Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: MMC is a global professional services firm operating through four segments: Risk and Insurance Services (Marsh and Guy Carpenter), Risk Consulting & Technology (Kroll), Consulting (Mercer), and Investment Management (Putnam). The company employs approximately 55,000 people in over 100 countries.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenue | $11,921 million | $11,578 million |
| Operating Income | $1,458 million | $853 million |
| Net Income | $990 million | $404 million |
| Diluted EPS (Net Income) | $1.76 | $0.74 |
| Operating Margin | 12.2% | 7.4% |
| Long-term Debt | $3,860 million | $5,044 million |
| Stockholders' Equity | $5,819 million | $5,360 million |
| Cash from Operations | $878 million | $399 million |
Material Changes vs. Prior Period
- Profitability Surge: Operating income increased 71% to $1.458 billion, driven by a 3% revenue increase and a 2% decrease in operating expenses. Net income more than doubled to $990 million.
- Segment Performance:
- Risk and Insurance Services: Revenue declined 2% to $5.463 billion due to the phase-out of market service agreements (MSA) and softer insurance markets, though operating income improved significantly to $677 million (12.4% margin) due to cost controls.
- Consulting: Revenue grew 11% to $4.225 billion, with operating income rising to $466 million.
- Risk Consulting & Technology: Revenue increased 12% to $979 million, with operating income reaching $149 million.
- Investment Management (Putnam): Revenue declined 8% to $1.385 billion due to lower assets under management ($192 billion year-end vs. $189 billion prior year) and net outflows, though operating income improved to $303 million.
- Discontinued Operations: Reported $172 million in net income from discontinued operations, primarily from the sale of Sedgwick Claims Management Services and Kroll Security International.
- Debt Reduction: Long-term debt decreased by approximately $1.18 billion as the company reduced outstanding debt by $570 million during the year.
Guidance, Outlook, Risks, and Unusual Items
- Putnam Sale: On January 31, 2007, MMC announced an agreement to sell its Investment Management segment (Putnam) to Great-West Lifeco Inc. for $3.9 billion in cash. The transaction is expected to close in mid-2007. MMC will retain indemnification obligations for certain regulatory and litigation matters related to Putnam.
- Restructuring: In September 2006, MMC announced a restructuring plan targeting $350 million in annualized savings by the end of 2008, with associated charges of approximately $225 million. Phase 1 actions resulted in a net charge of $10 million in 2006, partially offset by a $74 million gain on the sale of five floors in the NYC headquarters.
- Legal and Regulatory Risks:
- Marsh Litigation: Ongoing litigation related to market service agreements (MSA) and bid-rigging allegations. MMC established an $850 million fund for policyholders; approximately $750 million has been distributed. Numerous class actions and state lawsuits remain pending.
- Putnam Litigation: Ongoing matters regarding "market-timing" and "excessive fees." MMC has agreed to indemnify the buyer of Putnam for liabilities arising from these matters.
- Accounting Changes: Adoption of SFAS 158 (pension accounting) resulted in a $905 million reduction to stockholders' equity. Adoption of SFAS 123(R) (share-based payment) added $116 million in stock option expense in 2006.
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 September 2006 and closing.
- Legal Exposure: Monitor the status of the New York Attorney General settlement fund and the outcome of pending class action lawsuits regarding MSA practices and Putnam market-timing allegations.
- Restructuring Execution: Track the realization of the targeted $350 million in annualized savings from the 2006 restructuring plan and the associated cash outflows for severance and exit costs.
- Insurance Market Conditions: Assess the impact of premium rate fluctuations and the continued decline of market service revenue on the Risk and Insurance Services segment's future growth.
- Pension Obligations: Review future funding requirements for U.S. and non-U.S. pension plans, particularly given the significant unfunded status of non-U.S. plans disclosed under SFAS 158.