Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: MMC is a professional services firm operating in three principal segments: Risk and Insurance Services (Marsh), Investment Management (Putnam), and Consulting (Mercer). The company serves clients in over 100 countries with approximately 60,000 employees.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 2003):
- Operating Revenue: $8,554 million (up 10% from prior year).
- Operating Income: $1,909 million (up 8% from prior year).
- Net Income: $1,165 million (up 11% from prior year).
- Diluted Earnings Per Share (EPS): $2.12 (up from $1.88).
- Operating Margin: 22.3% (down slightly from 22.6% in 2002).
Cash Flow and Liquidity:
- Cash from Operations: $1,625 million (up from $1,233 million in 2002).
- Cash and Cash Equivalents: $691 million (as of Sept 30, 2003).
- Free Cash Flow Proxy: Operating cash flow ($1,625M) less Capital Expenditures ($335M) equals approximately $1,290 million.
Debt and Capital Structure:
- Short-term Debt: $203 million (down from $543 million at year-end 2002).
- Long-term Debt: $2,919 million.
- Share Repurchases: 19.6 million shares repurchased for $910 million during the nine-month period.
- Dividends: $0.90 per share declared for the nine months; quarterly dividend increased by 11% in Q3.
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by the Risk and Insurance Services segment (+17% revenue) and Consulting segment (+14% revenue). Growth was partially offset by a 15% decline in Investment Management revenue.
- Expense Increases: Operating expenses rose 10% to $6,645 million, largely due to higher compensation costs and the integration of the Oliver Wyman & Company (OWC) acquisition.
- Investment Management Decline: Putnam's revenue dropped due to lower underwriting fees and the absence of a one-time contractual payment received in 2002, despite a 5% increase in average assets under management to $270 billion.
- Acquisition Impact: The acquisition of OWC contributed significantly to Consulting revenue growth and expenses.
Guidance, Outlook, Risks, and Contingencies
Management Commentary: Management anticipates that funds from operations will meet recurring requirements. The company has extended the maturity of its debt and improved liquidity by issuing $1.6 billion in senior notes to pay down commercial paper.
Significant Risks and Contingencies:
- Putnam Market Timing Investigation: The SEC and Massachusetts Secretary of the Commonwealth have commenced proceedings against Putnam regarding excessive short-term trading (market timing) by employees.
- Status: SEC entered an order on November 13, 2003, finding violations. Putnam agreed to remedial actions, including restitution and enhanced compliance.
- Impact: Civil monetary penalties are undetermined. There are 16 class action lawsuits and other derivative actions pending. Management believes the outcome will not materially affect consolidated financial position but may impact operating results in specific periods.
- Market Risk: Revenue is sensitive to equity and fixed income market fluctuations, which affect assets under management and investment income.
- Foreign Exchange: Significant portion of revenue is international; currency fluctuations impact reported results.
Investor Verification Checklist
- Putnam Restitution Amount: Verify the final calculation of restitution and civil penalties resulting from the SEC and Massachusetts proceedings, as these are currently undetermined.
- Assets Under Management (AUM) Flows: Monitor net redemptions at Putnam, which have been negatively impacted by the regulatory proceedings and market conditions.
- OWC Integration: Track the realization of synergies and revenue growth from the Oliver Wyman acquisition against the associated integration costs.
- Debt Maturity Profile: Confirm the schedule for the new senior notes issued in 2003 and the continued reduction of commercial paper.
- Stock-Based Compensation: Note that reported net income does not reflect the fair value cost of stock options; pro forma net income would be lower ($1,037 million for the nine months).