MRSH

Business Context and Reporting Period

Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: MMC is a global professional services firm operating in four segments: Risk and Insurance Services (Marsh, Guy Carpenter), Risk Consulting and Technology (Kroll), Consulting (Mercer), and Investment Management (Putnam). The quarter reflects the impact of restructuring initiatives, the adoption of SFAS 123(R) for stock-based compensation, and the classification of certain operations as discontinued.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income increased 211% to $416 million, driven primarily by a $178 million net gain from discontinued operations (sale of Sedgwick Claims Management Services) and a 53% increase in operating income from continuing operations.
• Revenue Decline: Operating revenue decreased 1% to $3.025 billion. Underlying revenue (excluding currency and M&A impacts) increased 2%.
• Expense Reduction: Operating expenses decreased 6% to $2.627 billion, reflecting $90 million in restructuring savings, lower legal/regulatory costs, and reduced employee retention awards. These savings were partially offset by $40 million in new stock option expenses under SFAS 123(R).
• Segment Performance:
  • Risk & Insurance: Revenue down 7% due to lower premium rates and reduced market services revenue; Operating income up 96% to $268 million due to cost cuts.
  • Consulting: Revenue up 8% and Operating income up 3%.
  • Investment Management (Putnam): Revenue down 13% due to a 7% decline in average assets under management ($190B vs $204B); Operating income up 28% to $64 million due to expense reductions.

Guidance, Outlook, Risks, and Unusual Items

• Discontinued Operations: MMC classified its U.K. wholesale operation (Price Forbes) and the recently sold Sedgwick Claims Management Services (SCMS) as discontinued operations. The $178 million net income from these operations is a non-recurring item.
• Restructuring: MMC incurred $45 million in restructuring charges in Q1 2006. Approximately $15 million in additional charges are expected for the remainder of 2006. Annual savings of $375 million are expected upon full implementation of the 2005 plan.
• Legal and Regulatory Contingencies:
  • NYAG Settlement: MMC is paying $850 million over four years to a policyholder fund. $255 million is due June 1, 2006.
  • Litigation: Numerous class actions and regulatory inquiries remain pending regarding market service agreements, bid-rigging allegations, and Putnam market-timing issues. Management states it is unable to estimate the range of possible loss for many proceedings.
• Outlook: The effective tax rate on ongoing operations is expected to be 35% for the remainder of 2006. Putnam does not expect a meaningful improvement in net redemptions in Q2 2006.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $178 million gain from discontinued operations, which inflated Q1 2006 net income.
• Putnam Asset Flows: Monitor Putnam's net redemptions and assets under management, which declined 7% year-over-year and drove a 13% revenue drop in the Investment Management segment.
• Legal Exposure: Review the status of the NYAG settlement payments and the potential financial impact of ongoing class actions regarding market service agreements and market-timing.
• Restructuring Progress: Track the realization of the projected $375 million in annual savings from the 2005 restructuring plan against the remaining $15 million in expected charges.
• Stock-Based Compensation: Assess the ongoing impact of SFAS 123(R) adoption, which added $40 million in expenses in Q1 2006 with no comparable prior-year charge.