MRSH

Business Context and Reporting Period

Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: MMC is a global professional services firm operating through four primary segments: Risk and Insurance Services (Marsh, Guy Carpenter), Risk Consulting & Technology (Kroll), Consulting (Mercer), and Investment Management (Putnam).
Material Event: On February 1, 2007, MMC announced an agreement to sell its Investment Management segment (Putnam) to Great-West Lifeco Inc. for approximately $3.9 billion. Consequently, Putnam's results are reported as discontinued operations for the quarter.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 5% year-over-year. Underlying revenue (excluding FX and M&A impacts) grew 1%. The Consulting segment drove growth with a 13% revenue increase, while Risk and Insurance Services grew 1%.
• Profitability: Operating income rose 15% to $387 million, aided by a 13% revenue increase in Consulting and cost savings from restructuring initiatives, despite higher compensation costs.
• Net Income Decline: Total Net Income dropped 36% to $268 million from $416 million. This decrease is primarily due to the absence of a $176 million after-tax gain on the disposal of discontinued operations (SCMS and Price Forbes) recorded in Q1 2006.
• Cash Flow: Operating cash flow usage improved (decreased) to $383 million from $517 million, largely due to the timing of incentive compensation payments.
• Debt Reduction: Total debt decreased by approximately $317 million, driven by the maturity of $500 million in senior notes, partially offset by new borrowings and commercial paper usage.

Guidance, Outlook, and Risks

• Putnam Sale: MMC expects the sale of Putnam to close in Q2 2007. Proceeds are estimated at approximately $2.5 billion after-tax. MMC will indemnify the buyer for certain litigation matters related to "market-timing" and excessive fees.
• Restructuring: The company continues to implement the "2006 Plan," targeting $350 million in annualized savings by end-2008. Phase 1 is expected to be completed by Q2 2007. Additional Marsh-specific actions aim for $40 million in annualized savings.
• Share Repurchase: The Board approved a new $500 million share repurchase program in Q2 2007. No repurchases were made in Q1 2007.
• Tax Outlook: The effective tax rate on ongoing operations is expected to be 33% for the remainder of 2007, up from 26.6% in Q1 2006, due to the resolution of favorable tax issues in the prior year.
• Legal and Regulatory Risks:
  • Marsh Litigation: Significant ongoing litigation regarding "market service agreements" (bid-rigging allegations) involving the NYAG settlement fund ($850 million total) and various class actions. A trial against former employees began in April 2007.
  • Putnam Litigation: Ongoing "market-timing" and "late trading" lawsuits and regulatory settlements (SEC, Massachusetts) involving restitution and penalties.
  • Other: Various state and federal inquiries regarding loss mitigation products and related-party transactions.

Investor Verification Checklist

• Putnam Sale Closing: Verify the final closing date and any adjustments to the $3.9 billion purchase price based on Putnam's equity and revenue performance between Sept 2006 and closing.
• Restructuring Progress: Monitor the realization of the targeted $350 million in annualized savings and the timing of remaining charges under the 2006 Plan.
• Legal Reserves: Review updates on the $850 million NYAG settlement fund payments and the status of the "market-timing" litigation indemnification obligations.
• Share Repurchase Execution: Track the deployment of the newly authorized $500 million share repurchase program.
• Consulting Segment Growth: Assess the sustainability of the 13% revenue growth in the Consulting segment, particularly in Specialty Consulting.