6% from the first
quarter of 2002. The year-over-year decreases reflect the global decline in
investment banking activity.
Asset management and portfolio service fees were $1.3 billion, down 4% from the
second quarter of 2001 and essentially unchanged from the 2002 first quarter.
The decrease from the prior year primarily reflects a market-driven decline in
equity assets under management. Private Client portfolio service fees increased
from both year-ago and prior quarters as demand for managed account services
continued to grow.
Other revenues were $219 million, up $66 million from the 2001 second quarter
and unchanged from the first quarter of 2002. The year-over-year increase
primarily resulted from increased realized gains on the investment portfolio of
Merrill Lynch's U.S. banks, partially offset by write-downs of private equity
investments.
Net interest profit was $797 million, 2% below both the year-ago quarter and the
first quarter of 2002.
EXPENSES
- --------
Compensation and benefits expenses were $2.6 billion, a decrease of 14% from the
2001 second quarter and 3% from the first quarter of 2002. Compensation and
benefits expenses were 51.9% of net revenues for the second quarter of 2002,
compared to 53.4% in the 2001 second quarter. The decrease is due primarily to a
reduction in staffing and lower severance expenses.
7
Non-compensation expenses, which included $111 million related to the New York
State Attorney General settlement agreement and related costs (included in the
Corporate segment), decreased 18% from the 2001 second quarter and were
essentially unchanged from the first quarter of 2002. Details of the significant
changes in non-compensation expenses from the second quarter of 2001 follow:
o communications and technology costs were $412 million, down 27% due to
reduced systems consulting costs, lower technology equipment depreciation
and lower communications costs;
o occupancy and related depreciation was $228 million, a decline of 16% due
primarily to lower rental expenses resulting from the fourth quarter 2001
restructuring initiatives;
o brokerage, clearing, and exchange fees were $172 million, down 29% resulting
from lower transaction volumes;
o advertising and market development expenses were $151 million, down 25% due
primarily to reduced spending on travel and advertising;
o professional fees decreased 13%, to $132 million, due largely to reduced
spending on consulting services, partially offset by increased legal fees;
o office supplies and postage decreased 29% to $65 million due to lower levels
of business activity, and efficiency initiatives; and
o other expenses were $274 million, up 64% due to the provision for the $100
million payment agreed to as part of the settlement agreement with the New
York State Attorney General.
Merrill Lynch's year-to-date effective tax rate was 29.7%, down from 31.2% in
the first quarter of 2002. The decrease in the rate resulted from benefits
associated with the wind-down of the Merrill Lynch HSBC joint venture, as well
as from the lower tax rate associated with certain foreign earnings and net tax
settlements.
8
During the second quarter of 2002, Merrill Lynch completed its review of
goodwill in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets"
and determined that the fair value of the reporting units to which goodwill
relates exceeds the carrying value of such reporting units. Accordingly, no
goodwill impairment loss was recognized.
STAFFING
- --------
Merrill Lynch's full-time employees totaled 54,600 at the end of the second
quarter, a decline of 1,800 during the quarter. Approximately half of this
reduction is due to the re-sizing of the Private Client business in Japan.
* * * *
Certain statements contained in this report may constitute forward-looking
statements, including, for example, statements about management expectations,
strategic objectives, business prospects, anticipated expense savings and
financial results, anticipated results of litigation and regulatory proceedings,
and other similar matters. These forward-looking statements are not statements
of historical facts and represent only Merrill Lynch's beliefs regarding future
events, which are inherently uncertain. There are a variety of factors, many of
which are beyond Merrill Lynch's control, which affect its operations,
performance, business strategy and results and could cause its actual results
and experience to differ materially from the expectations and objectives
expressed in any forward-looking statements. These factors include, but are not
limited to, actions and initiatives taken by both current and potential
competitors, the effect of current, pending and future legislation and
regulation both in the United States and throughout the world, and the other
risks detailed in Merrill Lynch's Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, and Current Reports on Form 8-K. Accordingly, readers are
cautioned not to place undue reliance on forward-looking statements, which speak
only as of the date on which they are made. Merrill Lynch does not undertake to
update forward-looking statements to reflect the impact of circumstances or
events that arise after the date the forward-looking statement was
9
made. The reader should, however, consult any further disclosures of a
forward-looking nature Merrill Lynch may make in its reports on Form 10-K, Form
10-Q, and Form 8-K.
10
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- ---------------------------------------------------------------------------
(c) Exhibits
--------
(99) Additional Exhibits
(i) Preliminary Unaudited Earnings Summary for
the three- and six-month periods ended June
28, 2002 and supplemental information.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
MERRILL LYNCH & CO., INC.
-------------------------------------------------------
(Registrant)
By: /s/ Thomas H. Patrick
-------------------------------------------------------
Thomas H. Patrick
Executive Vice President and
Chief Financial Officer
Date: July 16, 2002
12
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
(99) Additional Exhibits 14-19
(i) Preliminary Unaudited Earnings Summary for the
three- and six-month periods ended June 28,
2002 and supplemental information.
13