Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: MMC is a global professional services firm organized into three segments: Risk and Insurance Services (Marsh, Guy Carpenter), Consulting (Mercer, Oliver Wyman), and Risk Consulting & Technology (Kroll). The reporting period is significantly impacted by the sale of its investment management segment, Putnam Investments, to Great-West Lifeco Inc. on August 3, 2007, which is classified as a discontinued operation.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2007) | Value (in millions) |
|---|---|
| Operating Revenue | $8,425 |
| Operating Income | $854 |
| Income from Continuing Operations | $448 |
| Net Income (including Discontinued Ops) | $2,390 |
| Diluted EPS (Continuing Ops) | $0.81 |
| Diluted EPS (Net Income) | $4.31 |
| Cash and Cash Equivalents | $2,819 |
| Total Debt (Short-term + Long-term) | $3,869 |
| Net Cash Provided by Operating Activities | $71 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 7% to $8.425 billion for the nine months ended September 30, 2007, compared to $7.840 billion in 2006. Underlying revenue growth was 3%, driven primarily by the Consulting segment (14% increase) and Risk Capital Holdings (31% increase due to mark-to-market gains).
- Operating Income: Operating income from continuing operations rose 1% to $854 million. However, operating income for the third quarter alone decreased 20% to $194 million due to a 14% increase in operating expenses outpacing revenue growth.
- Discontinued Operations Impact: Net income was heavily influenced by the sale of Putnam. The transaction generated a pre-tax gain of $3.0 billion ($1.9 billion net of tax), resulting in a total Net Income of $2.390 billion for the nine-month period, compared to $764 million in the prior year.
- Expense Trends: Operating expenses increased 8% year-over-year, driven by higher compensation costs, increased advertising, and foreign exchange impacts, partially offset by reduced restructuring costs.
Guidance, Outlook, and Risks
- Share Repurchases: MMC authorized a $1.5 billion share repurchase program in August 2007. The company entered into an $800 million accelerated share repurchase agreement in August and a $500 million agreement in May. Approximately $700 million of the authorization remains available.
- Restructuring: The company continues to implement the "2006 Savings Initiative," targeting $350 million in annualized savings by end of 2008. Phase 1 is substantially complete, yielding $135 million in annualized savings to date.
- Legal and Regulatory Risks: Significant contingencies remain regarding the "Market Service Agreements" (NYAG settlement) and "Market-Timing" litigation related to Putnam. MMC has recorded a $220 million liability for indemnities related to the Putnam sale. Numerous class actions and regulatory inquiries are pending, with potential losses that are not reasonably estimable.
- Credit Ratings: On November 9, 2007, Standard & Poor's placed MMC's ratings on CreditWatch with negative implications following the release of Q3 results. A downgrade to BBB- is possible but not confirmed.
- Outlook: Management expects Risk Capital Holdings revenue to be substantially lower in Q4 2007 compared to Q3 due to market conditions. Taxes related to the Putnam gain (approx. $1 billion) are expected to be paid in Q4 2007.
Investor Verification Checklist
- Putnam Gain Sustainability: Verify that the $1.9 billion net gain from the Putnam sale is correctly classified as a discontinued operation and does not reflect core operational performance.
- Legal Exposure: Review Note 15 for updates on the NYAG settlement fund payments and the status of "Market-Timing" and "Market Service Agreement" litigation, which could result in significant future liabilities.
- Debt Maturity: Confirm the repayment schedule for long-term debt, noting that $260 million is due within one year and the company has no outstanding commercial paper or revolving credit facility borrowings as of September 30, 2007.
- Share Count: Monitor the final settlement of the $800 million accelerated share repurchase agreement, expected in Q1 2008, to determine the final reduction in shares outstanding.
- Operating Margins: Analyze the decline in third-quarter operating income margin (4.9% in Risk & Insurance Services) to assess if cost pressures are structural or temporary.